What’s Your Investment Timeline?

In 2016, days after securing his first Formula 1 world championship, Nico Rosberg shocked the racing world. 

How? 

He retired. 

On the surface this decision seems puzzling. The salary, endorsements, and chance to win another world championship would have convinced nearly any other driver to return for another season. But Rosberg viewed his championship in a different light. The victory was a culmination rather than an opportunity. By reaching the pinnacle of the sport, Rosberg had satisfied his childhood dream, which enabled him to leave racing and devote more time to raising his family and new career opportunities. Rosberg understood his career goals and timeline and did not let the opinions of his competitors, team, or the media influence his decision. 

Rosberg’s retirement has many parallels with investing. More and more opinions are available each day telling you which stocks you should buy or sell. The key to ensuring you are on the right track is personalizing your financial decisions. It is important to know your goals and time horizon and to invest accordingly. 

Here’s one example. 

Day traders and long-term investors are playing completely different investment games and apply completely different logic in their financial decisions. Day traders buy and sell stocks multiple times a day hoping to profit from small adjustments in the market. Long-term investors generally plan to keep their money in the market for over ten years. These different timelines lead to completely different considerations. A day trader attempts to determine whether a stock will go up in the next few hours, while a long-term investor makes decision based on the prospects of a particular industry over the next decade or longer. 

A good investment for a day trader may not be a smart investment for a long-term investor. 

It is critical to know what financial “game” you are playing and to make decisions strategically targeted to your goals and timeline. 

The risk profiles of investors are a case in point. 

Long-term investors can typically afford to take additional risk, as they have time to recover if the market dips. If an investor needs to access their money 10+ years from now, a decline in the market doesn’t have very much impact on their long term success if they remain invested.

Short term investors who want to withdraw funds in less than three years can’t afford the same level of risk because they know they need the money soon but they don’t know what the market is going to do.  A market decline could perfectly (or should I say imperfectly) align with the time to buy a house, retire or make a large charitable gift.

Retirees living off their financial portfolios have to adapt to a combination of timelines. They often need to use money from their portfolios every month, while relying on revenue from investments to sustain them throughout their retirement years. This circumstance requires a personalized investment plan that balances risk with financial security. 

Because investing is so personal, it is important to be skeptical of investment advice you get from TV, social media, books, or friends who aren’t investing on the same timeline as you. Keep in mind that the author of a book suggesting a particular investment strategy does not know you or your circumstances. Therefore, the book cannot give you the personalized advice required to make sure your financial goals are being pursued. 

Morgan Housel astutely wrote, “few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.” 

A key first step in this process is defining the financial “game” you are playing. 

Take it from Nico Rosberg, if you take the time to determine your financial goals, aspirations, and timeline you can ensure that you are driving in the right lane.