Short term investing vs Leaving money alone?
There are three basic concepts finance (as far as I'm concerned). Liquidity is basically an asset's spendability.  Assets range in liquidity from cash (very liquid) to real estate (not very liquid).  You can spend cash immediately, while real estate must first be converted to cash.   Another important concept is your time horizon.  When do you need your money.  Money you need in the near term should be kept in very liquid assets, while money you won't need for a significantly long time can be tied in to something much less liquid. Volatility is the degree to which an assets value is predictable from day to day.  Cash and guaranteed savings accounts have very low volatility, while a stock portfolio will fluctuate in value from day to day, sometimes a lot and sometimes you can lose your initial investment. So really, you need to determine what you need or want this money for, and depending on when you'll need it you can make decisions about whether or not to invest it, or keep it in a savings account, or keep it in literal actual cash. Your TFSA is maxed for the year, so that's out.  Do you have an emergency fund?  Do you want to travel or have other more near term desires that cost money?  If you have a solid financial foundation and already have an emergency fund, you may want to set up a brokerage account and invest in an index fund.  You should not invest money in the stock market unless you are ready to leave it there for at least a few years.  Stocks are volatile but over a long enough period the market generally goes up. In your search for the right index fund, watch out for fees.  Most big brokers will have a list of funds you can invest in with no up front fees and no commission.  The fund itself will charge an expense ratio, look for an index fund with an expense ratio around 0.10%.  This means you'll pay 0.10% of your holdings each year to the fund manager.   No matter how much money we're talking about, I wouldn't put more than half in the market.  Dip your toe in, get used to the value fluctuating.  Don't start reading about technical analysis and derivative trading.  Just put your money in a very low fee big market index and let it ride. "Should I invest the money I don't need immediately and only withdraw it next year when I need it for living expenses or should I simply leave it in my current account? This might come as a bit of a surprise, but your money is already invested. We talk of investment vehicles. An investment vehicle is basically a place where you can put money and have it either earn a return, or be able to get it back later, or both. (The neither case is generally called ""spending"".) There are also investment classes which are things like cash, stocks, bonds, precious metals, etc.: different things that you can buy within an investment vehicle. You currently have the money in a bank account. Bank accounts currently earn very low interest rates, but they are also very liquid and very secure (in the sense of being certain that you will get the principal back). Now, when you talk about ""investing the money"", you are probably thinking of moving it from where it is currently sitting earning next to no return, to somewhere it can earn a somewhat higher return. And that's fine, but you should keep in mind that you aren't really investing it in that case, only moving it. The key to deciding about an asset allocation (how much of your money to put into what investment classes) is your investment horizon. The investment horizon is simply for how long you plan on letting the money remain where you put it. For money that you do not expect to touch for more than five years, common advice is to put it in the stock market. This is simply because in the long term, historically, the stock market has outperformed most other investment classes when looking at return versus risk (volatility). However, money that you expect to need sooner than that is often recommended against putting it in the stock market. The reason for this is that the stock market is volatile -- the value of your investment can fluctuate, and there's always the risk that it will be down when you need the money. If you don't need the money within several years, you can ride that out; but if you need the money within the next year, you might not have time to ride out the dip in the stock market! So, for money that you are going to need soon, you should be looking for less volatile investment classes. Bonds are generally less volatile than stocks, with government bonds generally being less volatile than corporate bonds. Bank accounts are even less volatile, coming in at practically zero volatility, but also have much lower expected rates of return. For the money that you need within a year, I would recommend against any volatile investment class. In other words, you might take whichever part you don't need within a year and put in bonds (except for what you don't foresee needing within the next half decade or more, which you can put in stocks), then put the remainder in a simple high-yield deposit-insured savings account. It won't earn much, but you will be basically guaranteed that the money will still be there when you want it in a year. For the money you put into bonds and stocks, find low-cost index mutual funds or exchange-traded funds to do so. You cannot predict the future rate of return of any investment, but you can predict the cost of the investment with a high degree of accuracy. Hence, for any given investment class, strive to minimize cost, as doing so is likely to lead to better return on investment over time. It's extremely rare to find higher-cost alternatives that are actually worth it in the long term."
