Tap below to watch a short video about investment time horizon, and read for more details.
Investment horizon is basically a total length of time that an investor expects to hold a security or a portfolio. Each Investment horizon depends on the type of investor you are, your investment goals.
For long-term investors, the ideal investment horizon is forever. Yep, you read that correctly. But note the keyword: ideal. We're not saying to never sell your stocks, but hear us out. You see, history shows that despite market fluctuations if you hold a good stock long enough, its value will appreciate.
If you are a long-term investor, then you should only sell if something goes wrong at the fundamental level of the company (like huge layoffs, a natural disaster is disrupting part of their supply chain, their product is failing consumers' expectations, etc.).
If the company has sound management, stable profits, and good growth prospects, then the long-term investor need not worry about the short-term fluctuations of the stock market or the economy. Even if the stock takes a dive during a downturn, the price will eventually appreciate over time.
For investors who wish to make a quick profit in a shorter time period (days and months), knowing when to sell a stock depends on your personal investment goals. For example, you may have bought a stock because you expect the price to increase by 10% in the next year. Once that goal is achieved, you would sell the stock.
KNOW YOUR LIMITS
At the same time, you should also set a limit on how much you would let the price drop before you sell. For example, you may want to cut your losses at 10% to protect from further declines. In the short term, you are susceptible to a lot of random fluctuations in stock prices.
Therefore, even if a stock's price drops, it doesn't mean you made a bad investment.
But once you have set a rule for when to sell (whether it is the company's fundamentals or the stock price), you must stick to your rule.
DETERMINING YOUR TIME HORIZON: SHORT VS. LONG TERM CAPITAL GAINS
As we all know too well, Uncle Sam will find a way to get his share. So not surprisingly, taxes can play a big part in investment decisions as well. Fortunately, the government also wants to encourage an enterprising culture, so they’ve created some tax benefits associated with investing in the form of capital gains tax rates. While your short-term gains are taxed the same as your ordinary income, if you hold stock longer than 365 days and have earned a positive return before you sell it, it's considered a long-term capital gain, which is taxed between 0 - 20%. While income tax rates vary per individual, capital gains tax rates are always going to be lower. That said, how long you hold a stock can have a major impact on the amount of money you actually get to keep in your pocket.
Moreover, capital gains from one investment can be offset by capital losses from other investments, mitigating the impact on your personal bottom line. Therefore, sometimes it is in your best interest to actually sell an underperforming investment, in order to lock in your capital loss to offset current or future gains.
While tax impacts are an important part of decision-making, you should always look at them in combination with the fundamentals of the companies you own or the other investment opportunities that exist in the market.
"It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for." - Robert Kiyosaki