Lesson 4 of 10 · 6 min read
Money you'll need soon
Investing works over ten years. For a goal two years away it's gambling.
The horizon decides everything
There is no investment that is both safe and high-returning in the short run. What makes the market good over the long run is exactly what makes it unusable in the short run: it moves hard, and across one or two years it can easily sit twenty or thirty percent lower. Over ten years that's noise you sit through. Over two years, with your house deposit riding on it, it's the difference between going ahead and not.
The rule of thumb
Money you need within five years, you don't invest. Full stop. That goes in a savings account or, if you genuinely won't touch it, a fixed-term deposit matched to your goal. Between five and ten years part of it may be invested, with fewer shares as the date approaches. Beyond ten years investing is the logical choice, because then time works for you instead of against you. That five years isn't science, it's a line drawn wide enough to sit out most bad stretches.
Winding down as it gets closer
If you're investing for something eight years out, it's unwise to put everything in shares on day one and still have it there on the last day. What professionals do around a retirement date works here too: shift the equity portion gradually into cash as the date approaches. Not all at once at the last moment, because then everything hangs on the price on one particular day, but in steps across the final years. Then a bad year just before your goal stops being a disaster.
In practice
Someone saving in 2007 for a house in 2010 with everything invested watched their deposit halve. Someone who had started winding down a year earlier simply bought the house.
Remember this
- Under five years: save, don't invest.
- Five to ten years: partly invested, less as the date nears.
- Beyond ten years: invest, because there time works for you.
- Wind down gradually, not all at once at the last moment.
There is a quiz for this lesson
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