My figuring (and I'm not an expert here, but I think this is basic math) is: Let's say you had a windfall of $1000 extra dollars today that you could either: a. Use to pay down your mortgage b. Put into some kind of equity mutual fund Maybe you have 20 years left on your mortgage.  So your return on investment with choice A is whatever your mortgage interest rate is, compounded monthly or daily.  Interest rates are low now, but who knows what they'll be in the future.  On the other hand, you should get more return out of an equity mutual fund investment, so I'd say B is your better choice, except: But that's also the other reason why I favour B over A.  Let's say you lose your job a year from now.  Your bank won't be too lenient with you paying your mortgage, even if you paid it off quicker than originally agreed.  But if that money is in mutual funds, you have access to it, and it buys you time when you really need it.  People might say that you can always get a second mortgage to get the equity out of it, but try getting a second mortgage when you've just lost your job. It is a dangerous policy not to have a balance across the terms of assets. Short term reserves should remain in short term investments because they are most likely needed in the short term.  The amount can be shaved according to the probability of their respective needs, but long term asset variance usually exceed the probability of needing to use reserves. For example, replacing one month bonds paying essentially nothing with stocks that should be expected to return 9% will expose oneself to a possible sudden 50% loss.  If cash is indeed so abundant that reserves can be doubled, this policy can be expected to be stable; however, cash is normally scarce.  It is a risky policy to place reserves that have a 20% chance of being 100% liquidated into investments that have a 20% chance of declining by approximately 50% just for a chance of an extra 9% annual return. Financial stability should always be of primary concern with rate of return secondary only after stability has been reasonably assured. "The answer to your question depends very much on your definition of ""long-term"". Because let's make something clear: an investment horizon of three to six months is not long term. And you need to consider the length of time from when an ""emergency"" develops until you will need to tap into the money. Emergencies almost by definition are unplanned. When talking about investment risk, the real word that should be used is volatility. Stocks aren't inherently riskier than bonds issued by the same company. They are likely to be a more volatile instrument, however. This means that while stocks can easily gain 15-20 percent or more in a year if you are lucky (as a holder), they can also easily lose just as much (which is good if you are looking to buy, unless the loss is precipitated by significantly weaker fundamentals such as earning lookout). Most of the time stocks rebound and regain lost valuation, but this can take some time. If you have to sell during that period, then you lose money. The purpose of an emergency fund is generally to be liquid, easily accessible without penalties, stable in value, and provide a cushion against potentially large, unplanned expenses. If you live on your own, have good insurance, rent your home, don't have any major household (or other) items that might break and require immediate replacement or repair, then just looking at your emergency fund in terms of months of normal outlay makes sense. If you own your home, have dependents, lack insurance and have major possessions which you need, then you need to factor those risks into deciding how large an emergency fund you might need, and perhaps consider not just normal outlays but also some exceptional situations. What if the refrigerator and water heater breaks down at the same time that something breaks a few windows, for example? What if you also need to make an emergency trip near the same time because a relative becomes seriously ill? Notice that the purpose of the emergency fund is specifically not to generate significant interest or dividend income. Since it needs to be stable in value (not depreciate) and liquid, an emergency fund will tend towards lower-risk and thus lower-yield investments, the extreme being cash or the for many more practical option of a savings account. Account forms geared toward retirement savings tend to not be particularly liquid. Sure, you can usually swap out one investment vehicle for another, but you can't easily withdraw your money without significant penalties if at all. Bonds are generally more stable in value than stocks, which is a good thing for a longer-term portion of an emergency fund. Just make sure that you are able to withdraw the money with short notice without significant penalties, and pick bonds issued by stable companies (or a fund