Choosing the appropriate investment horizon depends on risk appetite, life stage and the investment itself
An investment horizon describes the length of time that an investor expects to hold an asset or portfolio of assets. According to Clive Eggers, head of Multi Management within the Asset Management team at leading financial and advisory business GTC, an appropriate investment horizon is determined by three factors: the investor’s goals, their preferred or required risk exposure, and the nature of the underlying investment.
“An important point to clarify regarding the relationship between volatility and risk,” says Eggers, “Is that volatility is the degree to which the value of an investment is expected to fluctuate over a given period. A volatile investment such as a bundle of small-cap equities poses more risk if it is held and measured over a short-term horizon. The volatility is smoothed out – and there is less resultant risk – by investing over a longer period: short-term fluctuations do not have the same impact over a longer timeframe.”
Advisers assess the risk appetite of investors very carefully. If an investor is risk averse, and their priority is to preserve capital, then short-term, low-volatility (and therefore low-risk) investments are preferred. This would be an appropriate consideration for an investor nearing retirement age. They would not want to jeopardise their investments by exposing them to volatility in the market because a significant downturn could erode their hard-earned retirement capital.
“Having a longer investment horizon allows for the inclusion of greater volatility in portfolio construction, since there is more time to recover from adverse conditions,” says Eggers. “It would therefore benefit a young professional just starting out in their career to invest their retirement savings into a portfolio that emphasises exposure to equities and therefore has greater volatility.”
He explains that the inevitable volatility of the stock market is smoothed out, and short-term pullbacks are overcome, by the decades over which the portfolio will be exposed.
Eggers says the Asset Management team at GTC advises clients that – when measuring performance – the higher the risk of the portfolio, the longer the investment time horizon to measure performance should be, and vice-versa.
“When measuring against a market-related benchmark, there is a high degree of accuracy in saying that; equity managers should be measured over seven years, bond managers over two to three years, and money-market managers over one year,” he adds.
If measuring against inflation, Eggers cautions that additional dynamics arise.
“It’s vital, therefore, for investors to engage with their financial advisers who will guide them to choose applicable time horizons against which specific investments should be measured,” says Eggers.
When reviewing asset managers, Eggers says there are multiple considerations.
“Here we consider not only performance against the market, but also performance against inflation and peers.”
He cautions that a key area of concern is that humans are not fundamentally wired to make optimal investment decisions.
“When considering the most effective time horizon for the measurement of investment performance, we find that people are far too short-term in their thinking and they inherently do not have enough faith in their investment plans,” Eggers says, reinforcing that it is crucial that once an appropriate investment horizon has been chosen, investors must stick to it.
“Knowing this is one thing; following through is another,” he continues.
Eggers advises that pullbacks or dips within portfolios with long-term investment horizons are not a reason to panic and withdraw the investment.
“That would undo the benefits of structured portfolios with long-term horizons. We need to have confidence in the guidance and advice we get from our investment managers,” he says. “Then we need to walk away and come back at the end of the investment horizon to reap the returns which should be at the expected level.”
Eggers says that the best investors, who enjoy the best returns, are those that walk away, and don’t fixate and obsess over their portfolios.
The GTC client-interface teams work with clients to understand their investment goals. These are then crystallised into an appropriate risk-adjusted investment objective, backed by appropriately built portfolios designed to assist investors to reach their goals - with the highest probability over their applicable time horizon.
“GTC has designed ‘sleep-easy’ portfolios, to alleviate additional stress from our clients’ lives, who really have enough going on in their lives that they shouldn’t also need to be worrying about their investments,” Eggers acknowledges. “Our portfolios are designed to provide returns that investors can understand and stomach, that are in line with the market, but ultimately give our clients a better outcome without the degree of variability. We build our portfolios to give our clients the best probability of achieving their risk-adjusted returns and objectives in a risk mitigated way. We have a market competitive solution, which stacks up well against peers. Our track record has built substantial investor confidence.”
In conclusion, Eggers says: “Understanding and committing to an investment horizon allows members to have confidence that, despite the inevitable fluctuations of the market, GTC has invested their assets with the best possibility of their desired return over their time horizon.”
