Time Horizon

As your investment time horizon lengthens, your ability to take on risk increases. This is because in the investment universe, you are compensated for your willingness to invest for longer time periods. Longer-term generally refers to investments in common stocks. You can invest in common stocks either by direct purchases of stock, through mutual funds or exchange-traded funds. ETFs offer a great option because they minimize management and transaction costs while providing much greater liquidity than mutual funds. Shorter time horizons are associated with short-term bonds, which are also available via the same investment vehicles. Again, ETFs provide the greatest flexibility.

Liquidity

Liquidity refers to the amount of time required for a security’s redemption and delivery of funds to be completed and occur. Cash and equivalents — including money-market funds — are the most liquid investments available. Publicly traded stocks and bonds are also highly liquid. Direct real estate investments are generally illiquid, but there are numerous real estate investment trusts and ETFs that allow you to invest in real estate while retaining liquidity. However, because ETFs trade publicly like stocks, their risk-return characteristics tend to mimic those of common stocks over the long term.

Other Considerations

Other considerations may include tax constraints, legal or regulatory factors, and the timing of payouts. For example, wealthy investors are subject to higher income taxes and they therefore often allocate larger portions of their investment portfolios to municipal bonds, which are tax-free. Also, as you approach retirement, your expenses become more fixed, and the amount allocated to the bond portion of your portfolio should increase. Direct bond investments yield consistent interest income, which can be used to cover fixed costs such as rent.

Diversification

References

Resources

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