of investment-grade bonds). However, in the present investment climate, this means that you are looking at returns not significantly better than those of a high-yield savings account while taking on a certain amount of additional risk. Bonds today can easily have a place if you have to pick some form of investment vehicle, but if you have the option of keeping the cash in a high-yield savings account, that might actually be a better option. Any stock market investments should be seen as investments rather than a safety net. Hopefully they will grow over time, but it is perfectly possible that they will lose value. If what triggers your financial emergency is anything more than local, it is certainly possible to have that same trigger cause a decline in the stock market. Money that you need for regular expenses, even unplanned ones, should not be in investments. Thus, you first decide how large an emergency fund you need based on your particular situation. Then, you build up that amount of money in a savings vehicle rather than an investment vehicle. Once you have the emergency fund in savings, then by all means continue to put the same amount of money into investments instead. Just make sure to, if you tap into the emergency fund, replenish it as quickly as possible." First of all kudos to you for seeing the value in saving at a young age. There are several different things you can mean by this and I'm not sure which is accurate so I am going to address the first two that I thought of. If you are selling your investments because you need the money (emergency expenses, saved enough for a short term goal, whatever the reason) then this may not be the best solution for your savings.  Investing in mutual funds, ETFs, stocks, 401k, IRA, etc are typically for longer term goals such as a goal that is 10+ years away (maybe buying a home, paying for college for your children, retirement, etc). If you are selling your investments because you believe that another investment is performing better and you want to get in on that one instead what I would suggest is leaving the money you have invested where it is and starting future investments in the new fund/ETF you are interested in.  For example if you have $2000 invested in fund X and now you do some research and fund Q looks more appealing that is great, start investing in fund Q with your next deposit.  Any research you do will be based on past results, there is nothing that guarantees that fund Q will continue doing better than the fund X you already have.  Trying to time the market rarely ends well for the investor. I would encourage you to continue saving money a bit at a time just like you have been doing.  Avoid selling your investments until it is time to sell them for whatever goal you intended them for.  Set aside some cash to cover any unexpected expenses so you won't have to sell your investments to cover the costs, even at 18 unplanned things happen. "Question 2 Some financial institutions can provide a way to invest small amounts with low or no cost fees over a period of time (like monthly, weekly, etc).  For instance, a few brokerages have a way to buy specific ETFs for no cost (outside of the total expense ratio). Question 3 When someone says that investing is like buying a lottery ticket, they are comparing an event that almost always has at least a 99.9% of no return (large winnings) to an event that has much better odds.  Even if I randomly pick a stock in the S&P 500 and solely invest in it, over the course of a given year, I do not face a 99.9% chance of losing everything. So comparing the stock market to a lottery, unless a specific lottery has much better odds (keep in mind that some of these jackpots have a 99.9999999% of no return) is not the same.  Unfortunately, nothing truly safe exists - risk may mutate, but it's always present; instead, the probability of something being safe and (or) generating a return may be true for a given period of time, while in another given period of time, may become untrue. One may argue that holding cash is safer than buying an index fund (or stock, ETF, mutual fund, etc), and financially that may be true over a given period of time (for instance, the USD beat the SPY for the year of 2008).  Benjamin Franklin, per a biography I'm reading, argued that the stock market was superior to gold (from the context, it sounds like the cash of his day) because of what the stock market represents: essentially you're betting on the economic output of workers.  It's like saying, in an example using oil, that I believe that even though oil becomes a rare resource in the long run, human workers will find an alternative to oil and will lead to better living standards for all of us. Do civilizations like the Mongolian, Roman, and Ottoman empires collapse?  Yes, and would holding the market in those days fail?  Yes.  But cash and gold might be useless too because we would still need someone to exchange goods with and we would need to have the correct resources to do so (if everyone in a city owns gold, gold has little value).  The only ""safe bet"" in those days would be farming skill, land, crops and (or) livestock because even without trading, one could still provide some basic necessities." "Investing is always a matter of balancing risk vs reward, with the two being fairly strongly linked.  