How much time do you have?

The longer you have until you will need to use the money - the longer your time horizon - the more time your investment has to even out it's return, taking care of the volatility risk. But the more time inflation has to eat away at the value of your money. The trick is to match your time horizon to the investment you are choosing.

What does the time horizon of your investment have to do with what investment you choose? Well, it's like this:

Fixed-income investments like GICs have no volatility and the return is guaranteed. You can't lose your principal and you know exactly what you'll earn in interest on the day your GIC matures. The same holds for a bond or mortgage investment that is held to maturity. (If you're actively trading bonds or mortgages, they behave more like equities, responding to market conditions.) So it doesn't matter whether you go long or short, you're guaranteed your return as long as you hold to the end of the term you choose.

Equities - things like stocks, and stock-based mutual funds -- are a whole different kettle of fish. They can be very volatile depending on their nature, some offering more price stability and others offering more opportunity for growth. Either way, they don't work as short-term investments since they may be at a low just when you need the money and must sell them. They work as long-term investments where you have time to ride out the highs and lows and average out your return.

Less than three years is considered a short-term investment horizon. Three to nine years is considered medium term, and ten or beyond is considered long term.

Short-term investors should avoid putting the majority of their money in investments where the risk of losing that money is greater. Choosing fixed-income investments that generate a steady return while offering a higher level of security is a better idea.

Medium-term investors can balance their investment portfolios using both equity and fixed-income alternatives.

Long-term investors have the luxury of time and can, therefore, choose an asset mix that is weighted more heavily with equity investments. Since equities have historically outperformed all other types of investments over the long term, people with an investment horizon of ten years can benefit from the potentially higher returns equities offer because they have the time to ride out the natural volatility associated with the market.

As you get older, or as your personal circumstances or economic conditions change, and as your investment horizon shortens (yes, you'll get older and closer to retirement, so your time horizon may go from 20 years to 10 to 5 and so on) you'll need to rebalance your portfolio's asset mix.

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