Unit 2 · Level 2 · Money that must never go in
The five-year line
A common convention says money you need within about five years does not belong in volatile assets. It is not a law of nature. It comes from a simple observation: over any single year, broad stock markets have historically finished lower roughly one year in four. Over stretches of ten or twenty years, ending lower has been rare. Short windows are where the odds work against you.
Free to play. No ads, no token, no account needed to start.
What you get asked
What is the reasoning behind the rough five-year line?
Nothing forbids you from investing money you need next year. The point is the odds. Over twelve months a broad index finishing lower is ordinary. Over twenty years it has been rare.
Historically a broad stock index has finished lower after roughly 1 year in every 4. Out of 20 single years, roughly how many end below where they started?
About 5. One in four is not a rare event. It is an ordinary outcome, and it becomes a problem only if your deadline happens to land on one of those years.
Match the holding window to how ordinary a loss has been
Time does not guarantee a gain. It has, historically, shrunk the odds of a loss. Past patterns are not a promise, which is exactly why the line is drawn conservatively.
The five-year line is a ___, not a guarantee, and money with a hard deadline should sit on the safe side of it.
Conventions like this exist so you do not have to model the whole thing every time. If the money is needed in three years, treat it as short. If in twelve, treat it as long.
You need €15,000 for a wedding in two years. What does the five-year line suggest?
Two years sits well inside the line, so the odds of being down on the day are ordinary rather than remote. A dull deposit account that pays little is doing the job you actually need. 🐜
The rest of this unit
Some money has a date attached, and a market cannot be told about the date.