Strategie
Investment Horizon and How to Choose Your Strategy Based on It
Key takeaways
- The investment horizon determines how much volatility the portfolio can afford — and therefore the optimal allocation.
- A short horizon (under 5 years) requires a more conservative approach: bonds, savings products, money market.
- A long horizon (10+ years) enables full equity returns and absorbs even significant drawdowns.
- The horizon changes over the course of life — allocation must be updated accordingly.
- Mistake number one: an overly conservative allocation over a long horizon because of fear of short-term volatility.
The investment horizon is the length of time you plan to leave money working without needing to withdraw it — and it is probably the single most important parameter of the entire investment strategy.
Why the horizon matters
Equities are highly volatile in the short term — the S&P 500 can fall by 30–40% in a single year. Over a 15–20-year horizon, however, it has never historically produced a negative return. Time is the greatest risk dampener. If you need the money in 3 years, you cannot afford to wait for a recovery after a downturn.
How the horizon affects allocation
- Under 3 years: money market, short-term bonds, savings products. Equities represent an unacceptable risk.
- 3–7 years: balanced portfolio of 40–60% equities / remainder bonds. Equities yes, but with a cushion.
- 7–15 years: equity weighting 70–80%. At this horizon the probability of a negative return drops sharply.
- 15+ years: 90–100% equities. Volatility is your friend — it allows you to buy more cheaply and compounding works at full power.
The horizon changes
At age 30 you have a 35-year horizon for retirement savings. At 55 it shortens to 10 years — and it is time to gradually reduce your equity allocation. The "100 minus age" rule (the equity percentage) is a rough but intuitively clear framework for a starting point.
Watch out for mixed horizons
Many people mix money with different horizons in a single portfolio: savings for a holiday (1 year), a car (5 years), and retirement (30 years) all in the same fund. Each goal should have its own allocation suited to its horizon. How to structure a portfolio around goals is explained in the article on your first portfolio. For an overview of available instruments, see the ETF overview.
FAQ
What is an investment horizon?
The length of time you plan to keep money invested without withdrawing it. It is the key parameter for determining the optimal asset allocation and acceptable level of volatility.
How long a horizon do I need for equities?
At least 7–10 years for the risk of a negative return to be acceptable. Over a 15–20-year horizon, the S&P 500 has historically never recorded a negative return. A shorter horizon requires a more conservative approach.
What is the 100-minus-age rule?
A simple allocation framework: subtract your age from 100 — the result is the recommended equity share of your portfolio. At age 30: 70% equities. At age 60: 40% equities. It serves only as a rough guide, not as dogma.
Should I have one portfolio for all goals?
Ideally not. Each goal with a different horizon should have its own allocation. Money for a holiday next year belongs in a savings account. Money for retirement in 30 years belongs in equities. Mixing compromises both.