How does your time horizon impact your investor risk profile?

The financial markets are full of people wanting to find the elusive edge that will take them above the crowd and help them achieve their financial goals, when all you really need is time.

You know you need to invest, but are unsure where to start. Yes, the wealth management industry is complex, but you don’t have the time to make it a priority right now.

Investment strategies come in all shapes and sizes, but all you need to remember is that time really is your friend and the earlier you can start the better.

Why is time so important?

The longer you have to invest the more risk you can take with your investments.

Now, risk is one of the most misunderstood concepts of cautious investors. When it comes to investing on the financial markets, it isn’t synonymous with danger.

Risk and return move together, so as your level of risk increases, so does your potential return – although the further your investments can also fall.  

The further away your time horizon, the longer your investments have to recover if they do suffer from any short-term fluctuations. 

Risk-averse investors will accept a lower potential return on their money so to protect their initial investment value, whereas other investors won’t mind taking on the risk of losing their money for blockbuster returns.

The risk tolerance of most investors sit somewhere between the two. Your risk tolerance helps build your investor profile, which influences what you invest in. Riskier portfolios will have a larger exposure to equities, whereas more risk-averse investors might prefer to invest in bonds to protect the value of their money and benefit from regular income.  

Investing is personal, and it’s important you listen to your investor profile when you look to the markets. By investing in the right way for you and your family, you portfolio can get one step closer to your financial goals, rather than two steps away.

Although investing is about accepting a certain level of risk for the return potential it holds, you should still look to manage the risk in your portfolios.

One popular strategy is diversification. By spreading your money across investments, asset classes and geographies, you hope to smooth out your returns – offsetting any losses with gains made elsewhere.  

How compounding can help

Time also allows you to benefit from one of the most powerful forces of investing; compound interest. Albert Einstein supposedly called it ‘the greatest mathematical discovery of all time’.

When you invest, you hope to make a return on your money. When you invest over a period of time, these returns end up earning their own return – a concept that’s called compounding.

The longer your money is invested, the longer your investments have to benefit from compounding.

Compounding can have a powerful impact on your returns – that’s why investors are always encouraged to start as early as possible. American research from asset manager JP Morgan shows just how much time can impact your returns. 

In fact, someone who invests $5,000 a year for just ten years earlier on in their career will end up with more money than someone who invests for 30 years later on in life.

In this example, you’d have $602,070 if you’d invested for a decade early on, whereas you’d have just $540,741 if you’d have invested for 30 years.

If you had invested $5,000 a year from 25-65, however, you’d have over $1.1 million in time for retirement.

Time in not timing the market

Longer time horizons are also important because they encourage investors to ignore market noise and avoid any potential costly knee-jerk reactions.

Often, investors try and time the market in an attempt to protect themselves from experiencing any losses. Sometimes, a fall in the value of an investment is temporary and quickly recovered.

By trying to time this market, an investor could find themselves selling when the price is lower and buying when the price is higher – not to mention the additional trading costs often charged by do it yourself investment platforms.   

Another study by JP Morgan is often used to emphasise that it’s time in not timing the market that helps you achieve your long-term financial goals.

For example, if you had invested in the S&P 500 in the two decades to 2014, you’d have generated an annualised return of 9.85%.

Imagine you had tried to time the market and had ended up missing just the 10 best days of performance. You’d have made just 6.1%.

Essentially, had you sat back and relaxed, you’d have been over 3% a year better off on average.

Match with your investor profile

At Moneyfarm, we understand how important time is to you. Not just as a way to grow your money, but also when it comes to what’s important.

You already have a busy life and would probably rather spend your spare time making memories with your family over monitoring the market.

At Moneyfarm, we help you make the most of the time you’ve got. We make investing for your future simple, by matching you with an investor profile based on your time horizon, what you’re investing for and financial background. You’re then paired with a portfolio that’s built and managed in line with your long-term financial goals.

You can then sit back and relax – or go and run a marathon if that’s what you prefer to do with your spare time. Our team of experts monitor the markets and manage your investments from there, so you can focus on the important things in life.