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    Understanding Time Horizons of Alternative Investments

    Business professional considering investment time horizon
    • 29 Jul 2021
    Natalie Chladek Author Staff
    tag
    • Alternative Investments
    • Finance

    There are several factors to consider when evaluating investment opportunities, such as volatility, expected returns, and risk tolerance. Another critical factor is time horizon. An investment’s time horizon, or longevity, can vary depending on the type of investment and the investor’s goals. It’s arguably the most important factor to take into account: For an investment to be successful, your strategy must allow you to access your money when you need it, however soon or far out that may be.

    What Is an Investment Time Horizon?

    An investment time horizon is how long an investor expects to own a particular security, or investment. Time horizons vary for different investment strategies—from a few days or hours to potentially decades.

    Generally, a longer time horizon is more conducive to a riskier investment or set of investments, as it allows more time for the market to recover from any setbacks and for the investor to realize a gain. Investing, at its core, is a balance of risk and reward—you can forgo having access to cash for a certain amount of time with the expectation that it will later be returned to you with a premium for giving it up. Usually, the longer you give up your cash, the more you can expect to earn back.


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    Types of Investment Time Horizons

    Time horizons vary and are often dictated by investment goals or strategies, which are closely related to liquidity. At the end of an investment’s time horizon, it’s fully liquid, or able to be cashed out or traded. Prior to an investment’s maturity, it’s illiquid, or unable to be accessed by the investor. Investors factor in liquidity when choosing which investments best suit their time horizon goals.

    For retail or individual investors, time horizons can be dictated by a particular savings goal, such as retirement or purchasing a home. Institutional investors, however, are generally long-term investors, as organizations like pensions or endowments exist to provide returns for decades, if not indefinitely.

    The structure of an investment makes it suited for different longevities, and trying to cut it short or extend its length can result in subpar performance. Additionally, there’s an opportunity cost: Not maximizing one investment might mean you could have better invested your money elsewhere.

    The simplest investments with regard to time horizons have preset maturity dates. Bonds, for example, are designed to mature on a certain date, and investors purchase them knowing the exact date their money will be returned.

    Other types of investments, however, can be more complicated. For example, when you purchase a stock, you can turn around and sell it at any time. But the stock market fluctuates constantly, so how do you know if you want to sell your stock the next day or the next year? These determinations depend on various factors, including when you need your money back and how you expect the market to perform in the future.

    Alternative Investments | Grow the value of your portfolio with alternative investments | Learn More

    What Do Time Horizons Mean For Alternative Investments?

    Alternative investments are generally much more illiquid than traditional investments, which means they’re only suitable for investors willing to invest cash over a long period.

    For example, venture capital funds typically last for approximately 10 years. Investors commit a certain amount of money to a venture capital firm that invests it over the next decade, along with other contributors to the fund. While investors may receive payouts during that period—depending on the fund’s exit events—they enter the fund understanding they may not have access to investments for several years.

    Real estate is another type of alternative investment that requires an investment strategy with longer time horizons. Historically, real estate has offered valuable opportunities for those willing to wait for hot market conditions. One only needs to look at the soaring price of housing in the United States during recovery from the coronavirus (COVID-19) pandemic to realize there’s money to be made by selling a house in 2021 versus 2019. The same holds true for institutional investors that, on average, hold real estate investments for an average of 7.6 years.

    There are many elements of real estate that prevent it from being a quick turnaround investment, such as complicated financing or years-long lease terms. For these reasons, only investors with longer time horizons should consider adding real estate investments to their portfolios.

    How Alternatives Differ From Traditional Investments

    It’s important to note that traditional investments, too, can be advantageous for investors with longer time horizons. For example, one could simply purchase a stock and hold on to it for decades. The difference with stocks, however, is that the investment is much more liquid because the investor could choose to sell the stock for cash at any time. In the case of alternatives, this option might not exist.

    Using Alternatives to Serve Longer Investment Time Horizons

    There are many factors to consider when thinking about investment time horizons, including your age, liquidity needs, upcoming life events (such as retirement or buying a home), or the goals and needs of clients and partners (if you’re an institutional investor). For those with longer time horizons, alternatives offer a promising way to diversify portfolios, as the concession of giving up access to cash in the short run can result in higher returns in the long run.

