A Little Secret About Stocks

I want to let you in on a little secret this morning...something that should not be a secret but that I have not seen written often. I suspect most of my readers have invested some of their money in stocks in one manner or another. Either you own some stock outright, or you own mutual funds that hold stocks. Now, let me tell you the secret about those stock investments you have:

Money invested in stocks is not spendable money

What I mean is that, barring true emergencies, you should never look to the value you have in stock investments as money available to support your lifestyle and spending now. You also should not see that money as available for next year or even five years from now. Money invested in stocks is money to be used well down the road...that's why stocks are long-term investments. Stock investments should be allocated for spending 10 or more years down the road. I would even argue for a number greater than 10 as a starting point. Stocks are volatile. Over the long-run, the expectation is that you will be rewarded for accepting that volatility and risk. That means you cannot expect to use that money until you have reached the long-run!

As you approach the need to use some money invested in stocks, that money should move to other investments. Very near term spending should be held in cash or cash-equivalents (money market funds, short-term CDs, etc...) For spending a bit farther out, look to other investments such as bonds and long-term CDs.

Once you have understood this secret and truly believe it, dealing with the volatility we have seen over the past couple years and poor performance over the past decade becomes more palatable. The short- and mid-term stock volatility can be painful to watch; but if you have followed this secret, the impact on your financial well-being should be minimized. 

So, let me give you the secret one more time: money invested in stocks is not spendable money.


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