A young couple plans to buy a house in five years. They are saving diligently and have
accumulated a down payment that currently amounts to $80,000.
Here’s what could happen to this money if exposed to the volatility of the stock market.
Year One: Their stock market investments rise 10 per cent to $88,000
Year Two: Their investment rises 7 per cent to $94,160
Year Three: Their investment falls 5 per cent to $89,452
Year Four: Their investment falls 20 per cent to $71,562
Year Five: Their investments rises 10 per cent to $78,718
What happens if they kept their money in safe investments?
After five years of using a five-year ladder of GICs with a blended annualized return of 2.06 per
cent, their down payment will be worth $88,587.
Even though young people can tolerate more investment risk, consideration as to the time frame
of when your principal is required needs to be prime consideration for your investment strategy.
A simple rule of thumb: zero in stocks for short term saving goals (five to seven years) and
mostly stocks when investing for the long term.
While this approach may seem boring, it is entirely appropriate for short term goals. High
interest savings accounts and guaranteed investment certificates will keep your principal safe
with modest growth.
Stocks can give you double-digit returns over five years if you catch a bull market rally, but the
risk of losing money outweighs that. Stocks are for the long-term. Ignore them for your house