    Which HBS Online Finance and Accounting Course is Right for You? | Download Your Free Flowchart

    The Importance of Investment Time Horizons

    While investments can be measured in many ways, they cannot enhance your portfolio unless they provide access to your money when you need it; understanding time horizons is crucial to ensuring success. To learn more about how alternatives differ from traditional investments and the unique advantages they offer, consider taking an alternative investments course to learn strategies for building and diversifying portfolios.

    Are you interested in expanding your knowledge of alternative investments? Explore our five-week online course Alternative Investments and other finance and accounting courses. Not sure which is right for you? Download our free course flowchart.

    About the Author

    Natalie is an Associate Product Manager at Harvard Business School Online working on Alternative Investments, Leading with Finance, Negotiation Mastery, and Sustainable Business Strategy. She received her B.A. and M.A. from Stanford University and M.B.A. from UCLA Anderson. In her free time, she enjoys running, cooking, and staying up too late rooting for her Bay Area sports teams.
     
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    How are HBS Online courses delivered?

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    We offer self-paced programs (with weekly deadlines) on the HBS Online course platform.

    Our platform features short, highly produced videos of HBS faculty and guest business experts, interactive graphs and exercises, cold calls to keep you engaged, and opportunities to contribute to a vibrant online community.

    Are HBS Online programs available in languages other than English?

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    We expect to offer our courses in additional languages in the future but, at this time, HBS Online can only be provided in English.

    All course content is delivered in written English. Closed captioning in English is available for all videos. There are no live interactions during the course that requires the learner to speak English. Coursework must be completed in English.

    Do I need to come to campus to participate in HBS Online programs?

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    No, all of our programs are 100 percent online, and available to participants regardless of their location.

    How do I enroll in a course?

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    Certificate Programs

    HBS Online welcomes committed learners wherever they are—in the world and their careers—irrespective of their professional experience or academic background. To extend the reach of HBS Online, we no longer require an application for our certificate programs. (Applications are still required for our credential programs: CORe and CLIMB.) You can now immediately enroll and start taking the next step in your career.

    All programs require the completion of a brief online enrollment form before payment. If you are new to HBS Online, you will be required to set up an account before enrolling in the program of your choice.

    Our easy online enrollment form is free, and no special documentation is required. All participants must be at least 18 years of age, proficient in English, and committed to learning and engaging with fellow participants throughout the program.

    Updates to your enrollment status will be shown on your account page. HBS Online does not use race, gender, ethnicity, or any protected class as criteria for enrollment for any HBS Online program.

    Credential Programs

    HBS Online's CORe and CLIMB programs require the completion of a brief application. The applications vary slightly, but all ask for some personal background information. You can apply for and enroll in programs here. If you are new to HBS Online, you will be required to set up an account before starting an application for the program of your choice.

    Our easy online application is free, and no special documentation is required. All participants must be at least 18 years of age, proficient in English, and committed to learning and engaging with fellow participants throughout the program.

    Updates to your application and enrollment status will be shown on your account page. We confirm enrollment eligibility within one week of your application for CORe and three weeks for CLIMB. HBS Online does not use race, gender, ethnicity, or any protected class as criteria for admissions for any HBS Online program.

    Does Harvard Business School Online offer an online MBA?

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    No, Harvard Business School Online offers business certificate programs.

    What are my payment options?

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    We accept payments via credit card, wire transfer, Western Union, and (when available) bank loan. Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined. Please refer to the Payment & Financial Aid page for further information.

    We also allow you to split your payment across 2 separate credit card transactions or send a payment link email to another person on your behalf. If splitting your payment into 2 transactions, a minimum payment of $350 is required for the first transaction.

    In all cases, net Program Fees must be paid in full (in US Dollars) to complete registration.

    What are the policies for refunds and deferrals?

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    After enrolling in a program, you may request a withdrawal with refund (minus a $100 nonrefundable enrollment fee) up until 24 hours after the start of your program. Please review the Program Policies page for more details on refunds and deferrals. If your employer has contracted with HBS Online for participation in a program, or if you elect to enroll in the undergraduate credit option of the Credential of Readiness (CORe) program, note that policies for these options may differ.

     

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