In 1964, the Rolling Stones released the song “Time is on my Side”, later going on to become the band’s first top ten hit in the United States. Determining how much “time is on YOUR side” as an investor is perhaps one of the most important factors that goes into determining the asset allocation of your investment portfolio.

At RBC InvestEase, our goal is to ensure that your investments are properly structured so that you can achieve your investment goals. In addition to objectives (e.g. are you looking for growth in your investments or do you prioritize preserving your capital), financial circumstances (e.g. your annual household income and net worth) and risk tolerance (e.g. how comfortable would you be if your investments declined in value due to market volatility), the amount of time you are planning to have your money invested plays a crucial role in establishing the proper allocation of stocks and bonds in your portfolio. Let’s examine the importance of time as it applies to your investments and the steps you might consider when planning.

1. Define Your Financial Goal

To determine your investment time horizon, you first need to define your investment goal, which for most people, falls into one or more of the following categories:

• Saving towards your home purchase or another major purchase
• Saving for your child’s education
• Saving for retirement

In Canada, there are several types of investment accounts that are designed with these objectives in mind. For example, a Registered Retirement Savings Plan (RRSP) is intended for retirement (although the funds in this type of account can also be used for other objectives such as a first home purchase or for continuing education). Similarly, a Registered Education Savings Plan (RESP) has the intended goal of saving for a child or grandchild’s post-secondary education. The recently launched First Home Savings Account (FHSA) is intended to help Canadians invest and save for the purchase of their first home (although again, the funds in this type of account can also be used for other objectives such as supplemental retirement savings). There are additional account types that allow for more flexibility, such as a Tax-Free Savings Account (TFSA), which can be used for a variety of objectives.

2. Identify Your Time Horizon

Once you’ve defined your investment goal, you want to determine how long it will take for that objective to become a reality. In other words, you need to establish an estimate for how long you plan to have your savings invested.

Assuming the other variables such as objective, risk tolerance and financial capacity remain the same, the longer your investment time horizon is, the more risk you can generally bear as in investor. This is due to the fact that if markets experience turbulence, there will likely be enough time for them to recover and for your investments to recoup their losses.

3. Understand How Time and Risk are Correlated

Anytime someone is prepared to take risk with their investments, they are doing so because they expect to earn a rate of return that is greater than what they could achieve by purchasing a principal-protected investment, such as a Guaranteed Investment Certificate (GIC).

Take for example an investment in the S&P 500. If we take a historical approach, we can determine that savings invested in this index have a historical probability of positive returns 93% of the time when those funds are invested for more than 5 yearslegal bug ¹.

How Your Investments Might Change with Time

To demonstrate how time horizon factors into how your investments should be allocated, let’s use an example of saving towards your first home. At RBC InvestEase, we utilize exchange-traded funds (ETFs) to access the stock and bond markets.

You estimate that you will be ready to make the purchase 10 years from now and you have set up your FHSA. Here is how your investments could look as you move closer towards this goal:

Years 1 to 3 – In the early years of your journey to homeownership, your objective might be to invest your funds in a way that will target higher returns. This could be achieved by allocating a large portion of your account to stocks. Stocks can fluctuate considerably but because you don’t need the funds for many years, you can be confident that you can ride out short-term market volatility. In fact, as you contribute to the FHSA over several years, you may be able to take advantage of market volatility and dollar cost averaging.

Years 4 to 8 – By now, you are likely thinking about what your dream first home will look like. You may also be approaching your total FHSA contribution limit of $40,000. As your plans come into clearer focus, your investment objective may shift from prioritizing investment growth to maintaining stability in your account. You’d still like to earn a steady return but not experience large drawdowns in your account. This stability could be achieved by shifting some of your stocks to bonds. Bonds can provide a steady cash flow and because they tend to be less volatile than stocks, they can help stabilize your account and reduce the risk of large fluctuations.

Years 9 to 10 – At this point, you have hired a realtor and you’re shopping for your first home. It’s an exciting (and stressful!) time. Because you will be cashing out of your FHSA imminently, you will want to lock in your gains and preserve the value of your investments instead of continuing to expose your account to market risk. To do this, you can purchase a principal-protected investment such as a cashable GIC² or simply opt to keep the money in cash. Often, it can be difficult to know exactly what your investment time horizon is. Your plans may change with time. You may plan to buy your first home in 10 years, but you may find yourself ready to take the leap in five.

To make sure that you’re not caught on your back foot and experience big losses due to market volatility when you need your funds, it’s always advisable to periodically revisit your investment goals. If there are material changes in your objectives, financial circumstances, risk tolerance, or time horizon it is imperative that your investments be adjusted to account for these changes.

We Make It Easy to Set Up a Plan and Put You on a Path to Achieve Your Financial Goals

When you submit your account application, you will answer a series of questions that will paint a picture of your overall financial situation. Your answers will lead us to recommend an investment portfolio that we believe is the best fit for you. Every year, you will review and update the answers to these questions. These updates may result in a change to your portfolio. All updates to client accounts are reviewed and approved by our team of registered Portfolio Advisors so we can be confident that we have set you up with the right portfolio.

As always, if you would like to learn about how we make our portfolio recommendation or are looking to review your investment plan, our team of Portfolio Advisors are happy to share their advice!