Elections, Brexit, Initial Public Offerings, changes in the Federal Reserve Rate. The marketplace changes at breakneck speeds, but the changes to the world don’t have to result to changes in your portfolio. When it comes to investing, one of the keys to success is appropriately managing your investing timeline. When you understand your timeline you can assess your risk tolerance and create an investment strategy that works.
How to establish your investing timeline
Your financial goals will dictate your investing timeline. If your kids will attend college in 10 years, your investing horizon for your college portfolio is ten years. You should establish a retirement investment timeline of your entire life. Knowing your investment timeline will help you assess your risk tolerance, so you can invest on the efficient frontier. On the efficient frontier, your returns will be commensurate with the investment risk that you take. A longer investing timeline tends to lead to a greater ability to take risks.
As an Investor, I have a 15-20 year investment timeline for my kids college funds, but 60-75 year timeline for my own retirement. My kids college funds have a diverse and conservative asset allocation, whereas my retirement portfolio is aggressive.
At DIY.Fund, it’s easy to manage your investment portfolios according to your investing timeline. I’ve created unique portfolios for both of my kids (which includes some savings from their grandparents as well), and my retirement which is spread across four accounts (two for both my husband and I). Now we don’t have to do mental gymnastics to calculate our return or our risk. We simply use emails from DIY.Fund for regular updates, and we log in if we need to investigate anything.
How will your investing timeline help you?
Defining an investing timeline offers twofold help. First, it will help you create a strategy that has appropriate risk for you. An investing timeline creates reasonable expectations for the way that risk will affect your portfolio. The shorter your investing timeline, the more likely it is that downward volatility will cause you to not meet your goal. Most people with short investing horizons, choose to have low risk portfolios even if that means that they miss out on potential returns. Longer timelines allow for riskier strategies.
Secondly, an investing timeline can help you stick to your strategy. Markets move up and down, and fluctuations in both directions cause strategy destroying behaviors. When you’re tempted to stray from your strategy, you can remind yourself that your risk is commensurate with your investing timeline. If you’re invested for the long haul, the troughs and peaks in the market won’t matter to you. Long term investors can ignore charts like the one year chart of the S&P 500, and focus on the 40 year chart. If a stock in your portfolio under-performs while it’s earnings and profitability remain strong, you can still be confident in the company’s long term performance. Short term investors should be mindful that an inappropriate asset allocation may cause you to withdraw at an inopportune time. Many short term investors should choose a more diversified investing strategy which yields greater stability, but lower returns.