Gen Z investors can leverage their long-term time horizon to build effective investment strategies for financial success and benefit from compound interest longer.
Why Gen Z Investors Have an Edge
As a new investor, you have significant advantage that support taking on more investment risk: Longer time horizon to recover from market downturns. By starting your investment journey earlier than previous generations, young investors can benefit longer from compound growth of their investments.
Time Horizon: Your Investment Timeline?
An investment time horizon is the amount of time you plan to hold an investment before you need the principle money back. Time horizon plays a key factor in your investment strategy by helping decide which investments to make, based on risk tolerance (more on that below).
Different Time Horizons
- Short-term (less than 5 years): Investing for near-term goals, such as saving for a car or vacation.
- Medium-term (5-10 years): Investing for medium-term goals, such as a down payment on a home or college.
- Long-term (10+ years): Investing for long-term goals, such as retirement planning.
As a result, a time horizon dictates how long you plan to park your money in an investment vehicle before needing it to returned with a pre-determined (or estimated) appreciation for other projects, such as a large purchase, or re-deploy into other investment opportunities.
Factors that Impact Your Time Horizon
To determine your time horizon, consider your financial goals, realistic time-frame, and the risk tolerance you’re willing to take to achieve this goal. For example, an extended time duration opens up more opportunities for your investment strategy, while a short-term time horizon should dramatically reduce your risk tolerance.
- Financial Goal: What is the financial goal you’re trying to achieve, such as savings for a vacation, college, or large stretch goal, such as the down payment on a home, or other large purchase.
- Time Duration: What is the time-frame (in months or years) you’re dedicating to achieve the financial goal.
- Liquidity: How important is it to liquidate and exit your position (whether the investment is up or down) to return the invested capital to cash.
- Risk Tolerance: How much risk are you comfortable taking with the principle of invested money.
- Appreciation Goal: What is the desired rate of return for the investment, based on time duration and risk tolerance.
Using Time Horizon in an Investment Strategy
If you view the money you invest the same way a bank (or an investment firm) allocates its capital, a diversified strategy would create a portfolio basket of different investments based on combination of factors within your time horizon (e.g. Short-time horizon, low risk-tolerance, high-liquidity).
- Fixed-Income: Some examples include, a 4% fixed interest-rate 12-month CD.
- Growth: An example might include, 5% annualized yield from a dividend stock or exchange-traded fund (ETF).
- Aggressive Growth: Some examples potential 20% appreciation in a stock’s share price vs. the cost-basis purchase price (e.g. $10 share price that investment analysts predict will rise to $12 in 12-months).
- Retirement savings: Money dedicated to long-term investments are generally pursuing retirement savings.