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Managing my investments
Managing my investments

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3.1 Time horizons and goals

A pile of calendars for the years 2015, 2016, 2020 and 2030.
Figure 1 What’s your time horizon when investing?

Last week you spent time familiarising yourself with the assets you can invest in and the investment products (including funds) you can use to build up your portfolio.

Now you need to turn your knowledge of what you can invest in, to what you want to invest in. To do this requires a plan to be devised and more information to be gathered about the alternative strategies you may want to employ, including the mixture of assets you aim to hold in your portfolio. Devising strategies for the timing of investment activity – whether you’re buying or selling – is also important.

The first stage is to re-visit the core building blocks of investment management introduced in Week 1. This involves asking the questions of what you are investing for and over what time horizon? This analysis provides information about how much you need to accumulate and by when.

One item which all of us should be investing for is a pension. So, a key part of the exercise is to determine what retirement income, other than that provided by the state, you need.

The next stage is to work out when you want to retire, since this will set the time horizon for the compilation of the fund required to provide the income in retirement needed to support your desired lifestyle. Help in doing this analysis is provided by the pension planning tools provided by Age UK [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] .

Why not access this now and work out how much you need to save to meet your pension objectives?

Once you have completed this ‘what’ and ‘when’ exercise for your pension planning then apply it to all the other things you invest money for – perhaps education costs, a new car or a wedding. In stages, you are building up a picture of how big an investment fund you need and the time horizons by which you need the funds to achieve defined volumes.

You also need to consider your risk appetite. This is crucial as, given the trade-off between risk and return, the greater risks you take the more quickly your fund might accumulate. Yet the higher risks associated with the (potentially) higher returns mean that such investments are not suited to building funds over the short-term: an adverse movement in the value of such investments during this period could leave you well short of the size of the fund you need. Rather higher-risk investments are more suited to a long-term investment horizon, over which adverse short-term moves in the value of such assets tend to be more than compensated for by the long-term trend to outperform safer investments.

Even with this maxim in mind, you do need to reflect on how comfortable you are with higher-risk investments. Ask yourself:

  • are you sure that if you invest in higher risk investments, you won’t need to cash them in over the short-term?
  • have you the capacity to bear financial losses if you do have to cash them in earlier than anticipated?
  • is holding investments which may fall in value – sometimes sharply and perhaps only in the short-term – going to upset your life (for example, by keeping you awake at night)?
  • finally, and critically, are you sufficiently knowledgeable about all the risks your investments are exposed too? Have you checked your investments off against the full range of risks that could apply to them?

Answering this last question requires you to know what this full range of risks is and see which apply to the assets you could invest in. So in the next section, you’ll look at the risk spectrum to make sure you know what to check for when investing.