My colleague, Tim Woodward, once brought up a point to me that has stuck ever since:
“What’s the riskiest asset class?”
You’d probably be inclined to say “stocks”. However, the correct answer is “it depends” (it always depends in finance).
So, where should you keep your money? It depends (I told you it always depends in finance).
The riskiest asset class for the money that you plan on using today is stocks due to their volatility. With that in mind, I keep all money that I am planning to use for goals within the next 5 years in a savings account. This account can include savings for things such as your emergency fund, a house down payment, a car purchase, etc.
I think that people too often put money that they plan to use for short-term goals in the market or try to find some other investment to make a better return than the 1% they can get in a high yield savings account. Although 1% isn’t an outstanding return, the money is in a stable and liquid account. If you have the money that you’ve earmarked for a down payment on a new home invested in the stock market, then you could witness some heartache if the market experiences a draw down when you have finally built up your savings to a point that you feel comfortable purchasing a home. Funds that are going to be used for short-term goals are best left in less volatile assets.
On the other hand, the money that I’m saving for retirement is in the market because it has 30 or 40 years to recover if something were to happen to it today. The riskiest asset for retirement-Drew is cash because it will likely lose purchasing power over time due to inflation. If I keep all of my retirement savings in cash, then the costs of goods and services will probably continue to rise at a higher rate than the value of my savings.
Stop and think about the time horizon of your goals when you feel like you should be getting a better return on your money.