Risk-free assets generally keep up with inflation, if that; these days advice is that even in retirement you're going to want something with better eturns for at least part of your portfolio. A ""whole market"" strategy is a reasonable idea, but not well defined. You need to decide wheher/how to weight stocks vs bonds, for example, and short/long term. And you may want international or REIT in the mix; again the question is how much. Again, the tradeoff is trying to decide how much volatility and risk you are comfortable with and picking a mix which comes in somewhere around that point -- and noting which assets tend to move out of synch with each other (stock/bond is the classic example) to help tune that. The recommendation for higher risk/return when you have a longer horizon before you need the money comes from being able to tolerate more volatility early on when you have less at risk and more time to let the market recover. That lets you take a more aggressive position and, on average, ger higher returns. Over time, you generally want to dial that back (in the direction of lower-risk if not risk free) so a late blip doesn't cause you to lose too much of what you've already gained... but see above re ""risk free"". That's the theoretical answer. The practical answer is that running various strategies against both historical data and statistical simulations of what the market might do in the future suggests some specific distributions among the categories I've mentioned do seem to work better than others. (The mix I use -- which is basically a whole-market with weighting factors for the categories mentioned above -- was the result of starting with a general mix appropriate to my risk tolerance based on historical data, then checking it by running about 100 monte-carlo simulations of the market for the next 50 years.)" For me, spending my spare time on my career offers better return on investment (time) than stock investing, so I don't have the time to try to craft strategies about stock confusion anyway. It just serves as further proof to me that trying to time the market on short time scales is doomed unless you can account for all the irrationality of human behavior. Even straight index funds grow at about 6-7%. on average, or over long periods of time.  In short time periods (quarters, years), they can fluctuate anywhere from -10% to +20%.  Would you be happy if your bank account lost 10% of its value the week before you had to pay the bill for the repairs?   Is it appropriate to invest small amounts for short periods of time? In general, no.  Most investments are designed for long term appreciation.   Even sophisticated financial companies can't do any better than 1 or 2% (annualized) on short-term cash reserves. Where you can make a huge difference is on the cost side.  Bargain with suppliers, or wait for sales on retail items.  Both will occasionally forego their margin on certain items in order to try to secure future business, which can make a difference of 20% or more in the cost of repairs. I would encourage you to read The Warren Buffett Way.  Its a short read and available from most libraries as an audio book.  It should address most of the ignorance that your post displays.   Short term prices, offered in the market, do not necessarily reflect the future value of a company.  In the short term the market is a popularity contest, in the long run prices increases based on the performance of the company.  How much free cash flow (and related metrics) does the company generate.  You seem way overly concerned with short term price fluctuations and as such you are more speculating. Expecting a 10 bagger in 2-3 years is unrealistic.  Has it happened, sure, but it is a rare thing.  Most would be happy to have a 2 bagger in that time frame. If I was in your shoes I'd buy the stock, and watch it.  Provided management meet my expectations and made good business decisions I would hold it and add to my position as I was able and the market was willing to sell me the company at a good price.   It is good to look at index funds as a diversification.   Assuming everything goes perfectly, in 2-3 years, you would have an extra 1K dollars.  Big deal.  How much money could you earn during that time period?  Simply by working at a fairly humble job you should be able to earn between 60K and 90K during that time.  If you stuck 10% of that income into a savings account you would be far better off (6K to 9K) then if this stock actually does double.  Hopefully that gets you thinking. Staring out is about earning and saving/investing.  Start building funds that can compound.  Very early on, the rate of return (provided it is not negative) is very unimportant.  