[cujo]

Numbers. It's all about how you feel about that risk of crashing vs the potential payout.

Say I'm squirreling away $5k a year for a new car in 4 years. Every year I put in another $5k, so by the end, I've put in $25k.

If I put that in a typical savings account, I earn 0.1% and come out $50 ahead. Effectively 0, or losing value once you throw in inflation.

Go with stocks, at a 5% return, I end up with over $27k, and at 8% I have over $29k. It's also true that I could lose value, and that's the gamble.

So it's a matter of your comfort level, obviously, and if you can't afford to lose the money, don't invest. But in many many cases, the reward outweighs the risk.

I view it that I'm much, much more likely to get a return > 0.1% than experience a loss over 5 years, and I'm willing to accept the risk.

[Uroboric]

Savings accounts aren't the only option though. Bonds will return like 2-3% depending on the type, without the occasional dramatic crashes in value.

[tdb7893]

The issue is that even after dramatic crashes my impression is that stocks generally beat bonds long term. That means that if one person put all theirs in stocks and the other in bonds the one in stocks is likely going to have more money later, even if the market crashed a few times in between.

[Uroboric]

I agree with your point entirely, but my point is that most people don't just sock money away for decades if it isn't specifically retirement money. Usually it is saved for some medium-term goal, which stocks could potentially spoil. Aside from that risk, why even deal with the psychological effect of that uncertainty for a paltry gain?

[shakestheclown]

Most people can't come up with $2k in case of an emergency. Most people are living paycheck to paycheck. Don't be most people.

There is a compromise between living for the moment and living for the future. If you are saving for a house then you can move those investments to a less risky investment option but still a better return than bonds or interest. Keep your medium-term investments separate from your retirement account. I have short term, long-term non retirement, and long-term retirement accounts.

The gain isn't paltry. The difference between a 2% rate of return and a 5% rate of return for $5k initial + $50/month over 30 years is around $22k. If you do $200/month it's $59k.