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Knowing your time horizon is key to making the investment choices to achieve multiple goals.Getty Images

What’s your time horizon?

It’s a question for investors who seek opportunities in exchange-traded funds (ETFs). They need to decide whether they want access to their money in the short term (up to three years), medium term (three to 10 years) or long term (10 or more years).

“Understanding one’s time horizon is of the utmost importance before investing in any kind of vehicle, including ETFs,” says Prem Malik, financial advisor with Queensbury Securities Inc., in Toronto.

Those with a short time horizon might consider less risky liquid investments such as cash and cash equivalents. Chris Arthur, CEO of Bold Wealth in Toronto, suggests high-interest ETFs, which currently pay in the range of 5 per cent, and perhaps short-term bond ETFs.

For investors with a medium time horizon, Mr. Arthur advises holding an equal mix of those short-term assets and equity ETFs. Mr. Malik says another approach for the medium-termers is having a 70/30 split between equity and balanced ETFs. Within the equity basket, he recommends about 60 per cent North-American-based equity ETFs and 10 per cent in world markets such as U.S. ETFs, with the remaining assets in balanced ETFs that are tactically and actively managed.

If you have a long time horizon, Mr. Malik says he would stick with proven index-based ETFs. “Those linked to the broad NASDAQ and S&P have outpaced actively managed ETFs consistently over the long run.”

Here, he suggests ETFs with a 90/10 split between equities and balanced.

Individuals with a long time horizon should typically allocate more to equity and other risky investments that have the best growth prospects but are more volatile, Mr. Malik says. The general rule is that in case of periodic market downturns, there’s more time for investments to recover any losses.

Having a long time horizon doesn’t necessarily mean an investor is willing to take on more risk. “A client could have a very long time horizon, but if they lose sleep at night over markets moving too much, an equity-based portfolio might not be best suited for them,” Mr. Arthur says.

Long-term investors who can’t stomach losses might prefer to invest in relatively safer investments, such as high-interest savings ETFs.

Goals with different time horizons can make investing in ETFs or other vehicles more complex, Mr. Malik says. Investing to save for a home, a child’s education or retirement may require prioritizing objectives in terms of relative importance.

No matter how well people have planned, situations can create a shift in their time horizon. A new baby or a loss of income could affect the amount of money they have to invest to meet their needs at a given time. “Most people have limited financial resources to fund multiple goals,” Mr. Malik says.

As people move toward the end of a time horizon for a specific goal, they might need to adjust their asset mix, especially if they’re investing aggressively with a strong equity bias. The closer someone gets to retirement, which shortens their time horizon from when it was set originally, they may want to assume a more conservative asset mix to ensure a stable value of their investments.

“Many of our clients have multiple time horizons. We find it is best to separate each goal into its own account and set the time horizon there,” Mr. Arthur says.

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