 Personal Finance PowerPoint Presentation, Time Horizons and Investing Goals. Prepare to get financially fit by practicing personal finance. Most of this information can be found at Investopedia using Time Horizons to reach your investing goals, which you can find online. Take a look at the references, resources, continue your research from there. This by Lisa Smith updated January 26, 2022. In prior presentations, we've been taking a look at investment strategies and goals in general. Now we're looking at using Time Horizons to reach your investing goals, focusing in on those Time Horizons. When contemplating an investment, few questions are as important as, quote, what is your Time Horizon end quote. So obviously when you're thinking about investing, you got to know how long you have for the investments to basically take place in order to make accurate decisions about that investment. So the answer can help you decide what type of investment vehicle you should consider, which investments to avoid, and how long to hold your investment before selling. It is important to note that the passage of the setting every community up for retirement enhancement, that's the S-E-C-U-R-E, the Secure Act, in December 2019 changes some of the familiar rules of retirement. For example, prior to the passage of the Act, the age for taking required minimum distributions, those are the RMDs, from a retirement account was 70 and a half, now that age is 72. So when we're thinking about saving for retirement, for example, we want to think about how much we need to put away in order to grow in our working years to get to the point that we have enough money in the nest egg for retirement. But we also have to think about the fact that the government is giving us a tax advantage to put into those accounts that are under a retirement umbrella, such as a 401k, such as an IRA, for example, and they will force us to take that money out at some point, which has an impact on basically our Time Horizon in terms of how long we have to be able to hold the investments in that account. So in addition, if you are still working, you can continue to contribute your traditional IRA account past the former cut off age of 70 and a half, similar to the rules for the 401k and Roth account. Risk and time, so whenever we're thinking about the risk of the investment, if we have a longer time horizon, that greatly changes the calculation. Funds often put their money into an average investment vehicle, such as growth stocks, and then keep it there indefinitely, not a smart move. So in other words, when you talk about the time frames that are going to change as you grow older, then clearly the time horizons that you have until you're going to need the funding are going to change. So it's not really a one size fits all. If we just put all of our money into, say, stocks, that probably leans better towards when we're younger, because we have a longer time horizon, which hopefully the returns of stocks will kind of pay off over the long run, even though there's going to be dips and falls in the middle. And you could then further tailor your strategy based on your risk tolerance levels. But as we get closer to retirement, then we're going to be more subject to the volatility in the market. If there's a big dip in the market, and we don't have a lot of years to basically wait out that dip and hopefully the returns overpowering it, that becomes more of a problem. While such an investment may be a good choice when purchased, it can become less and less appropriate as time passes. This scenario often happens when saving for retirement or for a child's college expenses, any long-term investment plan. So notice that we might have a specific goal-oriented plan, and the same kind of thing applies there. And we might just be saving generally for retirement. So then the question would become, well, how do I change my mix in investment strategy, which would be appropriate? And we could use different vehicles to do that. We might use one fund that has some kind of targeted fund that kind of mixes up the mix, or we might have our own strategy for altering the fund categorization. And obviously, we want to be aware of the complexity involved as we think about these different strategies. So in one common example, investors partake in their company's employee stock ownership plans. Over the course of several decades, bi-week payroll deductions, employer matching contributions help the employee build up a substantial number of shares in the company. So notice a company has incentives to have you invest in shares of the company because that means that you're actually now invested in the company in your retirement, which would mean that you would have an incentive they would hope for you to want the company to continue to grow more than just for the reason of getting a paycheck. That's all good. But if all your money is in that one company's stock, then you don't have much diversification and that becomes a problem. So as the employee's retirement date approaches, though, the stock market crashes, devastating the value of the employee's portfolio and forcing them to continue working. A similar result is often seen when an employee puts 100% of their savings into equity mutual funds. So notice that's kind of an extreme example because now you've got all your eggs in one basket. Oftentimes, the company will set up mutual fund options, which is a great tool. Mutual funds, when they came about, makes it a lot easier for individuals to invest and diversify while doing so, which means that you could put money