Investing for a Down Payment?

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By Selena Maranjian (TMF Selena)
January 17, 2003

Q. If I'm saving money to buy my first home within three years, how should I invest my money so I get decent returns on my investments?

A. To ensure that you can afford more than a corrugated aluminum shack when the time comes to buy a home, any money that you expect to need within five years or so should not be invested in the stock market.

You should take great comfort from the fact that the stock market has averaged an annual 11% return for most of this century. But that rate of return is an average over the long haul. From year to year, anything can happen. In one 10- or 20-year stretch, the market can behave very differently than in another 10- or 20-year stretch. You can't necessarily count on achieving average results -- you'll likely do better or worse.

Short-term scratch should be kept in a safe place, such as certificates of deposit or money market funds, to protect your principal. The return on your money won't be stellar, but your money will be there when you need it.

If you've got short-term money to invest, learn how to make the most of it in our Short-Term Savings Center (which offers Fools some special deals on interest rates). For long-term investments, you'll likely want a brokerage. To learn more, and possibly to find a better brokerage for yourself, check out our Discount Broker Center.

If you have any questions, thoughts or opinions on this column, share them with others on our Ask the Fool discussion board.

This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.