“Shane, I have a lump sum I want to use for a home purchase in a few years, but I need it to grow first. Where can I invest the amount to get some quick growth?”
Sigh. Unfortunately, this question is all too common. However, I do find it interesting.
First, let me answer the question definitively: There is no such investment.
Here’s why I find this an interesting question.
There is a general fear of the stock market. People tend to think of the stock market as something that is always on the verge of losing money. They say this even though, over time, the stock market is up 70% of the time.
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Humans fear a loss twice as much than we find pleasure in a gain. This is known as the loss aversion bias. Our natural tendency is to avoid losses. It comes down to survival instinct: We would rather not lose $50 than gain $50.
Yet, the quick growth question persists.
Maybe it’s rooted in another psychological bias known as mental accounting. We categorize things like finances, college, retirement, windfall, etc. Labeling causes us to overlook established finance principals because we limit our focus to a situation. Coming into a lump-sum amount is “found” money — money you would never risk under regular circumstances now becomes money to take a flyer on.
Or maybe it’s the thought that an investment exists that they don’t know about. However, if there was an investment that could turn a quick profit, with low-to-no risk, I’m certain it would not be a secret. Some money manager would be overworked taking peoples’ money. If this existed, why would we bother putting our money elsewhere?
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Instead of focusing on the available money, focus instead on the time before money is required:
- Short-term money (<1-5 years) requires safety, stable value, and liquidity — nothing pays well in this category, but that is not the requirement in this category, is it?
- Mid-term money (five 10 years) can assume minimal risks for a slightly larger return, but you must focus on the amount of risk you are assuming.
- Long-term money (10-plus years) can take on the greatest risk as time becomes your ally. Remember, 70% of the time, the stock market is up.