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Determining Your Investment Time Horizon

When evaluating an investment opportunity, there are many considerations, especially when deciding how to allocate capital within your portfolio. Determining portfolio composition takes into account your investment objectives, risk tolerance, experience, and time horizon. This article will help define investment time horizon, identify industry standards, and highlight factors that might influence planning to achieve financial goals.

What is the investment time horizon?

The Securities and Exchange Commission (SEC) defines the time horizon as the expected amount of time for an investor to hold the investment to achieve a particular financial goal. Setting an investment time horizon is similar to mapping out the course and resources necessary to reach a specific destination. To get from a starting point to a destination most efficiently, a traveler would survey the distance and pack the essential tools to reach their end goal. Similarly, when determining your investment time horizon, savvy investors map out their financial goals and allocate them to their investment portfolio according to plan.

What are the standard investment time horizons?

Investment time horizons are unique to the investment goals you aim to accomplish. However, there are traditionally three benchmarks: short, medium, and long term.

  • Short term horizons are generally less than three years. Typically, short-term horizons aim to preserve capital liquidity or to earmark funds for a particular near-term capital outflow.
  • Medium term horizons fall around three to seven years in length. Often looking for the right balance between risk and return, medium term investments allow for more risk than short term investments but are more conservative than long term investments
  • Long term horizons are usually around seven years or greater. Investors take on increased risk over more years and have the potential for heightened exposure to volatility in the form of market swings.

A famous adage says, “time in the market is more important than timing the market.” For example, the table below depicts the growth of $1 based on historical returns left untouched, compared to missing the best 10 days in the 85 year timeframe when evaluating the S&P 500 Index. *

Not only does the amount of time in the market provide a more extended period for recovery in the case of potential decline in value, it also allows for the potential of growing anticipated returns through compounding. Said plainly, as the initial investment begins to yield returns, the value of the investment increases and the subsequent returns are based on the increased value, thus compounding over time. The longer an investment is held, the greater the opportunity for compounding growth.

Liquidating an investment earlier than anticipated might cause you to pass up on the potential for future returns or be forced to find an opportunity that might not be similarly attractive on a risk-return basis. Alternatively, if you extend the duration of an investment for longer than the initial term, you will forgo another potential investment that is available.

The bottom line: the length of time usually correlates with the amount of risk an investor is willing to take; however, there are other factors that can influence the investment time horizon.

What factors may influence your investment time horizon?

Age is the one determinant when considering an investment time horizon. When contemplating one popular financial goal, retirement, the time for risk exposure and potential for compounding returns is vastly different for a younger investor looking to start investing than someone older. While retirement is just one example that maps an investment time horizon to a specific financial goal, others may include purchasing a house or car, paying for a wedding, or eliminating debt. We can conclude you might have multiple time horizons that are actionable when you are carefully planning your investments.

Once an investor establishes their goals of investment, they can begin making a plan to meet those goals by assessing their current income and financial obligations. The advancement of a career, and consequently a higher salary, or growing a business if self-employed, may provide added income, which can accelerate the potential timeline to attain a financial goal. Inversely, an increase in spending or unexpected expenses, might delay the realization of your financial goals. With the rise of online budgeting apps that help track spending and plan for purchases, you can view the potential timeline to reach your financial goals based on hypothetical variables.

Investment Time Horizon Img 2

Your risk tolerance is also a factor that could potentially influence your time horizon to achieve defined financial goals. Generally, risk is segmented into two categories, idiosyncratic risk (sometimes referred to as “unsystematic” risk) and systematic risk. Idiosyncratic risk is the specific risk when investing in an individual asset or company. Systematic risk is the general overall market risk (i.e., interest rate). One way to reduce idiosyncratic risk is to diversify a portfolio or consider adding non-correlated assets, such as real estate to one’s portfolio.

External factors such as market trends can also influence the amount of time an investor is willing to hold an investment. For example, someone with a long term investment time horizon might see an opportunity to allocate capital or commercial real estate assets during a recession at a reduced basis when compared to historical levels. Conversely, you might decide to hold on to your investment for longer than you planned if your exit is coterminous with a recession since the value of the asset might not be fully reflected in the sale price.

How does allocating to commercial real estate play a factor in my investment time horizon?

Tangentially, commercial real estate investments can provide opportunities for investors across most time horizons. Short term investors can find opportunities investing in bridge debt loans or publicly traded REITs. In contrast, medium to long term horizons could align with value-add real estate or funds. Jamestown Invest 1, LLC is a value-add real estate fund that targets a wide range of institutional property types focused on geographies that have historically exhibited strong growth. The Fund aims to maximize operating cash flow and preserve invested capital over a five to seven year hold period.

While investors have several options to consider when diversifying to alternative investments via commercial real estate, investors with a medium to long term time horizon might consider partnering with a well-capitalized, stable, and reliable manager with significant experience.

Determining your time horizon

As you evaluate your financial goals and account for unique factors such as age, personal finances, and risk tolerance, your investment time horizons should start to come together. A well-balanced portfolio contains a mix of investments with varying time horizons that map to your goals. Ultimately, your portfolio allocation will change based upon your evolving personal investment philosophy, earning potential, and investment objectives.

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The NPI is a quarterly, composite total return for private commercial real estate properties located in the United States. The NPI includes operating office, retail, industrial, apartment, or hotel properties accounted for on a market value basis and includes the impact of leverage employed on the properties in the index. The NPI Levered Index is illustrative of historical average annualized commercial real estate returns on a gross property level leveraged basis, and these historical returns may not be indicative of future results. Leverage adds additional risks because leverage providers generally get paid first and may have a full or partial recourse claim against a portfolio. Such real estate return data should not be used to estimate returns of Jamestown Invest investments. While Jamestown Invest 1, LLC may acquire properties that meet some of the NPI criteria, it may acquire properties that do not meet such criteria. Further, Jamestown Invest property returns may have a better or worse average annualized return performance compared to the index as each real estate investment is unique in nature, which is inherently problematic for benchmarking to the composite returns of a highly diversified index.