Gerard’s investment time horizon is the length of time he plans to hold his investment until he needs to use the money for his specific goal. In this case, Gerard’s goal is to use his mutual fund portfolio to meet the 20% down payment requirement to buy a house for $650,000. Therefore, his investment time horizon is determined by how long it will take him to accumulate enough money in his portfolio to cover the down payment amount. Assuming that Gerard does not withdraw any money from his portfolio and that his portfolio earns a constant annual rate of return of 6%, we can use the following formula to calculate how long it will take him to reach his goal:
FV=PV×(1+r)n+PMT×r(1+r)n−1
where:
FV is the future value of the portfolio
PV is the present value of the portfolio
r is the annual interest rate
n is the number of years
PMT is the monthly payment
We can rearrange the formula to solve for n:
n=log(1+r)logPV+PMT×r1FV−PMT×r1
Plugging in the given values, we get:
n=log(1+0.06)log40,000+1,500×0.061130,000−1,500×0.061
n=4.98
Therefore, Gerard’s investment time horizon is approximately 5 years, not considering market fluctuations. This means that he will need to invest his money in a way that matches his risk tolerance and expected return for this time period.
Canadian Investment Funds Course (CIFC) Study Guide, Chapter 4: Mutual Funds, Section 4.6: Asset Allocation and Diversification, page 4-271
Future Value of an Annuity Definition - Investopedia2
