Your Investment Time Horizon
When you decide to invest your money, you need to figure out how long you plan to invest for. You may not be able to come up with an exact number, but you can probably estimate whether you will be investing for one year, three years, five years, ten years, or longer. Plans can change, but the important thing is to make a plan. If you can’t figure out roughly how long you think you might invest your money for, then you probably shouldn’t invest.
The reason why you need to know your investment time horizon is because different investments behave differently. If you only plan to invest for one year, but put your money into the stock market, you may be very disappointed if all-of-a-sudden the stock market drops and you lose 20% of your investment. It may take the stock market many years to recover what you lost, and if you only planned on investing your money for one year, you will be out of luck. You can see that someone who only plans on investing for a short period of time should stay out of the stock market. The stock market typically requires a long time horizon—ten, twenty, or thirty years—so that your investment can weather the ups and downs and eventually generate a good return for you.
People who are looking to invest their money for a short period of time (less than a year or two) and want to have it very accessible in case of an emergency will usually put their money in a high interest savings account, a term deposit, GIC or money market funds. Investors who are looking to invest for three to five years may also consider investing in bonds, bond funds and other fairly conservative investments that pay interest. Those who are looking to invest for a decade or more often move a substantial portion of their investments into the stock market, real estate or other investments that have potential for higher returns but are not always easy to liquidate (sell) or may experience downturns that can last for many years.