into different mutual funds and get more diversification. But oftentimes, people still put them all into equity instead of kind of balancing out between bonds and so on and for example. And once again, you're not as, if that's the case, you're not as restricted with one company. That's really quite restricted. No diversification. If you're in equity funds, that's more diversified. But still, you're not really taken into consideration other types of investments, which can further diversify hedging if there's problems in say equities. So for years, a bull market rains and the balance grows. Then just as employee starts planning to retire, a decline in the stock market wipes out the substantial portion of the employee's nest egg. It's really hard to avoid these types of things, even though in theory, it makes perfect sense that we want the diversification because we often see in the bull markets, we're saying, hey, I got this money in these places that aren't earning what they would if I had my money in the equity. So then you want all your money in the equity. But obviously at some point in time, there's going to be a downturn in the market, and then you're going to get hit hard on the downturn in the market if all your money is in basically the one place. So being diversified sounds easy to do. But in practice, it's difficult because as the market swing, then the market sentiment starts to say, hey, this is the new thing. It's going to be like this forever. Markets are going to go up forever. You should have all your money in equity and so on until it isn't anymore. And that's when the sentiments get to the point where everybody thinks the same thing. That's usually when things fall apart, but it's hard not to think the same thing when everybody else is thinking that because everybody's thinking the same thing. So these scenarios play out frequently. So in response, the financial services industry has created investment products to help investors match their portfolio holdings to an appropriate timeline. This approach helps investors avoid the negative outcomes associated with inappropriate asset allocation. So this can be quite a nice tool. You can try to put your money into a fund that basically diversifies for you to some degree. So as you get older, it tries to basically balance the stock portfolio in such a way that it will be properly diversified based on your age, allowing you to basically put money in a simplified way, track your investment more simply, but not just have all your money in one stock or one mutual fund or possibly you have it in a mutual fund, a diversified kind of portfolio fund, for example. That's one approach that can be used that can be useful. So of course, with any of these investments, one must pay attention to associated fees and costs. So as you have money into a fund that if it was managed or if it has more kind of components to it, if it's not just following say an index, then it will talk about index funds more later, then it's going to it's going to cost more because now you got people that are managing it. So you want to be aware of that component. Evaluating time horizons. There are no hard and fast rules, but some generally agreed upon guidelines will help you decide which investments are appropriate for various timelines to create a portfolio based on time. You must realize that volatility is a bigger risk short term than long term. So clearly, if you're only investing for a short period of time and you put the money in and there's a dump in the market and you have to pull the money out, then that's going to hurt. But if you've got 30 years that you have to pull the money out, then you then if you could stomach the downturn, you might be able to wait it out. And usually that would be beneficial because in the long term, things hopefully will play out. Well, if history tell it repeat, you know, tells us tells us about what's going to happen going forward. So if you have 30 years to reach your goal, such as retirement, a market move that causes value of your investment to plunge is not a big a big a danger given that you have decades to recover, experiencing the same volatility a year before you retire, though can seriously derail your plans accordingly, placing parameters around the timeframe of your investments is a valuable exercise. So clearly, when we're younger, we might have more in in stocks that are have potential for greater returns, but more volatility, and then we might taper that towards retirement so that we're not exposed to as much volatility because we're going to need the money at that point in time, for example, just a general idea strategy. So short term, as a general rule, short term goals are those less than five years in the future with a short term horizon, if a drop in the market occurs, the date on which the money will be needed will be too close for the portfolio to have enough time to recover from the market drop to reduce the risk of loss. Holding funds in cash or cash like vehicles is likely the most appropriate strategy. Money market funds and short term certificates of deposit are popular conservative investments as our savings accounts. Now note that recently, a lot of people look at these money market accounts and savings accounts and CDs and say, well, those are just ridiculous because the interest rate has been held artificially low for so long that you don't feel like you're getting any returns. But they're not going down, right? They're not going to be you're not going to get hit by the decrease in the market. So that's good. And if you're in a period