ASSET ALLOCATION FOR OTHER INVESTMENT GOALS

In our articles on asset allocation considerations for retirement and college planning, we explored some concrete examples of how the investment time horizon affects asset allocation decisions. The same basic considerations apply to other investment goals as well: the longer you have to hold your investments before cashing them in, the greater the opportunity you will have to invest in more volatile investments that typically provide high returns. As you approach the time you need to withdraw your funds, the risks of holding more volatile investments increase—especially if you need the funds to meet crucial needs such as living expenses.

Of course, your investment time horizon needs to be factored into other investment considerations. For example, if you want to build a vacation home or make another major luxury purchase in five years, you might pursue a relatively aggressive growth investment strategy right up to the time you withdraw your funds. On the other hand, if you might need to access your capital to meet emergency expenses, or if you rely on interest income from your investments to help meet your cost of living, you might wish to protect more of your capital with safer assets, regardless of how long you will be holding them.

Let's summarize what we have learned about the effects of investment time horizons on asset allocation strategies.