Why Five Years Is Not a Simple Investing Rule

Five years is often treated as an important dividing line when deciding whether money should be saved or invested. It can be a useful timeframe to think about, but reaching five years does not automatically make investing suitable or remove the possibility of losing money.

Investments can rise and fall over any particular period. If you invest money today and need it five years from now, there is no guarantee that your investments will be worth more at the point when you need to withdraw them. They could have grown, but they could also be worth less.

The timeframe therefore needs to be considered alongside the reason you may need the money. Someone who definitely needs a particular amount on a fixed date faces a different situation from someone who might use the money in approximately five years but could comfortably leave it invested for longer.

What Does Investment Time Horizon Mean? explains the wider relationship between the amount of time money can remain invested and the uncertainty involved in investment returns. For money you might need in five years, the important point is that five years describes the timeframe; it does not determine the outcome.

How Certain Are You That You Will Need the Money?

The word might makes an important difference to this question. Saying that you might need money in five years can describe several very different situations.

You might know that a particular expense will occur around that date and expect to need the entire amount. Alternatively, five years might simply be an approximate point at which you would like the option of using the money. You may not yet know whether the expense will happen at all.

The practical question is what would happen if five years arrived and your investments were worth less than you expected. If the money had to be withdrawn regardless of its value, a market fall could directly affect the amount available for the goal. If the date were flexible, you might have more options over when the money was used.

What Does 'Might Need It in Five Years' Mean?

The money will definitely be needed

You expect to need a particular amount around the five-year point, with little flexibility over when it will be used.

The money will probably be needed

You expect the goal to happen, but there is some uncertainty over the exact date or amount required.

The money may be needed

Five years is a possible withdrawal point, but you do not yet know whether the money will actually be required.

The date is flexible

You have a goal in mind, but the money could potentially remain untouched for longer if circumstances or investment values change.

These situations all share the same headline five-year timeframe, but the consequences of an uncertain investment value are different. Understanding which situation most closely reflects the purpose of the money provides more useful information than the number of years alone.

What Could Happen to Your Investments Over Five Years?

There is no single investment outcome associated with a five-year period. The value of an investment at the end will depend on what happens to the investments held and the markets affecting them during that particular period.

The investments could grow substantially or produce more modest growth. Their value could end up relatively close to the amount originally invested, or they could be worth less when the five years are over.

This is why an average long-term investment return should not be treated as a prediction for a particular five-year period. An average calculated across many years can contain periods of strong gains, weak returns and losses. Your five years will represent only one particular sequence of market conditions.

Why Investments Rise and Fall in Value explains some of the reasons market values change. The broader uncertainty around the amount you could eventually receive is covered in What Is Investment Risk?.

For money with a possible five-year use, the important issue is not trying to predict which outcome will occur. It is considering whether the goal could still work if the investment outcome were less favourable than expected.

What If Markets Fall Just Before You Need the Money?

The timing of investment returns can matter as well as the overall length of the investment period. A market fall shortly after investing leaves several years before the possible withdrawal date. A similar fall near the end of year five leaves much less time before the money may be needed.

For example, suppose £25,000 has been invested towards a future goal. As the five-year point approaches, the investments are worth £28,000. If they then fall by 15%, their value would drop to £23,800. The fact that the investments had previously grown would not prevent the amount available at that particular point from being below the original £25,000.

The important issue is not whether the investments might subsequently recover. Future market movements cannot be known in advance. The issue is whether the money would need to be withdrawn before there had been time for its value to change again.

This becomes increasingly relevant as the potential withdrawal date approaches. What Should Happen to Your Investments as Your Goal Gets Closer? explores how a shortening timeframe can change the relationship between an investment and the goal it is intended to fund.

How Flexible Is the Five-Year Deadline?

A five-year goal with a flexible date creates a different situation from one tied to a particular deadline. The difference becomes most obvious when considering what you would do if the investments were worth less than expected when year five arrived.

If the goal could be postponed, you may have flexibility over when the money is used. That does not guarantee that delaying will produce a better investment outcome, but it means the original date does not automatically force a withdrawal.