The key is to get money to compound! "First: what's your risk tolerance? How long is your investment going to last? If it's a short-term investment (a few years) and you expect to break even (or better) then your risk tolerance is low. You should not invest much money in stocks, even index funds and ""defensive"" stocks. If, however, you're looking for a long-term investment which you will put money into continually over the next 30 years, the amount of stock you purchase at any given time is pretty small, so the money you might lose by timing the market wrong will also be rather small. Also, you probably do a remarkably poor job of knowing when to buy stocks. If you actually knew how to time the market to materially improve your risk-adjusted returns, you've missed your calling; you should be making six figures or more on Wall Street. :)" You seem to have a grasp of the basic principles involved, but your estimation of the risk you are taking seems a bit low. Your non-investment reserves are unlikely to cover your expenses for more than a month, so the chance that you would need to sell investments to cover additional expenses is high. You mention that I am flexible with the 'cash on hand' amount. For instance, for about three months I put a very tight spending/investing freeze on my life because I knew I'd be leaving jobs and moving (I already had the other job lined up). Those savings presumably went toward moving expenses, as your usual savings were insufficient. In the event that you are laid off suddenly, you might find yourself in the same position again, with added unplanned expenses like fees for breaking a lease. Your current plan involves selling investments to cover the gap. Based on your age you have probably only invested in a predominantly positive market, so the chance that you might need to sell investments for cash seems like a reasonable trade-off for the added potential gains. Your perception might change if the markets go south and you are forced to sell into a down market, possibly at a significant loss. You also don't indicate if your investments are currently sufficient to cover an extended period of unemployment. You are taking on a lot of risk under your current plan. Essentially you are trading possible investment gains for flexibility and time. By making small changes like saving at least enough to move as you did previously, you can give yourself time to react to job loss or other unexpected financial need. Rather than give the traditional emergency funds advice, I suggest you look at the broader picture. The total amount of savings/risk is up to you, but you should consider your current savings as insufficient to rely on as a safety net. "Some thoughts: 1) Do you have a significant emergency fund (3-6 months of after-tax living expenses)? If not, you stand to take a significant loss if you have an unexpected need for cash that is tied up in investments. What if you lose/hate your job or your car breaks down? What if a you want to spend some time with a relative or significant other who learns they only have a few months to live? Having a dedicated emergency fund is an important way to avoid downside risk. 2) Lagerbaer has a good suggestion. Given that if you'd reinvested your dividends, the S&P 500 has returned about 3.5% over the last 5 years, you may be able to get a very nice risk-free return.  3) Do you have access to employer matching funds, such as in a 401(k) at work? If you get a dollar-for-dollar match, that is a risk-free pre-tax 100% return and should be a high priority. 4) What do you mean by ""medium"" volatility? Given that you are considering a 2/3 equity allocation, it would not be at all out of the realm of possibility that your balance could fall by 15% or more in any given year and take several years to recover. If that would spook you, you may want to consider lowering your equity weights. A high quality bond fund may be a good fit. 5) Personally, I would avoid putting money into stocks that I didn't need back for 10 years. If you only want to tie your money up for 2-5 years, you are taking a significant risk that if prices fall, you won't have time to recover before you need your money back. The portfolio you described would be appropriate for someone with a long-term investment horizon and significant risk tolerance, which is usually the case for young people saving for retirement. However, if your goals are to invest for 2-5 years only, your situation would be significantly different.  6) You can often borrow from an investment account to purchase a primary residence, but you must pay that amount back in order to avoid significant taxes and fees, unless you plan to liquidate assets. If you plan to buy a house, saving enough to avoid PMI is a good risk-free return on your money. 7) In general, and ETF or index fund is a good idea, the key being to minimize the compound effect of expenses over the long term. There are many good choices a la Vanguard here to choose from. 8) Don't worry about ""Buy low, sell high"". Don't be a speculator, be an investor (that's my version of Anthony Bourdain's, ""don't be a tourist, be a traveler""). A speculator wants to sell shares at a higher price than they were purchased at. An investor wants to share in the profits of a company as a part-owner. If you can consistently beat the market by trying to time your transactions, good for you - you can move to Wall Street and make millions. However, almost no one can do this consistently, and it doesn't seem worth it to me to try. I don't mean to discourage you from investing, just make sure you have your bases covered so that you don't have to cash out at a bad time. Best of luck! Edit Response to additional questions below. 