Seek liquidity for short-term investments

The stock market may not be the right place for all of your money at all times. Here are two situations when cash accounts can be a better solution.

Situation #1. Generally, the stock market is not a good place to invest funds you will need during the next two to three years, such as when you need to pay ongoing living expenses in retirement. In that case, the money you’ll need would be better stashed in stable investments such as money market funds, bank CDs, or bonds with maturities matched to your needs. The idea is to eliminate the risk that you’ll be taking withdrawals when the stock market is depressed.

Situation #2. Your emergency fund – three to six months of current living expenses – has one purpose: to provide the money you might need for crises such as job loss, illness, or major unexpected repairs. These are situations when you can’t afford to wait until the market recovers to get your funds.

Cash savings do carry risks, such as losing purchasing power during times of inflation. And historically, the stock market has provided superior returns over long time periods. But those returns come at the price of volatility. If you need to withdraw your savings during a market downturn, you might not recover your investment. Wherever you choose to invest your other savings, consider keeping some of the funds you will need in the short-term in less volatile, old-fashioned cash investments.