of inflation, then you start to look at these money market funds and whatnot. You might have interest that you can say, okay, I could see at least a return on the interest. So it really depends on what kind of market we're in. And like I say, markets tend to change. They might be static for some time, but then you can have a substantial change to the market. People might say, okay, the new norm is to have interest rates at zero all the time until it isn't, right? And so just be aware of that. So intermediate term, intermediate term goals are those five to 10 years in the future. At this range, some exposure to stocks and bonds will help grow the initial investment value and the amount of time until money must be spent is far enough in the future to permit a degree of volatility, balance mutual funds, which include a mix of stocks and bonds are popular investment for intermediate term goals. So now we've got a wider expanse on when we're going to need the money, we can have more exposure to the volatility, which also has exposure to possibly more gains, hopefully the mix between stocks and bonds stocks typically being the one that has the capacity or ability for having the bigger gains, but also has the more volatility exposure to losses. The bonds typically being, you know, less, less exposure to losses. They might act inversely in some cases, but generally the bonds are going to be more of the safer item most of the time. So long term, long term goals are those more than 10 years in the future, more conservative investors may cite 15 years as the time horizon for long term goals over long term time periods, stocks offer greater potential rewards while they also entail greater risk. There is time available to recover from a loss. So if you have the long term, you might be leaning more on the equity side of things. It might doesn't mean you're not going to have any bonds maybe, but you're probably waiting that in the general idea of the general strategy, the general recommendation would be saying go towards the stocks because in the long term, the stocks should pay off even though you're going to have that volatility, that up in town movement. Clearly, you still want to take into consideration your risk tolerance kind of level whenever you're considering the overall strategies within each of these categories or time horizons as you make your plan. Investment choices to help investors avoid the negative consequences associated with bad timing, the financial services industry has created a variety of investments. So we got the target date funds, a mutual funds that automatically reset the mix of assets, stocks, bonds, cash in their portfolios according to a selected timeframe. So this could be a great tool because you might think, okay, I get it, I need diversity, but how am I going to do that because I'm not a stock professional trader here. So one way you might say is the easiest thing you can possibly do is basically say I want one fund that does the mix for me and is targeted towards something like my retirement age or something like that. And so the fund will adjust the mix accordingly. And that's one way that you can basically have a really easy idea of you putting the money into the fund. You could also use index funds. So you might say I'm going to try to do my own diversification with the use of maybe index funds, which are tied to the market without as much of the personalized management kind of fees related to it. So they might be cheaper. And that way is another kind of strategy that might be used, obviously mutual funds in general are a strategy, index funds being a subcategory of the mutual funds. And then you can invest just in stocks, but investing just simply in stocks individually can be more tedious because you're obviously going to have to track all those individual stocks in an overall portfolio objective to try to meet your diversification goals. So that's typically something that you want to be doing. If you enjoy the stock picking and trading or possibly you have some money set aside apart from your overall investment strategy for individual stocks, for example, as part of your overall picture and portfolio. So they are frequently used as retirement saving vehicles with a mix of investments becoming more conservative as the investor's retirement date approaches. For example, a target date fund designed to fund an investor's retirement 30 years from today might have a mix of investments weighted heavily towards stocks with moderate amounts of bonds and little in cash. 30 years later, the mix might be exact opposite with cash making up the largest percentage of the portfolio followed by a moderate amount of bonds and few stocks. So college savings plans. So this isn't the targeted plan. So now you're thinking you're trying to get up to enough money for funding the college that on a known date into the future. So and qualified tuition plans also known as the 529 plans help investors cover the cost of primary and secondary schools, university and college vocational school or even an apprenticeship education, which was added under the passage of the Secure Act. In addition, the act now allows 529 plan funds to cover up to $10,000 in student loans. So you could get some tax benefit looking into the 529 plan helping you to then save for these kind of college savings education. So named after section 529, the internal revenue code, these tax advantage programs help investors pay the costs of tuition, room and board, books and other education associated costs. One method is a college savings plan that permits investors