When will you need the money? If you’re 40 and planning on retiring at age 65, then you have a long time horizon and should be in stocks. If you’re 25 and will need the money for a down payment on a house in 3 years, then you shouldn’t be in stocks.
The stock market can go down today, tomorrow, next year, or over the next 5 years. There’s no guarantee of anything. But history has shown that American stocks do very well over long stretches of time. If you invest in a broad-based U.S. index fund for over 10-20 years, then you are very unlikely to lose money. Which isn’t to say it won’t happen. Look at the Lost Decade (2001-2010) for Christ’s sake. It’s just to say that it’s unlikely.
If your time horizon is less than 5 years, then anything can happen. You could win; you could lose. The important thing is not to gamble money you’re going to need. If you’re saving up money for a down payment on a house, then it makes no sense to gamble it for a few extra percentage points. It makes no sense to risk screwing your life up.
5-10 years is more of a grey area.
Written in 2015
1. Warning
2. Emergency Fund
3. Credit Card Debt
4. Employer Matched Retirement Funds
5. Other Debt
6. Time Horizon
7. Index Funds
Podcast: Investing 100