A time horizon is a period of time that you set for your investment or trade to run its course (be settled). Time horizons can range from a matter of minutes to years, depending on whether you're an investor or a trader and what sort of risk you're comfortable with taking.
How do investors use time horizons?
It's easiest to understand the utility of a time horizon through the example of an investor, as opposed to a trader. Investors use time horizons to decide when they want to buy the assets they're interested in and when they want to sell them or just re-evaluate their holdings (rebalance their portfolio).
With a clear time horizon, you can easily set a schedule for dollar-cost averaging into your desired position, which is a process we describe here on our blog.
Is it true that the longer the time horizon, the larger the returns?
Generally, yes, that is true.
With Bitcoin, for example, if you'd bought 1 BTC at the beginning of this year, then you'd have a 64.87% ROI. Consider, however, what buying 1 BTC back in 2015 would've meant. From then until June 2020, despite the 2018 bear market, you'd have garnered a 3500% ROI. Consequently, in Bitcoin's case, longer time horizons (like 5 years) are better, based on historical data.
Other assets like Ether don't exactly fit this mold, which is a trend that we'll discuss in future posts.
Even so, if you take Bitcoin's data together with the history of the global stock, bond, and commodity markets, then you'll see the same pattern repeating. Holders with longer time horizons tend to always profit more, across almost all asset/commodity classes.
How do traders use time horizons?
Traders use time horizons to time their trades, just like investors use time horizons to time the entry and exit (or re-evaluation) points for their investments. Because of the nature of what they do, the process of setting clear time horizons on a trade-by-trade basis is a bit more complicated.
If you're interested in exactly how that works out, stick with us here for a future, dedicated post.