Should you put all your savings into stocks? (2024)

FAQs

Should you put all your savings in stock? ›

The simple rule: If you need the money in the next three years, then save it ideally in a high-yield savings account or CD. If your goal is further out, or you don't have a specific need for the money, then start thinking about investing in something that will grow more, like stocks or bonds.

A common rule of thumb is the 50-30-20 rule, which suggests allocating 50% of your after-tax income to essentials, 30% to discretionary spending and 20% to savings and investments. Within that 20% allocation, the portion designated for stocks depends on your risk tolerance.

Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky than purchasing individual stocks directly. Because S&P 500 index funds or ETFs track the performance of the S&P 500, when that index does well, your investment will, too. (The opposite is also true, of course.)

The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.

Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.

A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.

In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.

Generally, experts recommend investing around 10-20% of your income. But the more realistic answer might be whatever amount you can afford. If you're wondering, “how much should I be investing this year?”, the answer is to invest whatever amount you can afford!

Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300.

The S&P 500 is all US-domiciled companies that over the last ~40 years have accounted for ~50% of all global stocks. By just owning the S&P 500 you miss out on almost half of the global opportunity set which is another ~10,000 public companies.

Should I put all of my savings in a money market account? ›

If you want to put your money in a high-yield account for a short-term savings goal, money market accounts have many benefits. If you want to withdraw money frequently or save for long-term goals like retirement, a checking account and investment account or high-yield savings account would be better options.

“I advise my clients that any money they are going to need to spend in the next two to three years should not be invested in stocks,” says Itkin. “You do not want to have to sell during a bear market and risk losing principal.”

Even for those who cannot easily borrow, a 100% equity allocation might not offer the best return based on how much risk investors want to take. The problem when deciding between a 60%, 100% or even 200% equity allocation is that the history of financial markets is too short.

Investing a large amount of capital in a single stock can be risky, but with careful planning and strategic analysis, it can also yield significant returns.

Many personal finance experts recommend saving at least three to six months' worth of expenses. But this could also vary based on if you experience income fluctuations and other personal factors. If you don't have an emergency fund yet, it can help to start with small savings goals, and work your way up from there.

Key Takeaways. While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.