Did you know there are at least two categories of savings that
should never be invested in stocks or stock mutual funds? Many
investors have recently learned an unfortunate lesson about the
stock market: It’s not the right place for all of your money at all
times.
Did you know there are at least two categories of savings that should never be invested in stocks or stock mutual funds? Many investors have recently learned an unfortunate lesson about the stock market: It’s not the right place for all of your money at all times.
Historically, it’s true that the stock market has provided superior returns over long periods. But those returns come at a price – volatility. On the road to achieving those superior returns, there are many ups and downs. And if you need to withdraw your savings during one of the market downturns, you might not recover your investment.
Rule 1. Generally, you shouldn’t invest funds in the stock market that you will need during the next two to three years. For example, if you need to withdraw money to pay your ongoing living expenses in retirement, the money you’ll need in the next few years should be in stable investments such as money market funds, bank CDs or bonds with maturities matched to your needs. That eliminates the risk that you’ll need the money when the stock market is severely depressed, as it is now.
This lesson applies to college savings funds or any other savings set aside for a definite purpose. If you have 15 years before your child goes to college, by all means invest in stocks. But if your child is a junior in high school, you should be protecting the value of those college savings.
Rule 2. It’s generally advisable to keep at least three to six months’ living expenses in an emergency fund. Your emergency fund is to provide the money you might need for crises such as job loss, illness, major car repairs, uninsured dental work, etc. If you need to draw on these savings, you probably can’t afford to wait until the market recovers.
By all means, invest your other savings in stocks, bonds, real estate or whatever fits your goals. But keep these two categories of savings in safe, stable investments, and that means out of the stock market.
Mary Hubbell is the accounting manager and a partner of Bianchi, Lorincz & Company located in downtown Hollister.