If the goal cannot easily move, there may be fewer options. Needing a particular amount around a particular date makes the value of the investments at that point more significant.

A house purchase is one example. Someone hoping to buy in approximately five years but willing to change the timing faces a different situation from someone whose circumstances create a much firmer purchasing timetable. Should You Invest for a House Deposit? examines that particular decision in more detail.

The useful question is therefore not simply whether five years is long enough to invest. It is also what happens to the goal if five years arrives and the amount available is lower than planned.

Will You Need All of the Money?

The amount you may need can be just as important as when you may need it. Saying that you might need your money in five years can imply that the entire amount has the same timeframe when that may not actually be the case.

Suppose you have £40,000 available but expect that a possible expense in five years would require around £10,000. The remaining £30,000 may have no connection to that five-year date. Treating the entire £40,000 as though it has the same investment horizon could therefore hide an important distinction.

The reverse can also be true. If the whole amount is intended for a goal that is expected to happen around year five, substantially more of your money is exposed to whatever investment value exists when that point arrives.

Separating the amount that might be required from money intended for later goals can therefore make the timeframe clearer. It does not prescribe where either portion should be held; it simply avoids assuming that all of your money has the same job.

Saving and Investing Solve Different Problems

Part of the five-year decision involves understanding what saving and investing are designed to provide. They expose money to different types of uncertainty.

Money held in savings does not normally experience the same market movements as investments. This can provide much greater certainty over the nominal amount available, although inflation can reduce what that money can buy over time.

Investing provides exposure to potential investment growth, but the price of that opportunity is uncertainty over what the investments will be worth when you eventually need them. A five-year period does not remove that uncertainty.

This means the choice should not be reduced to the idea that saving is risk-free while investing is risky. The risks are different. Investment Risk vs Savings Risk explains the distinction in more detail, including how market movements and inflation can affect money in different ways.

For money that may be needed on a particular date, the relevant question is which uncertainties matter most to the goal. That depends partly on how much certainty you need over the amount available and how much flexibility you have if circumstances change.

Could Part of the Money Be Saved and Part Invested?

The decision does not necessarily have to apply to every pound in the same way. If different portions of your money have different purposes or timeframes, it can be useful to think about them separately.

For example, part of the money might be connected to an expense that could arise around five years from now while another part is intended for a much later goal. Although the money may currently be considered together, the two portions are being asked to do different jobs.

This does not imply a particular split between saving and investing. There is no universal percentage that applies simply because a possible expense is five years away. The useful distinction is between money that may genuinely be required around that point and money that has a different purpose and timeframe.

This same principle becomes particularly important when money is supporting several objectives at once. How to Invest When You Have More Than One Financial Goal explains how separate targets and timeframes can be considered even when the investments themselves are held together.

Reassess the Position as Five Years Becomes Four, Three and Two

A decision made with five years remaining does not stay a five-year decision. After one year, the possible withdrawal date is four years away. After three years, it may be only two years away.

By then, you may also know much more about the goal. Something that was only a possibility at the beginning might have become a firm plan. Alternatively, the goal may have been delayed, abandoned or changed substantially.

The amount required can change as well. Your investments may have risen or fallen, you may have added further money and the expected cost of the goal itself may be different from your original estimate.

Reassessing the position therefore means considering the timeframe that exists now rather than repeatedly relying on the five-year horizon you started with. As the potential withdrawal date becomes closer, What Should Happen to Your Investments as Your Goal Gets Closer? provides the next step in that decision process.

Conclusion

Five years can be a useful timeframe when thinking about whether money could be invested, but it is not a guarantee that investing will produce a positive outcome and it should not be treated as a universal rule.

Whether money you might need in five years is compatible with investing depends on more than the number of years involved. How certain you are that the money will be needed, how flexible the date is, how much of the money is required and what a market fall would mean for the goal can all affect the decision.

The timeframe also changes continuously. Five years eventually becomes four, three and two, while the goal itself may become clearer. Reviewing those changing circumstances keeps the decision connected to what the money may actually need to achieve rather than relying on a fixed rule about how long investments should be held.