How long does a portfolio need to be invested to meet someone’s goals? In other words, what is an investor’s time horizon? In our experience, it is a simple and important question – yet many struggle to answer it. In Fisher Investments UK’s view, understanding and correctly identifying time horizons can help investors make portfolio decisions that increase the likelihood of reaching their long-term goals.
What is a Time Horizon? According to Fisher Investments UK
In our experience, many investors mistakenly underestimate their time horizons. One widespread assertion Fisher Investments UK has seen is that an investor’s time horizon is the number of years until their retirement. This is based on the notion there is a period in which investors grow their assets – accumulating and saving whilst working – followed by a separate phase of living off these assets in retirement. But time horizon, in Fisher Investments UK’s view, is more accurately defined as the entire length of time an investor’s assets must work to reach their goals. If an investor’s goal is to generate cash flow in retirement, their assets probably need to work for them throughout retirement – making their time horizon roughly equivalent to their lifetime. It can be longer if an investor wants to support a spouse or relatives or wishes to leave a bequest.
Hence, we think life expectancy is a good starting point to determine time horizon. Yet Fisher Investments UK often finds people underestimate this, too. Based on the latest Eurostat data, the average life expectancy of a 65-year-old in the EU is a little over 19 years.i That is the average, meaning it could be prudent to plan for longer. Furthermore, life expectancy is increasing overall amidst medical advances (despite a COVID-skewed dip).ii To estimate their life expectancy, investors can evaluate this information alongside their age, health and family history (e.g. of longevity or illness). If an investor’s assets must support a spouse or partner in retirement, we think it is important to estimate their life expectancy too. It may be longer, especially if they are younger or healthier.
Factors to Consider when Determining a Time Horizon
An investor wishing to leave a bequest to heirs or a charity may have a time horizon that extends far beyond their own lifetime. It could be the lifetime of their children or grandchildren or the mission of a charitable foundation. In our view, if an investor doesn’t need cash flow – and is investing exclusively for one of these other factors – their own age, life expectancy and work status may be secondary considerations compared to those of whom, or what, they plan to leave their assets to. Or, if the primary purpose for an investor’s money isn’t providing for retirement or supporting others – perhaps it is instead to fund a home mortgage deposit or university tuition – the time horizon is the amount of time before they plan to spend (or start spending) on their goal.
Fisher Investments UK thinks time horizon plays a big role in another critical investment consideration: determining asset allocation (the percentage of a portfolio that is invested in equities versus fixed interest, cash or other securities). Based on our research, equities have historically experienced more short-term volatility than fixed interest whilst delivering higher long-term returns.iii Therefore, we think heavier exposure to equities makes sense for those with a longer time horizon and a need for growth, whether to support cash flows or maintain their assets’ purchasing power. In Fisher Investments UK’s experience, this goal applies to many investors – and understanding time horizons can help them position their portfolios accordingly.
Why Determining an Accurate Time Horizon is Important
Fisher Investments UK thinks understanding this can help investors reduce common risks. A major one, in our view, is outliving assets. Consider a hypothetical 55-year-old planning to retire at 65. If they invest based on a 10-year time horizon – despite reasonably expecting to live another 25 years – they might place a big part of their portfolio in fixed interest or cash to reduce short-term volatility, an asset allocation that may not generate enough growth to support future cash flows, if their time horizon proves longer than they thought. Forgoing the long-term growth a higher equities allocation could yield can increase the risk of portfolio depletion. Those who realise this too late may have limited options to reposition their portfolio for cash flow in old age – never mind leaving a bequest.
Understanding time horizons can also help investors avoid behavioural errors, including selling equities amidst short-term drops. Downturns are never easy, and we sympathise with those who have experienced major market declines. However, even during big drops, the knowledge one’s money has many years – or even decades – to work for them may help reduce stress and prevent panic-selling before a rebound.
Hence, Fisher Investments UK believes correctly understanding and considering your time horizon is a very important first step in portfolio construction. It is integral, in our view, to designing a portfolio tailored to your needs.
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This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
i Source: Eurostat. Mortality and Life Expectancy Statistics, 25/04/2022.
ii See note i. Statement based on average life expectancy at birth in the EU, 2002–2020.
iii Source: FactSet and Intercontinental Exchange, Inc., as of 22/06/2022. Statement based on MSCI World Index with net dividends in pounds, 31/12/1969–31/12/2021, and ICE BofA Sterling Broad Market Index, 31/12/1996 – 31/12/2021.