Time horizon
Your time horizon is how long until you need to spend the money. A college fund needed next year has a short horizon. Retirement money for a teenager has a very long one.
Why short-term money is different
Stocks can fall 20% or more in a single year. With a long horizon there’s time to wait for a possible recovery. Money needed soon may not have that time, so many people keep short-term money in safer places like savings.
Spreading across asset types
Asset types are broad categories: stocks, bonds and cash. Owning several different stock funds is still mostly stocks. Mixing asset types can soften big drops, since they don’t all move together.
Risk tolerance
Risk tolerance is how many ups and downs you can handle without panic selling. It differs from person to person. Higher possible returns usually come with bigger possible losses, and spreading money out lowers risk but can’t remove it.
Before you invest
Many people build an emergency fund and pay off high-interest debt first, so a surprise bill doesn’t force them to sell investments at a bad time. Be wary of anyone promising quick or guaranteed gains.