Under 5 Years = DON’T Buy Stocks ❌
I’ve seen a lot of posts of people asking about where to store money for a short time period. This question usually comes up when someone is using an FHSA as they’ll need the money quick for a down payment. This is a reminder to all of you saving cash for the short term: If you need money in under 5 years, you should NOT be investing in equities.
Any short term cash position is something you shouldn’t be adding risk to. The market works because in the long term you’re almost guaranteed to make money, however in such short time frames it’s unpredictable. When considering a short term position of where to park money (especially for an FHSA) you must protect this cash at all costs. The point is that you’d like to make some extra returns, but you can’t risk losing the capital as you’re using it for a down payment or elsewhere. Your short-term goals can’t be put to the test in risky investments.
While there may be a chance you make extra money, that isn’t the goal of short term cash. The goal isn’t to make more returns, it’s to make a SMART decision. Even if you lost out on potential returns, you may have made the best possible choice for yourself at the time. We can see from the graph attached, once you dip below 5 years of investing, your chances of losing money significantly increases. Even at 10% for 5 years, this is a very big risk for money you can’t afford to lose. It gets even worse with 15% at 3 and 26% at 1. If someone asked you to spin a wheel and you had over a 20% chance of losing money on the down payment on your house, (that you can’t afford to lose), just to make a little extra and STILL pay most of the mortgage, would you spin? If you said no congrats, if you said yes you have a gambling problem.
Investing works over the long term, and this is why we invest. When we need the money soon and for important reasons you can’t afford to be making stupid decisions. Rather then buying equities you should instead be focusing on fixed income like an HISA or Money Market funds as places to park your cash. These are great for short periods because they guarantee some returns while not risking capital at all. This is a better way to manage your money, and even if you miss out on returns you made the smartest decision at the time.
Remember, the shorter the time the less you should invest. If you’re unsure of what you should do (for example you’re in a 5-10 year range), try finding a percentage mix that works for you. Balance some guaranteed fixed returns with risky equities so you give yourself a bit more upside while also maintaining mostly risk free choices.
Investing is personal but that doesn’t mean you need to be dumb. As always, do your research and happy investing!
