What is an investment horizon?

The investment horizon is the length of time until the invested money is needed — for a house, a child's education, retirement. It is one of the most important inputs to any investment decision, because it determines how much short-term volatility a portfolio can afford. Money needed next year and money needed in thirty years should not be invested in the same way.

Why time changes the picture

Over a longer horizon, good and bad years have more time to balance out. For a portfolio with a yearly volatility $\sigma$ , the uncertainty of its **average yearly $\text{return} \times \times \text{over} T$ years is roughly:

\sigma_{\text{average}} \approx \frac{\sigma}{\sqrt{T}}

Over one year, a portfolio with 16% volatility can easily return −20% or +30%. Over 20 years, the likely range of its average yearly return narrows to around 3.6 points either side of the expected value.

A simple illustration

For a stock portfolio with an expected return of 7% a year and a volatility of 16%, assuming normally distributed returns, the chance that the average yearly return over the horizon is negative is roughly:

Horizon	Chance of ending with a loss (approx.)
1 year	+33
5 years	+16
10 years	+8
20 years	+2.5

The longer the horizon, the less likely it is that the portfolio ends below where it started — although, in real markets with crashes and long bad stretches, the risk never disappears entirely.

What it means for the allocation

Short horizons, under about three years: mostly cash, money market funds or short-term bonds. There is not enough time to recover from a large fall.
Medium horizons, three to ten years: a mix, with the share of stocks rising with the time available.
Long horizons, over ten years: a high share of stocks is usually appropriate, because there is time to ride out drawdowns and benefit from their higher expected return.

Things to keep in mind

The amount at risk still grows with time. The range of average returns narrows, but the range of final amounts in euros widens: a long horizon makes a loss less likely, not smaller.
Horizons shrink. As the date approaches, the portfolio's risk usually needs to come down gradually.
Several goals mean several horizons. One portfolio often serves goals with different dates, which can be treated as separate parts.
Horizon is not risk tolerance. Even with a long horizon, an investor who would sell in panic during a crash needs a portfolio they can actually hold on to.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

Is my current risk level appropriate for my time horizon?

I show these portfolio risk figures relevant to a time horizon:

Metric	Value
Recent annualized volatility (last year)	8,17%
Long-term annualized volatility	18,18%
Maximum historical drawdown	-33,82%
Longest drawdown duration (days)	837
Top 3 volatility contributors (share)	35,57%

Interpretation (no advice, just context):

Recent volatility at 8,17% is in the lower range; long-term volatility at 18,18% is higher. For context, volatility under 10% is often seen as low, 10%–15% moderate, and above 15% high.
The maximum drop of -33,82% (the largest fall historically) shows the scale of downside experienced; long drawdowns (837 days) measure how long recoveries can take.
A top-3 volatility contribution of 35,57% means around that share of portfolio volatility comes from three positions; more than 30% is commonly viewed as a concentrated volatility contribution.

If your time horizon is short (years rather than decades), the higher long-term volatility and past drawdown size may be more relevant; if your horizon is long, temporary volatility is often less critical. I’m only showing the numbers — tell me your exact time horizon and I can summarise the same metrics focused on that period.

See these numbers for your own portfolio

Floreo works out every figure on this page from your own holdings — returns, risk, allocation, currencies — and the assistant explains them the way this page does. Import from your broker, or try it on the sample portfolio first.

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