What Decides How You Should Invest?

What Decides How You Should Invest?

As a financial advisor I obviously get a lot of financial-related questions.  Duh.

But there is one question that seems to come up much more than the rest and that is, “what is the best way to invest my excess money?”

To that question I typically respond with:

  • What are you planning on using the money for?
  • How much risk are you comfortable taking?
  • When do you plan using the money?

There are a myriad of factors that determine how you should invest any of your excess money.

Your own personal risk tolerance is incredibly important.  If you’re the type of person who can’t stand to lose even $50 at a Blackjack table then I would say diving into aggressive stocks may not necessarily be your best option.

However for the purposes of this post, we are going to focus on that final question, “when do you plan on using your money” as the main driving force behind how you should consider saving/investing your money.

Time Is Money…or Better Yet Time Determines Money

Part of this driving force is your investment time horizon.  In other words, the amount of time it will be before you use the money that you have invested.

So When Will You Need Your Money?

The following illustration is a very general guideline to how risk can be approached with relative time horizons.  Keep in mind that nothing is set in stone and each individual’s own financial situation should be carefully addressed before determining the amount of risk one should take.

Depending on when you will need to access your money will help determine where to put that money and how much risk you should consider taking when investing/saving.

WHEN Can Help Determine WHERE

Separating WHEN exactly it is you will need what money can help make the process of deciding WHERE to save/invest money much clearer.  Let me explain.

One Year or Less 

  • Bank Savings Accounts
  • CDs (Certificates of Deposit)

This is an immediate cash need.  Let’s say you plan on purchasing a new car in the coming months or putting a down payment on that dream home of yours a year from now.

You wouldn’t want to subject the money you are using to make this purchase to very much risk.  That is, if you were to invest this sum in all US Stocks and 2 months later the US Stock Market fell by 40%, your cherished $50,000 down payment just went to $30,000.

Can you say higher interest rates and more difficult borrowers approval?

The shorter time horizon you have for needing the money, the less risk you should take on.

In this case, a traditional bank savings account or a Certificate of Deposit (CD) from a bank would probably be the best call.  Both guarantee the value of your money will not fall, although currently they will provide you with a pretty dismal rate of return (around 1% or so).

But hey, you’ll need the money in a year or less so making sure that you have at least the same amount of money you started with is most important here.

1 to 5 Years 

  • Bank Savings Accounts
  • CDs
  • Conservative to Balanced Investments depending on risk tolerance

This is a cash need for a purchase that you know is coming in the next couple of years but not until you save up a bit more.  Depending on exactly how many years it will be until you need the cash will ultimately determine where you should consider parking the money in the meantime.

I’d generally advise that if the cash will be used in 1 to 3 years to put your money in a more conservative investment such as a CD (as discussed above) to correspond with the length of time until you will need the money.

Now if the timeline for needing your money is more like 3 to 5 years, then I’d be looking into ways of investing your cash to potentially receive a higher rate of return.  Now this is where your own personal risk tolerance comes into play.

Not That Risk Tolerance Sermon Again

Generally, if you’re the “Can’t Stand to Lose $50 at a Blackjack Table Personality” that we described earlier, conservative methods of saving such as Bank CDs or Bank savings accounts would be best.

If you’re the wheeling and dealing type that can stand a substantial amount of risk, perhaps looking to invest your money in potentially higher-yielding stocks may pay off.

Again, depending on how aggressive or conservative you want to be and what the money ultimately will be used for will help you determine where that money will go.

5 – 10 Years

  • CDs if you’re really conservative
  • Balanced to Growth-Oriented Investments depending on your risk tolerance

Time to stretch out our time horizon a bit here.

This is quite a common scenario for someone who has no clue where they’ll be in 5 years.

Haven’t quite decided where to settle down? Not sure if the career you’re currently in is really right for you in the long term?  Then this section is just for you!

In this case, the prospects of a large financial purchase are pretty far off into the future.  But where to put your money in the best place to help support that future purchase when it surely comes along in 5 or 10 years?

Here is where you can consider being more aggressive.  If you have a 5 to 10 year time horizon investing in stocks whether that be through mutual funds, ETFs, etc. is probably an option to consider unless you’re an ultra-conservative investor.

10 Years Plus

  • Growth – Oriented Investments 

Typically the kind of money that fits into the 10 year plus time horizon consists of money you plan on using for your retirement or some purchase way off into the distant future.

This includes, but is not limited to, money in your work’s 401k, money in IRAs or maybe an inheritance you received from a family member but have promised to save it for a much later date.

Due to the long time horizon, generally you may be able to take more risk.

Yet as we know the more risk you take with your investments there is the increased likelihood that you’ll experience additional market volatility.

However, with that increased volatility comes the opportunity for potentially higher rates of return given the increased risk that you are now taking.

As mentioned above, I’d recommend different types of stock investments, mutual funds, ETFs, etc. but it does depend on your personal risk tolerance.


WHEN you are going to use whatever money you decide to invest is a huge driving force behind WHERE you should consider saving/investing.

Everyone’s financial situation is unique but by looking at your own time horizon through these general guidelines it may help you determine where your money would benefit you the best.

All investing involves risk and you may incur a profit or a loss.  There is no assurance that any investment strategy will be successful.  Every investor’s situation is unique and you should consider your investments goals, risk tolerance and time horizon before making any investment.  Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds.  The prospectus contains this and other information about mutual funds.  The prospectus is available from our office [or from the fund company] and should be read carefully.

ETF shareholders should be aware that the general level of stock or bond prices may decline, thus affecting the value of an exchange-traded fund.  Although exchange-traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the funds may not be able to exactly replicate the performance of the indexes because of fund expenses and other factors.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.  Any opinions are those of Jacob Dahlstrum and not necessarily those of Raymond James.

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