Follow the Five Year Rule of Investing to Protect Your Money
The stock market can have stable returns over time, but this is less predictable in the short term. For this reason, experts recommend the “five-year rule,” which basically means that if you need money over the next five years, you don’t have to invest it.
Forbes author Robert Berger explains:
A good rule of thumb is not to invest in the stock market that you will need for the next five years. This is especially important for those who are retired and rely on their investments for their day to day expenses. The goal here is to avoid having to sell stocks during a bear market to cover the cost of living.
This rule is difficult to follow today due to the extremely low yield on the bond market. But given the relatively high stock prices, this is an important rule to follow. With at least 5 years of out-of-market spending, an investor is more likely to weather a bear market knowing that his immediate needs will be met.
When the stock market goes down, which is inevitable, it’s important not to panic . The first rule of thumb to avoid panic is to make sure your investment is being allocated correctly. In other words, if you need this money in the next few years, you should probably avoid investing it. For more tips on how to prepare for a dip in the stock market, see Berger’s full post at the link below.