A common theme I see in conversations with clients is, "How should I invest for XYZ goal?"

It could be a home purchase, new car, or paying for college.

This is where I often talk about ranges of returns for stocks, bonds, and a balanced portfolio.

You want to align your investment with the expected time frame for using the funds.

How this works in practice is cash is often used for short-term need (i.e. 6 - 24 months), bonds for medium-term needs (2 - 7 years), and stocks for long-term needs (7+ years).

You can adjust each bucket based on how much risk you can stomach, how much you can take given your other resources, and the potential consequences of the money not being available if you took too much risk and your investment declines in value.

For most people, this makes sense after we go through an example tailored to their situation, but some people want to see exact numbers.

I learned about this Risk Reduction Calculator, and thought you might enjoy it.

According to their website, "this calculator is intended to allow you to calculate how much to put into a CD and how much to put into stocks so to protect yourself against any loss in principal at the time the CD matures.”

Example - $100,000 Investment, 2 Year Time Frame, 5% APY CD

Let's say you need $100,000 in two years for a new home purchase and you can purchase a CD with a 5% APY.

If you thought the worst-case scenario of the stock investment was a 50% loss, the calculator would indicate that you could put $82,987.55 into a CD and $17,012.45 into a stock investment.

If the stock investment had a 50% loss, the interest on the CD would help make up for the loss, so that by two years, you have your original $100,000.

Although nobody can say for certain what the worst-case scenario would be for a stock investment, it's a helpful framing.

You can also see if the stock performs better, what your annualized return would be. For example, if the stock investment went up 8%, your annualized return would be 5.52%, and you would have $111,337.10 at the end of two years.

Blog This Month

​How to Review Your Tax Return​

What I've Been Reading

• ​Here’s What Happens at the IRS After You File Your Taxes​
• ​National Park Visits Are Surging, and One Firm Is Making Millions​
• ​The Gambler Who Beat Roulette​
• ​This Is The Most Fun Way To Make Your Life Awesome​
• ​Should I Buy a House Now?​
• ​Silicon Valley Bank's risk model flashed red. So its executives changed it.​

​