Stocks for Long-Term Accumulation Fund?

Q: Four Major Financial Decisions that Affect Eternity suggested keeping cars for 10 years. Doing that would mean we have 7 years left to save for our next car. Should we put a portion of this monthly savings into a stock mutual fund (say 20%) and the rest in a bond fund?

A: As Selecting The Right Savings Vehicle For Your Time Horizon illustrates, a key saving principle is to match your savings vehicle to your time horizon. Because your time frame is fairly long (7 years), putting a portion into stocks is a reasonable thing to do. However, this assumes that your car savings is truly an accumulation fund and not money you might need to use sooner as part of your liquid emergency fund.

Generally speaking, we only recommend investing in the stock market if you have at least a 5-year time horizon. For periods shorter than that, we recommend more conservative savings vehicles as mentioned in Selecting The Right Savings Vehicle For Your Time Horizon. Those are usually bank or bond products. With seven years to go until you expect to use your savings to buy another vehicle, you could definitely justify putting 20% into a stock fund and the rest into a bond fund. In fact, if you're comfortable with the increased risk, you could consider putting much more than 20% into stocks initially, then gradually paring your stock exposure back as your purchase date gets closer (for example, you could start with 100% in stocks and shift 20% into bonds each year). There are obviously no guarantees such an approach will boost returns, but the long-term averages would be in your favor.

• Current Best Rates tables 
• SMI Savings Accounts page
• Selecting The Right Savings Vehicle For Your Time Horizon
• Why You Usually Get Your Best Savings Deals from Money Funds
• Getting Your Money's Worth 
• Using Bank Certificates of Deposit to Build a Savings Ladder
• Ultra-Short Term Bonds Take A Hit: Time to Run for the Exit? 
• For Savings You Won't Need to Draw On for Two to Three Years 
• Why Mortgage-Backed Bond Funds Make Sense for Long-Term Savers 

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