Stocks Behaving Badly vs Your Plans

We often advise clients about short term investments, such as how to save for the imminent purchase of a home or for a child soon to enter college. In the midst of a bull market, it seems tempting to buy a stock fund to sock away that cash. However, that’s a bit of a roll of the dice. Stock market history since 1926 contains 9 decades in which returns were 3% or less per year, slightly more than 11% of the decades we measured. Four of those periods showed negative returns – that is, an investor in stocks lost money for ten years. These examples were clustered around some of the most notable bear markets in US history – the Great Depression, the crash of ’73-’74, and the Great Recession.

Saving for a short term objective by utilizing an investment where good results tend to require a long term commitment is a risky strategy, particularly from a viewpoint near the top of the multi-year bull market that we are experiencing. We call this ‘liability mismatch’: the moment you must write tuition checks comes before the best years of your investment returns.

Even if you have an investment program in place for your retirement – which would likely be a long horizon plan – recognize that when you need to fund a short term objective, your time horizon on that portion of your portfolio has shortened, and it might pay to raise cash or use short term bonds to fund it, rather than staying put. Otherwise, that tuition check could coincide with a nasty market decline, forcing sales at low prices.