to set aside a specific amount of money that is generally invested in a pre approved list of mutual funds. Many of these funds are age based funds, which operate in a similar manner as target date funds. So you got a similar kind of perspective. We're investing. We're trying to, we're trying to get obviously gains or returns. And we would like to do so in a targeted based method, which means that we have this horizon and therefore the closer we get to that, to that date, then the range will change and the less we would want and on the volatile type of investments. So you might have a similar kind of approach using a type of mutual fund, which pools money together and we'll talk more about them in a future presentations, but they pool money together so that, so that individual investors have the ability to invest in a more diversified fashion and you could set up a diversified mutual funds in a similar way as you might do for targeted funds for retirement. So at the tiled ages, the date on which tuition must be paid approaches, the asset allocation becomes conservative, meaning less volatile stocks, more cash and bonds. Since the value of the investment portfolio changes with fluctuations of the financial markets, automatic adjustments to the portfolio move money to more conservative investments to reduce the risk that a stock market crash will wipe out the savings just before tuition comes due. The challenge here is that underlying investments grow may not be enough to cover the full tuition costs. So mutual funds are a convenient way to diversify. So mutual funds were a great huge benefit because before mutual funds, the investing was typically something that might be more wealthy individuals would be doing because they would have the ability to diversify whereas because they're investing in individual stocks. If you have mutual funds, then that opens up the ability for smaller investors, which is great for smaller investors. It's also great for businesses who have a wider range of capital that is available to them. Choosing investments that automatically shift assets to cash or income-oriented investments isn't the only option for investors seeking to use time horizons. Investing in mutual funds and then moving the money to less aggressive funds as time passes is another option. So you might say, I could put money into a targeted type of fund or maybe I try to put money into my own strategy of mutual funds. This of course would take more time and more planning, not as much time and planning as trying to invest in individual stocks for your entire portfolio. But you might choose mutual funds and want to, and this would be someone who is investing that wants to be more engaged in the process, then you would be saying, I'm going to have my own set of mutual funds and as time passes, I will do my own reallocation from those mutual funds that have a high volatility like equity and into other types of funds, possibly bonds and cash for example. So they offer professional investment management, including security selection and a large variety of choices, making it easy to get a mix of many securities, so-called, quote, balance and quote funds, even offer a balance between stocks and bonds in a single fund. So you can find funds that are trying to balance out between the stocks and the bonds in various ways. But of course, if you have a static balance between the stocks and bonds, then it becomes a little bit more difficult to adjust that balance as you get older and your time horizons change. So the idea would be that you have one set of balance between, say, stocks and bonds when you're younger, and then as you get closer to save retirement, then you're going to have to change that mix up to reduce the level of volatility. And so you want to have a strategy set in place where you can do that without being too overwhelmed and being able to do that and be able to kind of understand what your overall mix is. So stocks and bonds can be used to build and manage your own portfolio if you have the time, skill, and interest. So clearly, all those three factors would be relevant, right? If you don't have the time, skill, and interest, then you might be looking just at the targeted fund that hopefully tries to reallocate an accordance and possibly have some other investments as well. But that would be the general idea. If you have the time and the skill and you're saying, I would like to get more involved in the mutual funds and the time horizon change-ups, then you might then go into a strategy of mutual funds and you might set some money then aside as well if you would like to invest in the individual stocks. But I think of, personally, I think of investing in the individual stocks as more of like almost more of a gambling type of thing where I'm going to spend the money and if I lose some of the money on the individual stocks, I would like to have my enough money and my other strategies which would be mutual funds or a targeted kind of fund to meet my goals and objectives in any case. But as time passes, you can adjust your asset allocation in favor or less aggressive investments. So what's the bottom line? Time horizon investing is all about planning. You need to think about your goals. Once you have done that, investment selection is based on the amount of time you have until the goal must be funded. So as the funding date approaches, assets are shifted to more conservative investments to reduce the risk of market-related losses derailing your strategy. However, associated fees need to be considered when choosing the mix of investment.