Personal Wealth Management / Expert Commentary
Calculate Your Investment Time Horizon
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher reviews how investors can determine their “time horizon”—the length of time their assets need to last. Ken believes investors should first determine the primary purpose for their money. For example, investors often want their assets to support them and their spouses for the rest of their lives. In this scenario, Ken thinks the time horizon should equal the longer of the two people’s life expectancies.
Importantly, Ken says assets can have multiple time horizons. Even if an investor’s primary goal is lifetime income, they may have other goals such as gifting to charity, spending on grandkids or leaving money to heirs. Ken suggests investors separate their assets according to their goals, and invest each “pocket” of money accordingly. Ken believes investors with short-term time horizons should focus on lower-volatility investments to protect against major, unexpected losses. Conversely, Ken thinks investors may want to accept higher volatility in exchange for higher return potential to help them reach longer-term goals.
So in capital markets and the stock market and the bond market and all kinds of other markets, people often talk in jargon, and I find myself doing that and I find it annoying when I find myself doing that. But I do it, because it's really hard for anybody in any special category, whatever it is, to not talk about the jargon of their category. To not use the jargon of their category and one of the jargon phrases in financial planning, investment advice and capital markets in general is time horizon. What's your time horizon? And people throw that around pretty readily. And then someone will say to me. What do you mean? And how do you calculate it? And that's a really valid question.
When you're in the fifth grade, they're not teaching you how do you calculate your time horizon? So, really it works pretty simply and about like this. What's the primary purpose of your money? What are you trying to accomplish with it? Over what time? Is there something else you're trying to accomplish that maybe change is part of it? And how would you measure that? So, let's say you're 25. Or let's say you're 65. And there's a lot of options otherwise, of course.
So you're 25, and the purpose of your money, let's say, is to save so that you can buy some groceries next week. Well, that's a really short time horizon, and you know that intuitively. Let's say instead it's that it's to save because you're 25, and unlike most people who are 25 today, you just got married. And you want to buy a house ten years from now. You know you can't afford it now. But you're thinking down the road ten years from now, that's when you're going to have kids and that's when you're going to buy your house. Well, if that's what the primary purpose of your money is, I just told you your time horizon. You follow that? The more common one that I see, and I'm just going to tell you, when I was young, I mean, when I was in my 20s, every year I had a five year plan. Every year! My five year plans never worked out. Every year, I couldn't quite envision what the real long term was because when you're young, you haven't lived a long time. And young people don't like to hear that. But I know it was true from when I was young, and I know it's true from young people I talk to now.
But as you get older up to be more like that person, that's, let's say 65. Now you're thinking differently and you're thinking, well, the primary purpose of my money, and this is the most common answer I ever hear to this question, is to take care of me and my spouse the rest of our lives. Okay. Anything else? Oh, yeah. We'd like to leave some money to our offspring. Okay. Anything else? Well, we probably want to spend some money on our grandkids before we die, too. Okay. Anything else? Well, we got a little bit of money we want to leave to charity. Okay. Anything else? No. No, that pretty much covers it. Those kind of answers are real standard and common ones, and I think that makes sense to you.
So then my next question is, okay, so if the primary purpose take care of you and your spouse the rest of your lives, how long do you think you're going to live? How long do you think your spouse is going to live? So then the way I would answer that. Is not to look at actuarial tables because I don't think actuarial tables work quite right. Instead, what I'd do were I you, is say, how long did my parents and grandparents live? And how long did my spouse's parents and grandparents live? And am I in better overall health or worse than they were? And average that out. Take your parents lives, add a few more years to it because medical science improved over those years and people live longer. Take your grandparents lives, add a few more years to it. I'm gonna come back to that in a minute. Kind of average that and that's maybe how long you should expect to live and then do the same for your spouse. So like in my case. You know, my grandparents were all gone between their late 70s and early 80s. My parents both made it into their 90s. Why? Overall, a little bit better health conditions relative to their parents. And medical stuff had improved, things that might have otherwise taken them out. So they live longer. That continuing to process.
