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IF YOUR TIME HORIZON is five years or less, the big threat can be summed up in two words: losing money.
To get a sense for the range of potentially rotten returns, consider the worst annual returns for some of Vanguard Group’s mutual funds. In 2008, when the financial crisis hit with full fury, Vanguard’s S&P 500-stock index fund declined 37%, its small-company index fund fell 36.1% and its total international-stock fund tumbled 44.1%. And these numbers don’t fully reflect the punishment suffered: The market’s slide started in late 2007 and continued into early 2009, before global stock markets bounced back beginning in March. The S&P 500’s peak-to-trough price decline was a staggering 57%.
For bonds, 2022 was a rough year. How rough? Vanguard’s long-term Treasury index fund fell 29.5%, its intermediate-term inflation-indexed bond fund slumped 11.9% and its long-term corporate bond index fund tumbled 25.8%. Vanguard’s high-yield corporate bond fund, which invests in low-quality “junk” bonds, slid “just” 9% in 2022. Instead, its rough year was 2008, when it fell 21.3%, reflecting junk bonds’ tendency to trade more like stocks than bonds.
Want to see how your funds performed each calendar year? You might check the website for the fund company involved or head to Morningstar.com.
The bottom line: If you have money that you’ll need to spend in the next five years, you probably shouldn’t own anything riskier than short-term bonds. Vanguard’s short-term corporate bond index fund was down 5.7% in 2022 and its short-term Treasury index fund slipped 3.9%. While not great, losses like those shouldn’t imperil your financial goals and should be easily recouped.
For greater safety, you might go for money-market mutual funds, which strive to maintain a stable $1 share price, or even an FDIC-insured savings account or certificate of deposit. One tip: You may find you can come out ahead by buying longer-term CDs, with their higher yields, even if you have to cash out before maturity and pay an early withdrawal penalty. You might also consider savings bonds, but keep in mind these can’t be sold in the first 12 months.
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