JohnnyGreig | E+ | Getty Images
When stocks gyrate, stock investors invariably hear this advice: “Stay the course.”
In other words, don’t sell in a gut reaction; stick to your financial plan. This counsel generally makes sense for long-term investors. Stocks are likely to recoup losses by the time owners need the money many years or decades from now.
But the calculus is different for someone depending on stocks to help fund a near-term purchase. That may include buying a home or paying for a child’s college education sometime in the next year to 18 months.
More from Personal Finance:
The cost of college has never been higher
How to teach your kids to have a healthy relationship with money
How much in student debt could Biden forgive?
Firstly, this strategy is often unwise — it’s like gambling with money you can’t afford to put at risk. However, it’s one many investors weighed as stocks continued to soar until recently, according to financial advisors.
The risk has been thrown into stark relief in 2022, though. The Dow Jones Industrial Average and S&P 500 stock indices are coming off their worst month since early pandemic woes in March 2020. The S&P 500 is down about 13% this year.
“This is the first lesson for most investors: Money you need for short-term goals just doesn’t belong in the stock market,” according to Ted Jenkin, a certified financial planner and co-founder of oXYGen Financial in Atlanta.
Money earmarked for a major purchase in months’ time should generally be in something more conservative, meaning it’s insulated from market whiplash, according to financial advisors.
“We always say, ‘Are you comfortable if that $100,000 turns into $60,000 right at the time you need to write that [tuition] check?'” according to Lee Baker, CFP, founder of Apex Financial Services in Atlanta. “The answer is always ‘no.'”
Unfortunately, investors caught off guard by the market’s plunge in 2022 don’t have many good options.
Yes, it’s possible stocks will rebound by the time you need the money.
However, the war in Ukraine and the Federal Reserve’s renewed cycle of raising interest rates may prolong the recent pain — or make it worse.
The better bet is to pull the money from stocks that you’ll need and park it in something safer, even if it means inking a loss, advisors said.
“You made that decision [to invest in stocks],” Baker said. “You’ve got to suck it up.”
Hispanolistic | E+ | Getty Images
There may be one minor consolation, Baker said: tax-loss harvesting. (This applies to investors who own stocks or stock funds in a taxable brokerage account.) This tax play lets investors use an investment loss to offset a capital gain elsewhere in their portfolio.
Investors can also consider taking a short-term loan to cover college tuition for the first semester, for example, to give stocks some time to rebound, Baker said. But this also carries risk — namely, you’re still on the hook for the loan even if the market doesn’t recover as fast as anticipated.
Traditional safe havens like cash and bonds have been troubled, too.
High inflation is eating into paltry returns on bank accounts and certificates of deposit. Bond funds are beleaguered by rising interest rates (which cause bond prices to fall). One bond benchmark, the iShares Core U.S. Aggregate Bond ETF (AGG), is down 10% this year.
But parking money in cash is a better option for short-term funds than stocks, advisors said.
There are ways some investors might be able to eke out a slightly higher return, too.
You made that decision [to invest in stocks]. You’ve got to suck it up.
CFP, founder of Apex Financial Services
I bonds, for example, are a nearly risk-free asset paying a guaranteed 9.62% through October 2022.
However, there are caveats: There’s a $10,000 purchase limit. You also can’t touch the money for a year, meaning I bonds aren’t for investors who need the funds in a few months. (There’s also an interest penalty for someone who cashes out within five years, but the record-high rate means investors would still get a good return even with that penalty, Jenkin said.)
Investors can also consider short-term treasury inflation-protected securities, which offer some insulation from inflation and rising interest rates, Jenkin said. (He recommends the Vanguard Short-Term Inflation-Protected Securities ETF [VTIP] or something similar.)
They may also consider floating-rate bond funds, he said. (However, these types of funds generally carry more risk than others like U.S. Treasury funds.)
“We’re just in one of those markets right now where it’s really hard to make money on short-term cash,” Jenkin said.
(Correction: An earlier version of this article misstated the name of a Vanguard fund.)