Reblog: The Importance Of Time Horizons For Investing (And Beyond)

The Importance of Time Horizons

 When it comes to evaluating market risk, your time horizon is a key factor to consider. As a general rule, shorter time horizons require more caution than do longer ones. I would also argue, however, that this concept applies to many areas of investing—and beyond.

Long-term investing

Let’s start with why longer-term results can be more predictable than shorter-term ones. The answer is, simply, averaging. One data point might be noisy, but as you accumulate more and average them, the outliers tend to offset each other. As a result, the signal starts to dominate the noise. The more data points you have, the closer you get to the expected result. Investors with 40 years, for example, can look at longer-term return goals with a reasonable expectation of actually getting them. But for shorter time frames, the noise can dominate. Hence, the extra caution needed as you get closer to retirement.

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