Any money you might need in the next three years, especially for a known goal, should not be in stocks. By Knight Kiplinger, Editor Emeritus October 31, 2007 I didn't lose sleep when the market slumped this summer after hitting record highs. I had lightened up on U.S. stocks a few months before -- mind you, not in all of my family's investment accounts, but only in those with near-term goals. I did so because I had grown increasingly skeptical of the market's surge during the first half of 2007, and I know that stocks are risky in the short run (say, less than five years) -- just as they are a highly reliable wealth builder over longer periods of time.So I took a close look at the asset allocations in our accounts. The accounts with the most-distant horizons -- retirement savings in 401(k)s and IRAs -- I left heavily invested in equities. Then I focused on the nonretirement brokerage accounts of my son and two daughters, who are in their early to mid twenties. When they were children, I invested their funds (summer earnings and gifts from grandparents) entirely in equities and stock mutual funds, which appreciated well over time. Short-term goals But now they are young adults and they are thinking about buying their first homes, maybe in the next year or two. They will need cash for down payments, and they shouldn't trust the stock market to preserve their capital in the meantime. With their concurrence, I sold most of their stocks in May and June (when the Dow was between 13,200 and 13,500) and parked the proceeds in money-market funds yielding 5%. Advertisement At the time I sold, the annual percentage growth rate of U.S. corporate profits was decelerating from double digits to the high single digits. Housing prices were continuing to soften, and it was becoming more difficult to obtain a mortgage. Private-equity funds were paying ridiculous prices (using too much cheap credit) to buy companies and commercial real estate. Yet the stock indexes continued to soar. I was puzzled. The day after the Dow hit a record 14,000 on July 19, I voiced my concerns in our weekly Kiplinger Letter. I likened the financial markets to the Wild West and suggested that our readers "consider taking some gains and building cash, to take advantage of buying opportunities in the next market correction, whenever it comes." The major indexes had gone nearly five years -- an unprecedented length of time -- without so much as a 10% decline (a correction, in market jargon). I felt that a breath-catching was long overdue, but neither I nor anyone else could have known that the Dow would fall 11% and Standard & Poor's 500-stock index would fall 12% over the following month. When I reduced my children's exposure to volatile equities last spring, I was simply acting on the same advice we've always given our readers: Any money you might need in the next three years or so, especially for a known goal, should not be in stocks. Advertisement Six months of basic living expenses to cover the loss of a job? Never in stocks, only in money-market funds, short-term bonds or certificates of deposit. Savings for a down payment on a new home you hope to buy soon? Nope, not in stocks. Savings for the kids' college tuition? If college is ten years away, stocks are fine. But if it's coming up in the next two or three years, stocks are too risky. Prudent tinkering Nearing retirement? Maybe you've done great in growth stocks over a lifetime, but now you should take some of those gains and convert them to income-generating assets. I bow to no one in my long-term confidence in the future of the U.S. and global economies. That's why I believe in the superiority of stocks over long periods of time. But near-term needs require short-run realism.