Investing using Time Horizon
Let me tell you a story about an old client of mine. He and his wife were excited to hire a financial planner and they met me. They shared their goals & vision with me and they were excited about buying their first home and they were also expecting their first born. When I learned about their goals & their current action plan, my client stated, “We are planning to buy our home in the next 6-8 months and we are already looking for houses”. When I asked them how much money they have set aside in cash, my client stated, “Oh it’s invested in the S&P 500 since last year because the market has been doing so well”. Sadly enough, the storm in the stock market was brewing and I immediately advised the clients to pull the money out of the S&P 500 and leave it in cash or money market instrument since they were planning on using the funds fairly soon, BUT it was too late. The client lost close to 20% of their down payment savings which caused them to delay the purchase of their first home that they were so excited about.
So what do we do at this point? Do we either just lose money against INFLATION or lose money against gambling in the STOCK MARKET?
The answer is neither…
When contemplating investing, why do we often solely focus on long-term strategies? Many financial advisors, influencers, and bloggers advocate for investing in a single index fund or ETF and adopting a "set it and forget it" approach. While this may indeed hold true for long-term financial objectives, life encompasses more than just the present moment and 20 years from now. Virtually all of us harbor goals and aspirations, spanning the upcoming 2, 5, or 10 years. Hence, when navigating the realm of investments, we need to consider our investment philosophy by using time horizon.
When it comes to investing, here are some of the most important questions we should consider -
When do I need this money? Is it immediate term (next 12 months), short-term (next 2-5 years), mid-term (next 5-10 years), or long-term (10+ years)
If I immediately need the money, can I afford any losses? Are there any fees associated with taking my money out?
Worst case scenario, what amount of loss am I comfortable with?
What type of investments/tools should I be using to build my strategy?
Based on these questions, we can identify HOW we need to invest our money so in case if the stock market is to ever turn sideways, we are able to properly quantify our risks without losing more than what we can stomach for. Investments are just like tools, we want to make sure that we are using an appropriate tool for the right procedure because if we don’t, we can create more harm to ourselves than the potential benefit we were hoping for.
I am Raman Singh and I am a Certified Financial Planner™, your Personalized CFO, and my vision is to empower my community by providing guidance, coaching, and courage to help them achieve happier & healthier lives.
