Time Horizon Determines When Goals and Objectives Must Be Funded
A primary goal of a financial plan is to ensure that sufficient assets are available to meet financial obligations when they come due. A budget must be created to determine the anticipated recurring cash needs for living expenses which are paid from current earnings or borrowed funds. In addition, a cash needs projection for the next 5 years is made to determine the nearest time horizon for a portion of your investment portfolio. From the nearest point in time forward, the various investment time horizons associated with the respective financial goals create a schedule of life events for which you plan, your True North.
The sequence of time horizons requires a prioritization of goals to help determine the asset allocation of the assets earmarked for a specific financial goal’s time horizon. In order of importance the following determinations are made:
- What is the time horizon?
- Which asset classes should be selected?
- What is the composition of the allocations across the asset classes?
- What allocation across sub assets within an asset class is advisable?
- What money manager, mutual fund, ETF or index proxy should be used for each asset?
Other considerations which could have an impact on the selection of the asset allocation, specific investment vehicle or trustee/custodian include:
- Property Title
- Account Type
- Tax Status
Time horizon is a primary factor for consideration in the determination of a portfolios asset allocation. Segregation of each financial goal along with the respective time horizon requires a specific asset allocation which in turn drives the likelihood of the desired outcome.
