So you've got some money set aside for short-term goals (P.S: in the financial world, short-term is categorized as less than 3 years). This can be money going towards a house deposit, a car, a holiday, or a myriad of other objectives.
How should you invest this money? We all want our money to work hard for us, so it can be tempting to put it in the stock market. After-all, stocks have historically been the highest returning asset class. But that's a dangerous approach. Although investing in a diversified basket of stocks has made for a wonderful long-term strategy, values of these stocks can fluctuate unpredictably and sometimes dramatically over short periods of time.
If you invest your short term funds in the market, you could end up having to pull the money out at a loss, or equally unappealing - pushing back that important goal you've worked so hard to save for!
Here's the chance of historical probability of that happening:
Over a 1 year period, there is a 35% chance of losing money on the stock market.
Over a 2 year period, there is a 25% chance of losing money on the stock market.
Over a 3 year period, there is a 15% chance of losing money on the stock market.
Not only could you lose, but in some downturns, such as 2008's market crash, you can lose big. In that instance, stocks dropped by nearly 60%. Based on this, we believe that the potential reward from investing over a short period of time is not worth the risk. Taking risks makes sense when you've got the time horizon and the discipline to ride out short-term negative fluctuations - but many investors underestimate what "short-term" can be. On rare occasion, markets can be down over periods of 5 or even 10 years. For short-term goals, protecting the money becomes a priority to ensure you don't have losses by the time you need the funds.