Archimedes is often referenced as saying, "Give me a lever long enough and a place to stand, and I can move the earth." In the world of investing, that lever is time. The longer investors can hold onto their portfolios, the greater their risk capacity. Will an investor need 20% of the value of his investment portfolio in two years, five years, seven years, ten years, or longer? Usually, the closer a person is to retirement, the shorter his or her investment horizon becomes. Risk-calibrated index portfolios carry recommended holding periods that range from four to 15 years. The longer an investor holds onto a risky investment, the greater the chance of obtaining its average historical return and the greater the ability to reduce the uncertainty of these returns through time diversification.
Sample Risk Capacity Survey Question:
How many years will it be before you need to withdraw a total of 20% of all your investments for living or other expenses?
- Less than 2 years
- From 2 to 5 years
- From 5 to 10 years
- From 10 to 15 years
- More than 15 years