Any Low-Risk Stock Investments?

Q: I am a 23-year-old who recently received a $20,000 gift from my parents for a future home down payment. I won’t be ready to buy for about five years, and in the meantime I would like to put the money in a low-risk, high-liquidity investment.

I’m learning toward investing in an index mutual fund tied to the Standard & Poor’s 500 benchmark of large-company stocks. Is this the best use of my money given my intentions?

A: It’s almost refreshing to hear someone refer to stocks as a “low-risk” investment, reminiscent as it is of the go-go market of the late 1990s. Ah, those were the days.

But reality hasn’t changed: Stocks and stock mutual funds weren’t low-risk then, and they aren’t low-risk now. They’re no place to put money you’re going to need in the next 10 years.

Put the cash in a money market or a “laddered” portfolio of certificates of deposit (where the money is divided among CDs that mature at different times).

Then sate your desire to get into the market by contributing as much as you can to your workplace 401(k) and a Roth IRA. Invest that money in mutual funds indexed to the S&P 500, with perhaps a little bond and cash exposure on the side.

You’ll have plenty of time to ride out the ups and downs of the market over the next 40 years until you retire.