How Do You Determine the Investment Horizon For Your Assets?

“There’s always a time and place for everything” is a common saying. For instance, you could go swimming in a lake during winter, but most would consider that to be unwise for various reasons.

This logic applies to investing as well. When you create an investment portfolio, it’s meant to accomplish a goal. This could be to start a business or purchase property. Even if it’s to build generational wealth, your portfolio needs to have assets which can stand the test of time.

How then, do you determine the investment horizon for your assets? We’ve got you covered with this handy guide. Read on and discover the general rules of thumb for the various asset classes, and if it’s ever possible to hold onto an investment for too long.

Related: 5 Financial Lessons Regular Investors Can Learn From The Goldfinger

How To Calculate Your Personal Investment Horizon

When you invest in something, you could hold onto the asset for as short as a few minutes to as long as several decades. Your personal investment horizon is therefore determined by two key factors:

1. Your expected lifespan. For instance, a fresh graduate in their first job generally has a much longer investment horizon than a 70-year-old retiree.
2. Your goal for a particular portfolio. For example, if it’s to accrue funds for your dream wedding in two years, your horizon for that portfolio would be much shorter than one which is meant for retirement in 30 years.

Additionally, one important principle to follow would be that the longer your investment horizon, the more risk you can take on. That’s because your portfolio will have the bandwidth to recover from shocks to the market. These shocks can include a property crisis or stock market crash.

However, you don’t have to invest in risk assets just because you have a long investment horizon. For example, if your horizon is 40 years but you’re a risk averse investor, there are indeed assets you can seek out to build a portfolio which fit these considerations.

What’s the Usual Investment Horizon for Specific Asset Classes?

Equities

Stocks and ETFs are highly liquid assets, being traded on exchanges all around the world. You can hold equities for as short as several hours to as long as a lifetime, depending on your investment goals and how well it performs. However, the usual investment horizon would be to wait until it adds at least 20-25% to a well-established price base.

For example, you buy Company A’s stocks at $100 per unit. You should only consider selling your holdings when its stock price reaches $120 to $125.

Fixed Income

A fixed income investment essentially involves you loaning money to a government or corporation for a specified amount of time. In return, you receive regular interest payments, along with the principal amount when the investment matures. Usually, the horizon for fixed income investments would be until the date of redemption arrives.

Let’s say you invest in the Singapore Savings Bond (SSB). It has a tenure of 10 years, with interest paid annually. Even though early redemptions are allowed for the SSB, it would be ideal to hold your position for 10 years.

Cash Equivalent Assets

Investments like treasury bills and commercial paper make up the cash equivalents asset class. This has the shortest investment horizon out of the three asset classes here by virtue of its definition. Its maximum investment duration must be three months.

What’s more, the investment’s value should not experience large changes before it matures or is redeemed, hence the name “cash equivalent”.

Are There Any Other Asset Classes I Should Be Aware Of?

Commodities

Precious metals and other basic goods like wheat and crude oil are considered commodities. Determining a general investment horizon for the commodities asset class is difficult because of each asset’s uniqueness. For example, gold has gained over 9,000% since the 1800s, whereas the price of crude oil has been fluctuating throughout its trading history.

However, a rule of thumb would be to think of commodities – especially precious metals – as long-term investments. To use gold as an example again, it only made an 8+% gain from February 2023 to February 2024. However, as mentioned above, zoom out to a 200+-year timeframe and you’ll see that its value has jumped by over 90 times.

Real Estate

If you own an investment property, you need to be prepared to hold onto it for around a decade before thinking about selling it off. Fortunately, your investment will act as an income stream in the meantime, with monthly rental payments helping you pay the mortgage and maintenance expenses.

However, if there are warning signs that the property won’t be able to meet its potential as an investment by the 10-year mark, do think about selling it and reallocating the funds gained. More on this below.

Alternative Investments

From luxury wristwatches to fine wine, these investments do not sit under any of the categories above. The usual investment horizon for these assets would be more target-based rather than time-based. That’s because the performance of alternative investments generally relies on the sentiment of collectors.

Take timepieces for example. The Bloomberg Subdial Index tracks the price of the 50 most-traded models in the secondary market. As inflation skyrocketed from 2022 onwards, the index dropped steadily because folks around the world were tightening their belts. A luxury watch is never a need, just like other branded goods.

Is It Possible to Hold Onto an Investment for Too Long?

Yes, it’s definitely possible to hold onto an investment for too long. That’s why it’s crucial to monitor your portfolio regularly and rebalance it whenever an asset consistently underperforms for longer than you’re comfortable with.

Here are several more signs you should sell an investment to stop yourself from holding onto it for too long.

1. Its Business Fundamentals and Performance Are Deteriorating

This particular indicator would be most relevant for equities. Publicly listed firms hold regular earnings calls where its top management executives discuss the company’s financial results. This can be for a quarter or a year. What accompanies these conference calls would be an earnings report, which details the firm’s financial performance for that period in print.

If you join these calls and read the accompanying reports, it’s much easier to make a decision. If the organisation reports declining revenues, profits, and even investments for multiple consecutive quarters and years, along with increased debt and competition, it might be best to let go of your holdings.

2. It Reaches Your Price Target

It isn’t uncommon to see multiple assets hit your price target within the horizon you set, especially if you’re a long-term investor. However, do remember that your portfolio is meant to serve a purpose, whether it’s to purchase a home or contribute to your retirement fund. Therefore, if an asset reaches your price target, it might be ideal to sell it off.

However, if said asset reaches your target significantly earlier than expected, you can consider holding onto it. With that being said, once it hits your target again or reaches a new one you set, you’d do well to finally liquidate it. Don’t fall prey to greed and hold onto an asset for longer than you need to. Its performance always has the potential to decline.

3. If It Is Generating a Negative Cash Flow

This signal is more applicable to real estate investments, regardless of whether it’s a residential or commercial property. If the property’s rental doesn’t sufficiently cover your monthly loan repayments and maintenance expenses, you might want to let it go.

Even if you strongly believe that a renovation or change in management team would turn its fortunes around, do your calculations first. This additional investment on your end to spruce the property up needs to make financial sense. Otherwise, you’d be better selling it off and redeploying the funds you receive from the sale into other assets.

In Closing

Managing an investment portfolio is tricky business, no matter how familiar you are with where you deploy your capital to. Knowing the general investment horizon for each asset class gives you a set of guard rails you can work with. In an ideal world, you would be able to hold onto every asset in your portfolio for as long as possible.

However, reality is often much different. Remember, there’s a time and place for everything, and understanding when to let go of an investment is just as important as knowing when to put your money in an asset. To get started on your wealth accumulation and preservation journey, check out our roundups of the best online trading platforms, savings accounts, and robo-advisors.

Read More:

• Five Ways to Diversify Your Investment Portfolio
• Safe-Haven Investments— What Are They and How Can You Invest in Them?
• How to Invest Your CPF-OA (And What You Can Invest It In)
• 4 Low-Risk Investment Alternatives to Fixed Deposits
• Key Lessons From the FIRE Movement For Retirement Planning

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