April 26, 2024

7 min read

Investment and Life insurance

Investment time frames: short-, medium- and long-term
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FWU - Expert Corner - FWU AG

  • Different times for different goals

  • The importance of the time factor when investing 

  • The relationship between time and the investor’s financial means

  • The investor’s goals and aspirations: the role of the time factor

When it comes to financial investments, there are clear rules we need to follow - partly to avoid any nasty surprises, but also to achieve the best possible outcomes. 

It’s therefore vital to draw up an investment strategy that takes account of two particularly crucial variables: the time factor and the investor’s risk profile. 

There is a precise correlation between the two, and it will determine a series of choices - not least which financial instruments to include in the investor’s portfolio.

Different times for different goals

Let’s begin with the time factor to help explain what an investment time frame is, i.e. the period of time an investor is prepared to tie up their financial resources in the investment itself.

It might sound obvious, but it’s useful to know why we need to establish an investment time frame, seeing as it’s the only way to create an effective financial plan and make the best decisions to suit the investor’s profile. 

An investment  time frame is usually defined as short-, medium- or long-term depending on its duration.

The conventional definition of a short-term investment is one with a duration of 1 to 3 years

This time frame means that investors can reap the short-term opportunities offered by the market while still being able to cope with any immediate needs for liquidity.

Short-term investments have a further advantage since they are less exposed to risk, but their disadvantages include low returns and, in many cases, a lack of protection from inflation.

The time frame of an investment is defined as medium-term when it covers a period of 3–5 years

Medium-term investments are ideal for achieving goals such as buying a house or funding your children’s studies. 

Choosing a time frame over the medium term means being able to balance growth with security: investors take on a moderate risk with higher returns than those achievable over the short term. 

However, a degree of caution is required when it comes to asset allocation, to protect your capital investment over the medium term.

A long-term investment involves tying up your resources for a period of at least 5 years

In this case, your portfolio will be designed to fulfil long-term goals, such as setting up a pension or building up assets to pass on to your children. 

One of the benefits of long-term investments is that they maximise capital growth potential, enabling investors to secure higher returns compared to a time frame over the short- or medium-term. 

With a long-term investment, you can diversify more successfully: remember that diversification improves a portfolio’s risk-return profile.

Risk profiles 1 to 7

Because the time factor means you can reduce your losses, a long-term investment enables you to take on greater risks with higher potential returns.

We usually talk about  risk profiles 1 to 7, the ratings scale used to measure an investor’s appetite for risk. 

The lowest, level 1, is classed as highly conservative, an investor who prefers security to potential gains. Two places higher up we come to risk profile 3, moderately conservative: investors who accept a moderate risk in order to obtain higher returns, and so on. 

The MiFID risk profile involves profiling clients/investors using a suitability questionnaire; this helps build up a picture that can then be used to choose the best asset allocation strategy for each one.

The importance of the time factor when investing

One of the questions on the suitability questionnaire concerns the time frame for the investment. The time factor plays a crucial role and is fundamental  in maximizing an investment for various different reasons.

Firstly, when investing over a longer period, investors can reap the benefits of compounding their capital, generating earnings not just on the initial investment, but also on the returns they make, such as interest, dividends or capital gains. 

The more long-term the investment, the greater the benefits will be thanks to compound interest. 

Secondly, time is an excellent ally when it comes to mitigating the impact of volatility, given that investing over the long term enables greater diversification and therefore reduces the risks involved. 

Investing in stocks, for example, often proves highly risky in the short term with significant potential losses. 

But extending the time frame of an investment can produce highly satisfactory  results, as fluctuations in the stock markets are offset by their tendency to grow over time. 

Another key aspect that underlines the importance of the time factor in investments is having a flexible strategy

Investors with a longer time frame can manage their portfolio with greater peace of mind, and avoid the anxiety associated with market volatility. 

This helps keep emotions at bay, which might otherwise compromise the portfolio’s long-term growth.

What’s more, investors can correct any mistakes over time and recover any initial losses, or change the asset allocation, steering their investments towards new opportunities that were not available to start with.

By giving our investments more time, we can capitalise on emerging trends, as some sectors and innovations might take longer to reach their full growth potential.

The relationship between time and the investor’s financial means

The time factor is closely correlated to an investor’s risk profile, but it is also tied in with their financial means. This influences different choices when it comes to strategic asset allocation for their portfolio. 

While younger people normally have fewer financial resources to invest, they do have the advantage of time. 

A longer time frame makes satisfactory outcomes achievable for those who don’t have significant starting capital: small amounts are enough to begin with. 

Investors who are just beginning their career but have already taken out a mortgage on a house will only be able to invest limited sums. However, if they start investing at a young age, they will enjoy a better  risk-return ratio.

By making small monthly investments, paying into a unit-linked plan to build up a private pension, for example, investors can reap all the benefits of compound interest.

They can also follow the weighted average cost strategy by buying assets at different prices over time; this lowers the risks involved in making a single, one-time investment.

The investor’s goals and aspirations: the role of the time factor

When it comes to investing, time also plays a crucial role in determining an investor’s goals and aspirations. 

The first step in designing a winning strategy involves drawing up an appropriate financial plan; to do this, we need to identify the investor’s personal objectives. 

This is where the time factor comes into play, given that every investment goal corresponds to a different time frame, requiring a range of strategies and instruments.

An older investor - a retiree, for example - will probably prioritise protecting the capital they’ve built up over the years to cover their needs in old age or to pass on to their children. 

The investment time frame will be rather limited, and their choices will therefore be oriented towards low-risk instruments which offer lower returns. 

Younger investors will have quite different aspirations, such as buying a house or setting up a private pension. 

Achieving their goals will certainly take longer, and they’ll need a different plan of action along the way. 

In these cases, the time frame will be long-term: this opens the door to investments with a greater degree of risk but higher returns, while the strategy can be adapted as they move closer towards their final goals.

In summary
  • Timing is fundamental if you want to get the best from investments

  • Every  investment goal corresponds to a different time frame

  • A long-term investment offers greater benefits than others

Good to know

A long-term investment enables you to take on greater risks with higher potential returns.