The impact of time

For long-term horizons, you can expect to hold investments for ten to 20 years – perhaps longer. Typically, this includes retirement savings as they’re something you want to build well in advance.

You could opt for more conservative products, like savings and money market accounts here. However, even those won’t guarantee that the value of your investments will rise.

If you’re planning on investing for three to ten years, you could consider your activities to be medium-term. For example, this might be the right course of action for you if you’re saving up for your child’s college fund.

You could buy bonds and stocks to help you achieve this goal as you can hold them long enough to benefit from potential coupons (interest payments on bonds) or dividends.

Short-term time horizons usually span less than three years. You might be preparing to buy a new house or need to use the funds soon for another purchase.

In this case, you may prefer to invest using products like short-term bonds so you have quicker access to your money.

Tough economic conditions may put pressure on a portfolio and decrease its chance of making a profit. In some situations, the entire market could experience a downturn. However, this might not deter a long-term investor because hard times usually pass and give an investment portfolio a chance to recover.

It’s important to remember that sometimes individual shares can collapse and not recover. Having a diverse portfolio with assets across different sectors, geographies and shares is a common strategy to help protect your investments.

Trading time horizons

In contrast to long-term investors, traders tend to be focused on the short-term performance of their positions. Here, you could hold your position for a few minutes or hours.

However, you might keep a trade open for days or even months. It depends on several factors.

Firstly, you may want to make use of leveraged derivatives to amplify your potential gains over the short-term. It could lead to higher losses than you’d incur if you’d entered the market without them. But having a quick exit strategy might help you minimize the effect of a losing trade.

Remember, traders need to be on their toes, keeping a close eye on their trades and making quick decisions around whether to take profit or exit a losing position. Waiting a few days to see what happens can lead to serious losses or profitable trades becoming losers.

Secondly, you’ll need to account for the cost of trading. Overnight funding fees may seem small but, given time, they’ll start to pile up. These costs can add unnecessary pressure, so it might help to understand exactly how you’ll be charged.

Finally, your trading style, which we covered in an earlier lesson, will also likely influence your time horizons.

If you’re a day trader or scalper, you probably won’t hold any positions beyond the end of the day. Trades like these are usually opened and closed in a matter of seconds or minutes.

Because you’re aiming to profit from small market moves, leveraged products might help you maximise your potential profits. Don’t forget, they can also amplify any losses.

On the other hand, swing, momentum and position traders can stay in the market for days, weeks or even months. If your style falls into any of these categories, you’ll likely have longer-term trading horizons. However, some derivatives might not suit you because of the overnight funding costs involved.

The link between time and risk

If your time horizon is in the distant future, you’re farther away from your liquidity. This means that there could be more opportunity cost and more time for the markets to move against you.

In other words, time can put distance between you and your money and might decrease its potential value. The more time there is, the larger its effect could be on the value of your wealth.

How long you plan to hold a position can also help determine how much risk you accept. One argument is that the longer your time horizon, the more risk you can take on. The assumption is that you’re better able to wait for a market to recover.

However, there’s an opposing school of thought. It states that if you’re retired, you might be more open to taking on more risk. Perhaps because you’re more experienced, or you have less need of secure funds for the future.

Ultimately, how much risk you take on is up to you. You can stick to products that seem more secure or use a range of different ones to meet your various financial needs.

Remember, you can have varying closure dates across your trading and investment positions. These influence how much time you can dedicate to monitoring your portfolio and positions as well.

If you're investing for the long term, you can have a time horizon that spans decades. This could mean you’re able to check your portfolio less frequently.

In contrast, you might need to keep a much closer eye on your short-term trades. Price movements can occur in seconds, and your open positions could experience significant losses.

If you don't have time to watch the market, you may prefer to opt for investing, as it tends to be for the long term.