The Impact of Investment Horizon on Investment Decisions – New Approach

Abstract

Following the practitioners’ advice and findings from the financial literature, we examine whether Investors hold higher ratio of risky assets to non-risky assets in their portfolio, as the length of the investment horizon increases. We present a novel approach to the identification and analysis of investors’ investment horizon. With unique dataset we identify three different investment horizons for each investor: Long, medium and short term investment horizon. This identification, allows us to overcome the identification problem presented in the literature, and examine for the first time the unique effect of investment horizon on the investors’ portfolios. To the best of our knowledge, we are the first to identify and examine the effect of three different investment horizons on the investors’ investment portfolios. We find that contrary to our expectations, investors do not allocate significantly higher ratio of risky assets to non-risky assets in their portfolio, as the length of the investment horizon increases. In particular, we find that the effect of investment horizon is not monotonic. In addition, we find an ambiguous effect of age on the ratio of allocation to risky assets to non-risky assets in the investors’ portfolio. This finding indicates that age, which was used as a proxy for investment horizon in previous literature, might not serve as a good proxy for investment horizon.

Keywords: Investment Horizon, Household portfolios, portfolio choice

JEL Classification: G02, G11, G18, G23