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If you have money saved for a short-term goal, should you invest it in your brokerage account to maximize potential returns? Keep these things in mind.
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If you are saving money for a short-term goal, such as buying a house in a year or so or covering the cost of your next vacation, you need to decide where to put that cash.
It may be tempting to put it into a brokerage account and invest the money. After all, you can earn 10% average annual returns in the stock market while even most high-yield savings accounts only pay around 4% to 5% right now (and that’s pretty high based on recent history).
But, does your short-term savings actually belong in your brokerage account?
Investing short-term savings could backfire
While earning a better return may seem like good justification to invest your savings, the reality is that this is a really bad idea that could backfire and leave you with less money.
See, while it is perfectly feasible — and in fact very likely — that you can earn 10% average annual returns over time by investing in the stock market, this is an average over a long time horizon. Not a short one.
The stock market can fluctuate wildly and you could see big gains one year and big losses another — even if you’re investing in pretty safe and stable investments such as S&P 500 index funds, and especially if you’re investing in individual stocks where you’re betting a lot on one company’s performance.
Just take a quick look at the performance of the S&P 500 (a financial index made up of 500 large U.S. companies that’s usually considered a good representation of how the stock market as a whole is performing).
As you can see, in some years, you would have lost a large portion of your invested dollars, while in other years you’d have gained a lot more than the 10% average annual return.
If you’ve invested for a short-term goal, the risk is simply too great that you’re going to need to pull your money out to accomplish that objective during a bad year before you’ve had time to have enough good years to end up with more money overall.
If you invested during 2022 and saw your investment go down 19.44% and you had to pull your money out right away, you would end up with a lot less money than you started with. You’d lock in those losses permanently if you had to sell to accomplish your goal, and you might not have enough money for your objective since you’d leave with less than you started with.
Short-term savings need to be in a safer investment
If you are going to need to take money out of your account within two or three years after putting it into that account, it does not belong in the stock market. Instead, check out more stable investments, such as:
The Best High-Yield Savings AccountsThe Best Money Market AccountsThe Best CD Rates
Note that CDs require you to lock up your money for a preset period of time known as the CD term. But terms come in everything from a few weeks to several years, so there’s a good chance you’ll find one that will work for you.
By keeping your money in an FDIC-insured account where there’s no risk of loss, you’ll ensure you have it when you need it, and you won’t make your overall financial situation worse by having to sell investments at an inopportune time. You should invest money for long-term goals in assets like stocks, but for short-term goals, the risk simply isn’t justified and you could be left with regrets.
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