The stock market may have a steady return over time, but in the short-term, it’s less predictable. For this reason, experts recommend the “five year rule”, which basically means that if you need cash within the next five years, you shouldn’t invest it.
Photo by Rafael J M Souza
You want to make sure your investments have time to bounce back when the stock market plummets.
Forbes contributor Robert Berger explains:
A good rule of thumb is not to invest any money in the stock market that you’ll need over the next five years. This is particularly important for those who are in retirement and relying on their investments for daily expenses. The goal here is to avoid a situation where you have to sell stocks during a bear market in order to meet living expenses.
This rule is difficult to follow today given the extremely low yields in the bond market. But given the relatively high prices of equities, it’s an important rule to follow. With at least 5-years worth of expenses out of the market, an investor is more likely to weather a bear market knowing their immediate needs are taken care of.
When the stock market takes a dive, which is inevitable, it’s important to remember not to panic. The first rule to avoid panicking is to make sure your investments are allocated properly. In other words, if you need that money in the next several years, you should probably avoid investing it. For more tips on how to prepare for stock market dips, read Berger’s full post at the link below.