An investment time horizon can be broadly defined as a timeline that investors use to determine the length of time they need to hold an investment before realizing profit. Investment time horizons help investors understand how much time they realistically have to reach their financial goals. In other words, this can help an investor assess how much time they need to hold onto an asset before selling. It can also provide a way to assess their risk tolerance or risk capacity as an investor. This information may be used to determine what mix of investments to include in their portfolio.
At its core, a time horizon provides the answer to the question: when does the investor expect to realize their profit?
To be more specific, an investment time horizon is the amount of time an investor needs, or expects, to hold an investment before they may decide to sell it. The length of the horizon is largely affected by the amount of time you need to reach a certain financial goal. It could vary from months to decades, such as with retirement savings plans.
The longer the time horizon, the more aggressive an investor may be when building their portfolio, choosing riskier investments over more stable alternatives. With a shorter time horizon, investors may choose to be more conservative with their traditional assets, such as stocks and bonds, choosing stability over risk. In the case of real estate, however, shorter term investments may prove riskier than longer term assets.
Most investors tend to have multiple financial goals they want to meet. As an investor, you benefit from keeping the calendar in mind as you build your portfolio and look for assets that fit your goals.
There are three different types of general holding periods used to designate the length of the time horizon: short-term, medium-term, and long-term.
The short-term horizon refers to investments expected to last for fewer than five years. Traditionally, this type is appropriate for investors who are approaching retirement, may need capital on a tight deadline, or who are less risk averse. In commercial real estate, this is not necessarily true. Investments in commercial property, especially those that are held for 3-5 years, can potentially present more risk but also have the potential for solid returns. Different assets perform differently, so it would benefit any investor to keep that in mind when choosing what to add to their portfolio.
This is for investors who expect to hold onto their assets for longer than five years and up to ten years. Examples include people who are saving for a new home or those who may want to increase the amount of money they have saved up for a college fund. Medium-term strategies tend to balance between high and low risk assets, which can potentially protect existing wealth without losing value to inflation, while also seeing capital appreciation.
Investors using this strategy expect to hold their investments for ten or twenty years, sometimes even longer. A well-known example would be saving for retirement through a 401k. The more time you have, the more you can potentially afford to deal with risks in your investment portfolio. In real estate, long-term investors may take greater risks in return for potentially greater rewards, however many look for stability.
No matter your time horizon, as you near the target date for your financial goal, it may benefit you to begin to shift your portfolio’s mix toward more conservative assets to minimize the risk. Of course, time horizon and risk tolerance are strongly related, as an investor’s overall inclination toward taking risks affects how they build up their portfolio.
It’s important to know your time horizon so you can properly outline an investing strategy that meets your goals. One of the biggest mistakes an investor can potentially make is not aligning the timeline of their goals with their investment types. The time horizon dictates the return of your investment versus the return on your investment.
To illustrate what is meant, take this example. With a shorter time horizon, your focus will likely be tilted toward preservation of capital. You want to make sure you get your initial investment back plus whatever growth was achieved. If you need the money by next year, there isn’t a lot of time to grow your investment, so you do not have a lot of room to risk losing it. If your time horizon is longer, you’ll likely focus on the returns on your investment.
Alternative investment classes generally tend to be more illiquid than traditional investments such as stocks and bonds. This means they’re typically suitable for those investors with a long-term strategy. For example, venture capital funds usually last about ten years. These investors commit a certain amount of money to a venture capital firm that uses it to invest over the next decade, along with capital from other contributors.
Real estate is another example of an alternative investment that may require a long-term horizon, though most properties may lend themselves well to short or medium-term horizons.
For investors with a short-term horizon, they will likely want to preserve the liquidity of their assets. As a result, they may only want to invest in commercial real estate through a publicly traded REIT, since the shares can be purchased and sold much like stocks can. Others might focus on investing in deals with solid cash flow at that point in time. For those nearing the end of their short-term horizon, they are likely to invest in safer assets with stable income and a greater potential of preservation of capital.
Investors with a medium-term horizon will likely pursue a more diverse investment approach. This may look like investing in neighborhoods with strong local economies and healthy job markets. They might also choose to invest in value-add real estate assets in order to improve the property and cash out their original investments alongside their profits once the property is fully stabilized.
Those who have a long-term horizon, typically more than 10 years, tend to have the most flexibility in investing. The longer period allows investors to add potentially riskier investments to their portfolio, such as ground-up developments or secondary and tertiary markets that show promise but are not currently stable enough to grow. Of course, the smart investor will still balance this out by investing in some assets that carry minimal risk, such as the examples used in short and medium-term horizons.
There are many elements of real estate, both commercial and residential, that prevent real estate assets from being as quick a turnaround as stocks and bonds. One of those is the illiquidity of this type. Rarely can a property be sold for cash at a moment’s notice. As an investor, it would benefit you to keep this in mind when diversifying your assets and choosing which to include in order to fit your time horizon.
Each type of investment carries different risks, and an investor would benefit from considering this when planning their financial and investment strategy. This is why it’s important to consider how you will diversify your portfolio to fit your time horizons. Here are some of the risks to consider when deciding on your personal time horizon.
Inflationary Risk: This refers to the danger that the real value of an asset will fall due to an unexpected increase in consumer prices. For example, bonds tend to be susceptible to inflation, meaning an unexpected spike could possibly negate the expected gains from this investment.
