Time horizons are simply the duration that the investor anticipates to make use of a given sum of money with a given investment or set of investments. Sometimes referred to as an investment horizon or simply a horizon, the time horizon describes the period that commences at the point of purchase and ends when the purchased option or security is sold. A time horizon can be a matter of seconds or constitute a period that lasts for decades.
Setting a time horizon for any investment usually has to do with the goals and aims of the investor. For instance, if the investor is seeking to invest in short term options as a way of financing the purchase of a home in five years, this goal will help to define the perimeters of the investment activity. The investor will actively look for ways to invest money in securities and options that will generate a sufficient return at the end of this five-year period to allow for the purchase of a home within a specified price range.
At the same time, a longer time horizon may be more in line with the goals of the investor. This is particularly true when the main goal of the investment activity is to create a solid financial base for the retirement years. In this scenario, the investor will likely migrate toward investments that show a consistent growth pattern over the years, with little to no downturns anticipated. The time horizon for this approach may span thirty years or more.
Day traders are an excellent example of investors who indulge in extremely short time or investment horizons. Because the trading activity may be frenzied, it is possible for the same security to be purchased and sold in a matter of seconds. The activity often allows the day trader to take advantage of a sudden jump in value and sell off the security before the unit price falls back to a former level. As a result, the day trader can make a significant return in an extremely short period of time without committing available funds for long periods.
