Unit 2 · Level 2 · Money that must never go in
Money with a date on it
You have €20,000 in one account. €8,000 is the deposit on a flat you sign for in eighteen months. €12,000 is retirement money you will not touch for thirty years. On the screen they look identical. They are not the same asset. The date attached to the money decides where it is allowed to live, because a market cannot be told about your date.
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What you get asked
Two people each hold €10,000. One needs it in a year, one in thirty years. What actually differs?
The euros are identical. The deadline is not. A horizon of one year rules out anything that can be down 30% when the year ends. A horizon of thirty years does not.
Match each pot of money to the horizon attached to it
Sort by date first, not by product. Once you know when the money is spoken for, the choice of container narrows on its own.
Money with a fixed date close at hand is judged on ___, not on the return it might earn.
For a deposit due in eighteen months, the job is to have the exact amount on the exact day. An extra 2% is nice. Being 20% short is a cancelled purchase.
You are 34 and plan to stop working at 64. How many years is the horizon on your retirement money?
Thirty years. That is long enough for a market to fall, recover and grow again several times over. Horizon is the one input you already know for certain.
Why does a market not care that your deposit is due in eighteen months?
Prices move on their own schedule and yours is invisible to them. So the date has to be respected on your side, by choosing the container before the money goes anywhere. 🐜
The rest of this unit
Some money has a date attached, and a market cannot be told about the date.