Interest Rate Risk: An unexpected rise in interest rates could affect some of the gains on an investment. Like inflationary risk, this mostly applied to what are considered “traditional” investment types such as stocks and bonds. This can also affect real estate if you have variable rates on the debt of an investment.
Business Risk: This is the risk that a company might fail or go bankrupt, causing the stocks, bonds or other investment type issued by that company to lose their value.
Default Risk: The probability that a borrower will be unable to repay its debts is considered default risk. This tends to refer to bond issuers but can also refer to other debt-based investments.
Market Risk: Also known as volatility risk, this refers to the chance that the value of an investment will be negatively impacted by market crashes or other world events. Since markets tend to trend upwards over the long term, this type of risk is usually more of a concern for short- and medium-term investment horizons.
All of these can be mitigated through various strategies, such as diversifying your portfolio or choosing traditional investments with high credit ratings. Knowing your time horizon can help you choose both the right investment and the right risk mitigation strategy suited to your needs.
If you’re an investor looking for commercial real estate properties that meet your investment goals, consider investing with us.
Avistone is a private equity firm that specializes in hotel investment properties and industrial properties. We purchase hotels in markets where brand selection, renovation and alignment with qualified operators can lead to increasing yield, inflation protection and capital appreciation. Our investments in industrial properties focus on stabilized, multi-tenant industrial and business park properties that are strategically located in growing metropolitan markets with high occupancy rates and strong economic drivers.
Since being founded in 2013, we have acquired and managed 27 industrial and hospitality properties, representing more than 4.1 million square feet of space in California, Georgia, Ohio, Virginia, Texas and Florida. We pride ourselves on our goal to deliver yield, inflation protection and long-term capital appreciation to our clients and have a history of success to prove it. Learn more about our offerings by contacting us through the form on our website or calling our office.
© 2024 Avistone, LLC. All rights reserved.
Communications from Avistone, LLC or its affiliates (referred to together as "Avistone"), whether it is transmitted through its website, social media, email, text or any other marketing platform used by Avistone (collectively termed "Avistone Communications") must not be taken as recommendations or endorsements to purchase, sell, or hold any securities. Furthermore, Avistone Communications should not be considered as advice related to investment, taxation, finance, accounting, legal matters, regulations, or compliance.
To gain a comprehensive understanding of the risks associated with the securities mentioned herein or in Avistone Communications, it is essential to review them with related private placement memorandums and other offering documents. Participating in private placements requires substantial financial commitment and the ability to tolerate a complete loss of the investment. Avistone Communications provide a preliminary overview and insights into Avistone sponsored investments, and are intended for initial reference. However, they do not encompass all relevant information and should not be considered a complete representation. The information presented is subject to further updates without notice and qualification as provided in the relevant offering materials. It's important to note that Avistone is not registered as a broker-dealer, and Avistone does not make any claims or warranties regarding the legality of investments in Avistone sponsored investments ("Avistone Investments").
Investing in alternative securities or real property carries inherent risks, are illiquid, may depreciate in value, and is limited to accredited investors under the Securities Act of 1933. These risks include market fluctuations, credit vulnerabilities, interest rate exposure, and potential loss of capital. Before investing, all prospective investors must conduct an independent assessment, evaluate fees, uncertainties, and risks outlined in offering materials, and consult with investment, tax, financial, and legal advisors. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or endorsed any Avistone Investment, or authenticated the accuracy or exhaustiveness of any information or materials furnished via Avistone Communications.
The information in Avistone Communications is not a recommendation, investment advice, or a solicitation to buy, sell, or hold any security or investment strategy. It is not provided in a fiduciary capacity and does not consider an individual investor's specific goals or circumstances. The information reflects Avistone's market interpretation, and the success of Avistone Investments is not guaranteed. Investment decisions should be based on individual goals, in consultation with financial professionals. Past performance does not predict future outcomes. All research and supplementary information in Avistone Communications are for informational purposes only, and Avistone assumes no responsibility for inaccuracies or omissions in the content or linked resources.
The financial and investment benchmarks, including forecasted internal rate of returns (IRR), total return, distribution yields, multiples, and investment holding period returns, displayed on Avistone Communications are projections, subject to change and should not be considered as actual investment outcomes or guarantees of future results. These benchmarks always come with inherent risks, such as market volatility, operational uncertainties, and limited liquidity. Additionally, financial metrics and calculations within Avistone Communications have not undergone independent verification or audit and may differ from actual financial metrics for any investment. The investment data provided is sourced from entities believed to be reliable, but no assertions or warranties are made regarding its accuracy or comprehensiveness, and Avistone assumes no responsibility for any inaccuracies.
Avistone’s historical track record in the industrial sector showing past performance is no guarantee of future results. The performance of Avistone’s prior industrial projects have not been audited by any third party. Not all investors received the same returns due primarily to investments in different property offerings. Full-Cycle Track Record average metrics are based on weighted averages that treat investment dollars equally and are calculated after summing the results of all Avistone full-cycle industrial investments, weighted by each investment's respective capitalization amount for each Full Cycle Investment.
Materials or data emanating from third-party media external to this domain or Avistone Communications may address or refer to Avistone or correspond to information contained herein, however, Avistone does not extend endorsement or accountability for such content. Hyperlinks to external sites or reproduction of content from third-party sources do not denote an endorsement or approval by Avistone of the content thus linked or reproduced.