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Should I only invest money I don't "need'?

I've been told that you should only buy stocks with money I won't need for a number of years, and if I'm not at that point I should not invest. How accurate is this prescription?

Feb 10, 2012 by Edith from Dayton, OH in  |  Flag
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4 votes

I agree that you should not put your money at risk when it will be needed within 3-4 years. Stocks would generally be considered at risk. There are some investments that have less risk, and then some with minimal risk (such as a CD with a solid bank). Oftentimes folks can budget for immediate needs and use only safe investments for that, and then take a tad more risk with their remaining funds. That being said, a financial planner with a strong distribution background should be able to assist with distribution planning needs.

Comment   |  Flag   |  Feb 10, 2012 from East Dundee, IL

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Absolutely it's correct you should only invest money you won't need in the short-to-intermediate term.

But if you want to build net-worth and ultimately achieve a level of economic freedom, you should perhaps reconsider the definition of "money you don't need."

My advice: consider "living below your means," ideally spending no more than 90% of your income. The other 10% can be used to pay off your debts, if any; and once that's accomplished, the money can be placed into long-term investments.

It may seem unrealistic or Calvinistic to save 10% of your income, but it's a path to financial security that has a high probability of resulting in success.

Comment   |  Flag   |  Feb 10, 2012 from Bryn Mawr, PA

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Ryan Level 19

Something to consider also is a strategy to essentially defer income before you ever have a chance to spend it. If you are not deferring a percentage of income into a retirement plan, you should start to consider that option as this is a prescription to help you see the value of long term investing. You are correct that money isn't often made in the short term in stocks. It can happen but be concerned about any one who says that quick returns are a regular event in the stock market. You are seeing good advice posted here by David, James, and Marty. Good luck!

Comment   |  Flag   |  Feb 10, 2012 from Gettysburg, PA

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This is good, intuitive advice. Time horizon is one of the factors that affects your risk capacity, which in turn is a component of your risk profile. Short time horizon = low risk capacity = no equities. To offer some justification for the intuition, equity markets are volatile compared to other asset classes. Volatility is generally not a problem if you have a long time horizon, if equities continue to perform as they have over the past hundred years, and if you have staying power. But if you have a short time horizon, volatility can become a curse on your portfolio. For short-term investments, we generally recommend an allocation to cash and/or short-term, government and agency securities.

Comment   |  Flag   |  Feb 10, 2012 from San Francisco, CA

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Let me answer your question with another question. Do you need income in retirement? Something that is too far misunderstood in the investment community amongst novice investors in the value of Risk Tolerance and Asset Allocation. When it come to investing in speculative investments, this is the time to invest money "you don't need" or at least you are able to bear the risk of 100% loss. In other scenarios such as saving for Retirement , for your children's College Education, or any other long term accumulation Goal, such as major traveling or purchasing a 2nd home. Investing these monies will allow your assets to accumulate significantly faster than your banks savings rate. My suggestion is that you employ diversification to reduce volatility and risk, familiarize yourself with standard deviation and be certain that you can bear the volatility that accompanies any investment. My best suggestion is for you to hire a Financial Planner, to help you understand your risk tolerance, time horizon, and goals. Your advisor will be able to create a plan that should meet your goals.

Comment   |  Flag   |  Feb 10, 2012 from Gilbert, AZ

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