1) Emergency fund. I would recommend not investing in anything other than cash equivalents (money market, short-term CDs, etc.) until you've built up an emergency fund. It makes sense to want to make the ""best"" use of your money, but you also have to account for risk. My concern is that if you were to experience one or more adverse life events, that you could lose a lot of money, or need to pay a lot in interest on credit card debt, and it would be prudent to self-insure against some of those risks. I would also recommend against using an investment account as an emergency fund account. Taking money out of investment accounts is inefficient because the commissions/taxes/fees can easily eat up a significant portion of your returns. Ideally, you would want to put money in and not touch it for a long time in order to take advantage of compounding returns. There are also high penalties for early disbursements from retirement funds. Just like you need enough money in your checking account to buy food and pay the rent every month, you need enough money in an emergency fund to pay for things that are a real possibility, even if they are less common. Using a credit card or an investment account is a relatively expensive way to do this. 2) Invest at all? I would recommend starting an emergency fund, and then beginning to invest for retirement. Once your retirement savings are on track, you can begin saving for whatever other goals you may have" I use two measures to define investment risk: What's the longest period of time over which this investment has had negative returns? What's the worst-case fall in the value of this investment (peak to trough)? I find that the former works best for long-term investments, like retirement. As a concrete example, I have most of my retirement money in equity, since the Sensex has had zero returns over as long as a decade. Since my investment time-frame is longer, equity is risk-free, by this measure. For short-term investments, like money put aside to buy a car next year, the second measure works better. For this purpose, I might choose a debt fund that isn't the safest, and has had a worst-case 8% loss over the past decade. I can afford that loss, putting in more money from my pocket to buy the car, if needed. So, I might choose this fund for this purpose, taking a slight risk to earn higher return. In any case, how much money I need for a car can only be a rough guess, so having 8% less than originally planned may turn out to be enough. Or it may turn out that the entire amount originally planned for is insufficient, in which case a further 8% shortfall may not be a big deal. These two measures I've defined are simple to explain and understand, unlike academic stuff like beta, standard deviation, information ratio or other mumbo-jumbo. And they are simple to apply to a practical problem, as I've illustrated with the two examples above. On the other hand, if someone tells me that the standard deviation of a mutual fund is 15%, I'll have no idea what that means, or how to apply that to my financial situation. All this suffers from the problem of being limited to historical data, and the future may not be like the past. But that affects any risk statistic, and you can't do better unless you have a time machine. "The fundamental concept of the time value of money is that money now is worth more than the same amount of money later, because of what you can do with money between now and later. If I gave you a choice between $1000 right now and $1000 in six months, if you had any sense whatsoever you would ask for the money now. That's because, in the six months, you could use the thousand dollars in ways that would improve your net worth between now and six months from now; paying down debt, making investments in your home or business, saving for retirement by investing in interest-bearing instruments like stocks, bonds, mutual funds, etc. There's absolutely no advantage and every disadvantage to waiting 6 months to receive the same amount of money that you could get now. However, if I gave you a choice between $1000 now and $1100 in six months, that might be a harder question; you will get more money later, so the question becomes, how much can you improve your net worth in six months given $1000 now? If it's more than $100, you still want the money now, but if nothing you can do will make more than $100, or if there is a high element of risk to what you can do that will make $100 that might in fact cause you to lose money, then you might take the increased, guaranteed money later. There are two fundamental formulas used to calculate the time value of money; the ""future value"" and the ""present value"" formulas. They're basically the same formula, rearranged to solve for different values. The future value formula answers the question, ""how much money will I have if I invest a certain amount now, at a given rate of return, for a specified time""?. The formula is FV = PV * (1+R)N, where FV is the future value (how much you'll have later), PV is the present value (how much you'll have now), R is the periodic rate of return (the percentage that your money will grow in each unit period of time, say a month or a year), and N is the number of unit periods of time in the overall time span. Now, you asked what ""compounding"" is. The theory is very simple; if you put an amount of money (the ""principal"") into an investment that pays you a