The way you should invest your money really comes down to the goal and the purpose of that money. We like to attach purpose to every investment account, because that purpose should drive how the money is invested.
For example, money set aside for emergencies shouldn’t take much market risk at all. That money needs to be stable and accessible, so things like savings accounts or money market funds make sense. The goal there isn’t growth. It’s protection.
On the other end of the spectrum, money invested for retirement has a very different purpose. Because you likely won’t touch it for decades, we actually want exposure to the stock market. We want to accept volatility, because historically, long-term investors have been rewarded for taking that risk.
Most investing mistakes happen when people mismatch purpose and risk. They take too much risk with short-term money, or not enough risk with long-term money.
So how should you invest your money?
Start by clearly defining what each dollar is for, how long until you need it, and which type of account it belongs in. When purpose and timeframe are clear, the investment strategy usually takes care of itself.
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