Time horizons refer to the length of time an investor plans to spend a certain amount of money with an investment. It can range from seconds to decades and is determined by the investor’s goals and objectives, such as financing a home purchase or creating a solid financial foundation for retirement. Day traders are an example of investors with extremely short time frames.
Time horizons are simply the length of time an investor anticipates spending a given amount of money with an investment or set of investments. Sometimes referred to as the investment horizon or simply horizon, the time horizon describes the period beginning at the point of purchase and ending when the option or security purchased is sold. A time horizon can be a matter of seconds or a period of decades.
Setting a time horizon for any investment generally has to do with the investor’s goals and objectives. For example, if the investor is looking to invest in short-term options as a way to finance a home purchase in five years, this objective will help define the perimeters of investment activity. The investor will actively seek ways to invest money in securities and options that will generate a sufficient return at the end of this five-year period to allow the purchase of a home within a specified price range.
At the same time, a longer time horizon may be more in line with the investor’s objectives. This is particularly true when the primary objective of the investment activity is to create a solid financial foundation for the retirement years. In this scenario, the investor will likely migrate to investments that show a steady growth pattern over the years, with little or no anticipated downturns. The time horizon for this approach can span thirty years or more.
Day traders are a prime example of investors who indulge in extremely short time frames or investment horizons. Because trading can be hectic, it is possible to buy and sell the same security in a matter of seconds. The activity often allows the day trader to take advantage of a sudden jump in value and sell the security before the unit price returns to a previous level. As a result, the day trader can earn significant returns in an extremely short period of time without committing available funds over long periods.
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