rate of return (interest), and don't touch the account (in effect reinvesting the interest you earn in the account back into the same account), then after the first period during which interest is calculated and paid, you'll earn interest on not just the original principal, but the amount of interest already earned. This allows your future value to grow faster than if you were paid ""simple interest"", where interest is only ever paid on the principal (for instance, if you withdrew the amount of interest you earned each time it was paid). That's accounted for in the future value formula using the exponent term; if you're earning 8% a year on your investment, then after 1 year you'll have 108% of your original investment, then after two years you'll have 1.082 = 116.64% (instead of just 116% which you'd get with simple interest). That .64% advantage to compounding doesn't sound like much of an advantage, but stay tuned; after ten years you'll have 215.89% (instead of 180%) of your original investment, after 20 you'll have 466.10% (instead of 260%) and after 30 your money will have grown by over 1000% as opposed to a measly 340% you'd get with simple interest. The present value formula is based on the same fundamental formula, but it's ""solved"" for the PV term and assumes you'll know the FV amount. The present value formula answers questions like ""how much money would I have to invest now in order to have X dollars at a specific future time?"". That formula is PV = FV / (1+R)N where all the terms mean the same thing, except that R in this form is typically called the ""discount rate"", because its purpose here is to lower (discount) a future amount of money to show what it's worth to you now. Now, the discount rate (or yield rate) used in these calculations isn't always the actual yield rate that the investment promises or has been shown to have over time. Investors will calculate the discount rate for a stock or other investment based on the risks they see in the company's financial numbers or in the market as a whole. The models used by professional investors to quantify risk are rather complex (the people who come up with them for the big investment banks are called ""quants"", and the typical quant graduates with an advanced math degree and is hired out of college with a six-figure salary), but it's typically enough for the average investor to understand that there is an inherent risk in any investment, and the longer the time period, the higher the chance that something bad will happen that reduces the return on your investment. This is why the 30-year Treasury note carries a higher interest rate than the 10-year T-note, which carries higher interest than the 6-month, 1-year and 5-year T-bills. In most cases, you as an individual investor (or even an institutional investor like a hedge fund manager for an investment bank) cannot control the rate of return on an investment. The actual yield is determined by the market as a whole, in the form of people buying and selling the investments at a price that, coupled with the investment's payouts, determines the yield. The risk/return numbers are instead used to make a ""buy/don't buy"" decision on a particular investment. If the amount of risk you foresee in an investment would require you to be earning 10% to justify it, but in fact the investment only pays 6%, then don't buy it. If however, you'd be willing to accept 4% on the same investment given your perceived level of risk, then you should buy." "This is basically the short-term/long-term savings question in another form: savings that you hope are long-term but which may turn short-term very suddenly. You can never completely eliminate the risk of being forced to draw on long term savings during a period when the market is doing Something Unpleasant that would force you to take a loss (or right before it does Something Pleasant that you'd like to be fully invested during). You can only pick the degree of risk that you're willing to accept, balancing that hazard of forced sales against the lower-but-more-certain returns you'd get from a money market or equivalent. I'm considered a moderately aggressive investor -- which doesn't mean I'm pushing the boundaries on what I'm buying (not by a long shot!), but which does mean I'm willing to keep more of my money in the market and I'm more likely to hold or buy into a dip than to sell off to try to minimize losses. That level of risk-tolerance also means I'm willing to maintain a ready-cash pool which is sufficient to handle expected emergencies (order of $10K), and not become overly paranoid about lost opportunity value if it turns out that I need to pull a few thou out of the investments. I've got decent health insurance, which helps reduce that risk. I'm also not particularly paranoid about the money. On my current track, I should be able to maintain my current lifestyle ""forever"" without ever touching the principal, as long as inflation and returns remain vaguely reasonable. Having to hit the account for a larger emergency at an Inconvenient Time wouldn't be likely to hurt me too much -- delaying retirement for a year or two, perhaps. It's just money. Emergencies are one of the things it's for. I try not to be stupid about it, but I also try not to stress about it more than I must."