If you read media, which is almost always aimed at scary, they'll tell you that life expectancy is falling. And on average, that's true because a lot of young people are dying for risky reasons. But once you get up into that 65 and up category, longevity is actually continuing to improve for all the same basic reasons. Elderly people now are more physically active than they used to be decades back. Medical care is better. Medical science is better. So you pad that time on there, you pad that time on there, because the most brutal thing you can actually do is to end up dying broke. And then you look at those time periods and you say to yourself, well, I'm 65, what are the odds that I make it to 85? Well, they're actually pretty good. But if you're 65 and your parents live this time period or that time period and your health is better or worse, you can adjust that. And if your time period is 20 or 30 years, then you say, okay, well, my second goal was to leave some money to my offspring. Okay, great. So when are you going to do that? And that either pulls in your time horizon to when you want to do that or leave it to them in your estate, which is as long as the rest of your time horizon, you follow that. It just means you need to have more savings at the end so you don't die broke. You die, leaving at least the amount for them, plus the taxes. And then you say, but you want to give some money to charity. Well, again, in your estate, before your estate, next year. That adjusts the time frame for that pocket of money, but just that pocket of money. And then you want to spend some money on your grandchildren. Hey, who doesn't want to spend money on their grandchildren? So you set that aside in terms of how old your grandchildren are, what you want to spend might be college, might be I don't know what. But that's exactly the methodology that you go through. It's a little bit like having a back of the envelope, relatively informal financial plan for the years of your life and where the money wants to go.
I don't believe you need to actually necessarily do a full, detailed financial plan. Some people like to do that, but it's a little bit neurotic. Because the most important part of all that, biggest piece? I want to take care of me and my spouse the rest of our lives. And how long is that? And everything else triggers off that. That's 80% of everything. So figure that out and you pretty well figured out what your time horizon is. If you really want to get more technical, you can get into a lot more detail. I wrote a book once, Planning Your Financial Future. But there's a lot of financial planning books you could read from all kinds of people and they can get you down into more granularity if you want to be that neurotic about it. But I don't think you need to be. I think you can just do it real simple. And then the fundamental thing that goes with that is if your time horizon's short, your investments ought to be things that don't have too much volatility in them. When your time horizon gets longer and longer and longer, you want to allow more volatility in the investments that you have because more volatility goes in the longer term with higher long-term returns. And the longer your time horizon is, the more you need that money to work for you.
And the real purpose in figuring out your time horizon is how long is it you need your money to work for you, so you keep it working over that whole time period. One of the things that people do wrongly all the time is to say, oh, I'm 65, so I'd be a conservative investor right now and not take any risk. That confuses conservative with not taking any risk. If you're 65, the biggest risk you have is the opportunity cost risk of not investing in high enough return categories over a long life ahead of you so that you end up too poor. And aged poverty is about the most brutal thing you can do to yourself. I'll tell you one more story and then I'll shut up.
And I know you never believe I'll really shut up. But the fact of the matter is, eons ago, I was writing one of my Forbes columns. This is decades ago. And Jim Michaels, the marvelous editor of Forbes for 38 years and just a marvelous man who was my editor and was marvelous to me. I wrote this column where I'm talking about this topic. And I said, the reality is but let's say you're 65 and you're a man and you're married and your wife is 50 and you think you're going to live ten years and you invest your money as if you both had a ten year time horizon when she, coming from a family that lives long, is in good health and is 15 years younger than you, is probably going to live for 30 or maybe even 40 years. And you invest like it's only ten. You're now subjecting what you experience to less risk but her to the risk of aged poverty because you've only invested the money like it's for ten years when in fact it needs to be invested like it's for 30 or 40. And my point was, if you hate your spouse that much, just go ahead and hit her right now so she understands how much you hate her. Because it's better to let her know right now. And I wrote the column that way, and Michaels got mad at me and he said, you can't write a column like that. You got to write it, we're going to call it wife haters, not wife beaters. You can't talk about that. And I said, okay, because I've never been very good at figuring those things out. And in reality, that's the point. You need to think about the second of the two of you, which is longer and plan for that because it's really that person's longevity that you're aiming for when you figure out your time horizon. I know this has been a long babble and a lot that you didn't want to hear, but thank you very much for listening to me.
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