Time Horizon
Time horizon = the expected period before the client needs to access the invested funds. It is one of the most critical factors in determining asset allocation.
Standard Categories
| Time Horizon | Length | Investment Implications |
|---|---|---|
| Short-term | < 3 years | Capital preservation focus; cash, short-term bonds, money market |
| Intermediate | 3-10 years | Moderate mix; balanced funds, intermediate bonds, some equity |
| Long-term | > 10 years | Growth focus; higher equity allocation, tolerance for volatility |
How Time Horizon Affects Risk Capacity
- Longer time horizons permit greater equity exposure because there is more time to recover from market downturns
- Time horizon shortens as the client ages or approaches a financial goal
Multiple Time Horizons
Clients often have multiple time horizons simultaneously:
- Emergency fund: Immediate (must always be liquid)
- College funding: 5-10 years
- Retirement: 20+ years
Each goal requires a separately appropriate investment approach. Mixing time horizons (for example, investing the emergency fund in equities) is a suitability failure.
Exam Tip: Gotchas
- A single client can have multiple time horizons at once. Asset allocation should be set per goal, not per client. An emergency fund (immediate) and retirement savings (20+ years) should NOT share the same allocation.
"To" vs. "Through" Retirement
A newly retired 65-year-old does NOT have a 0-year time horizon. Their portfolio must last through a 25-30 year retirement. The distribution phase time horizon extends well beyond the retirement date.
Exam Tip: Gotchas
- A 60-year-old retiring at 65 does NOT have a 5-year time horizon. The DISTRIBUTION phase time horizon extends well beyond the retirement date. The exam specifically tests this distinction.
- Time horizon is not the same as age. A 70-year-old in excellent health with a 25-year life expectancy still has a long time horizon for retirement assets.