Your investment horizon is the length of time you expect to hold the investment. If you are young and just starting out, then any contributions to your RRSP (for retirement) will have a 40+ year time horizon. But that same young person setting aside money to buy that first home or condo would have a much shorter investment horizon – maybe 3 to 5 years.
The general rule is that the longer your investment horizon, the more risk you should be taking in your investments. This is because risk and return are directly related – the higher risk you take, the more return you get and this has been true for hundreds of years. But it is only true when looking at a long investment horizon – at least 10 years. With a shorter time horizon, you want to avoid large fluctuations up and down since if you are caught in a downturn (think 2001 and 2008) you might not have enough time to recover your losses.
This is why all Investment Advisors ask you about your investment horizon, either indirectly by asking about your current age and your retirement age, or directly by asking you how long you expect to stay investment. In both cases they are trying to ascertain if you should be holding a relatively risky/high return portfolio (long horizon) or a relatively safe (but lower return) portfolio.
Our blog article takes this discussion further.