I've talked about emergency funds before and how the investments inside the emergency fund have to be very liquid. I often get questions about what to do with funds that someone has set aside for something in the next few years. Normally, the question involves getting good returns and therein lies the problem.
There are those out there that will disagree with this, but in my opinion markets are entirely unpredictable in the short term. Ask me where the stock market will be in 10 - 20 years and I'm pretty confident in saying that it will be higher than it is now. Ask me where it will be in 6 months and I have no idea. I also have no idea where it will be in 3 years. Somewhere between 3 and 5 years into the future I start to get some confidence that the market will be higher than it is today.
Here are some numbers to back that up.
Going back to 1872, the S&P 500 (or equivalent) 1 year returns have been negative 31% of the time
In the same time period when looking at 5-year rolling averages the average was down 26 out of 146 5 year periods or about 18% of the time
Push it out to 10 years and the index was down about 7.5% of the time
And, wait for it, if you go out to 20 years, the index was never down in value at the end of the 20-year period
So, what does that mean for your short-term money? Keep it out of the stock market. It probably means, a savings account, CDs or maybe a money market. If you're really adamant about getting a higher return, you could consider an ultra-short bond fund. Bottom line? No risk. Sorry...
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