Should I invest money I need in the next few years?

Today’s question comes from Scott. He asks:

“My girlfriend and I recently decided to take the next step and move in together. We both own homes, and decided she would move into mine and sell hers. We currently live in Baltimore city, and plan on selling my house and purchasing a home together in the country within 2-3 years most likely.

She has around $40k in profits from her sale and as she is extremely risk averse it is currently sitting in an online savings account drawing < 1% interest. I am trying to talk her into opening an online brokerage and investing it in S&P index funds/ETF’s.

Thoughts on this strategy for a relatively short term investment? My point to her was barring a complete market collapse it is a very safe investment. Any other thoughts or ideas as to what to do with the money before we use it to purchase a home together a few years down the line? (I’m aware of your views on renting vs. buying but I don’t think I’m going to win that battle.)”

My recommendation is to let her do what she wants with the money, and that sounds like keeping it in a savings account.

Yes, over the long term the stock market goes up. The annualized return since 1871 has been 9%, and there’s no reason to believe that won’t continue. That’s why it’s important to invest for your retirement.

But if you invest money you know you need in one year, or two years, or three years, what you’re doing is gambling.

We’ve been in a bull market since March of 2009. The market has gone up about 200%. Anyone who started investing in that time has made money. It’s been easy.

If you convince her to invest her $40,000 in an S&P 500 index fund and the bull market continues until you need to pull it out it you’ll think it was a good decision.

But what if it doesn’t?

People have already forgotten about the financial crisis. How scary that was. And it wasn’t even that long ago. If you weren’t investing back then you haven’t lived through a big market decline to know how bad things get.

The market went down 37% in 2008. If she invested $40,000 that year she would’ve lost $15,000.

A few years before the financial crisis was the dot-com bubble. The market went down three years in a row: 9% in 2000, 12% in 2001, and 22% in 2002. Her $40,000 would’ve gone to $36,000, then $32,000, then $25,000.

If something like that happened, and investing was your idea but her money, you’ll have interesting conversations at the dinner table.

We know that over the long term the market goes up. But on average the market goes down by 10% every 11 months, 20% every four years, and 30% every decade.

There’s no way to know if you’re going to get caught in a decline. And that’s why when you have cash you know you need for something in the next few years, like a house, if you invest it you’re gambling.

The best places to put the $40,000 are an online savings account or CD. You can find savings accounts that yield around 1%. A two-year CD will yield a little bit more, maybe 1.5%. Either one is fine.

When she wants to do one thing with her money, you convince her to do another, and it doesn’t turn out how you said it was going to turn out it will create problems in your relationship.

It’s her money, let her decide what she feels comfortable doing with it. Your relationship is the more important investment.