Most investors have three buckets figured out: emergency cash, long-term retirement accounts, and maybe a checking account buffer. But there's a fourth category that gets surprisingly little attention, and it's often the most consequential: money you'll need in 2–7 years.
This is often the largest pool of money people actively worry about because the timing is fixed, and the consequences are real.
This is down payment money. Business launch capital. Sabbatical funding. The bridge between early retirement and Social Security. It's too important to let inflation erode, but too urgent to ride out a 30% stock market decline.
And most financial advice treats it as if it doesn't exist.
The Standard Options Don't Work
The conventional wisdom offers two paths, and both have serious problems.
Path one: Keep it safe in high-yield savings. You'll preserve capital, but you'll watch purchasing power slowly bleed away. A 3% savings rate sounds reasonable until you realize it barely matches inflation after taxes. Five years later, your nominal balance is higher, but your actual buying power hasn't moved. Or worse, has declined.
Path two: Invest it like retirement money. This means stock-heavy portfolios, often 60% or 70% equities or more. The math looks compelling over 30 years, but over 3 years? In 2022, traditional balanced portfolios dropped 15–20%. More aggressive allocations fell further. If your down payment deadline hit in October 2022, you didn't have a portfolio strategy--you had a crisis.
The first option guarantees slow erosion. The second option gambles that your deadline won't coincide with a drawdown. Neither is actually designed for the 2–7 year window.
What Actually Matters for Medium-Term Money
Long-term investing is about average returns. Retirement accounts dropping 25% at age 40 is unpleasant but manageable. There's decades to recover.
Medium-term investing is about something different: can you access the money when you need it?
This shifts the entire framework. A portfolio that averages 10% annually but drops 25% in year three is worse than one averaging 8% with a 12% maximum decline if you need the money in year three.
This is sequence risk, and it's far more dangerous over short horizons than long ones. A retiree drawing down over 30 years has time to absorb early losses. Someone saving for a house in 4 years does not.
Historical testing across multiple market environments, including the 2008 crisis, the 2020 crash, and the brutal 2022 rate shock, reveals a consistent pattern: drawdown magnitude matters more than average performance when time is constrained. Where modern instruments didn't exist in earlier periods, long-running proxy funds were used to evaluate comparable portfolio behavior. The question isn't "what returns can I get?" It's "what's the worst-case timing, and can I still meet my goal?"
The Behavioral Reality
There's another dimension that backtests don't capture but real-world experience does: how it feels.
An 8% monthly decline creates anxiety. A 20% decline triggers panic. A 30% decline often leads to capitulation. Selling at the bottom, precisely when discipline is most valuable.
Conservative diversification isn't just about mathematics. It's about creating a portfolio you'll actually maintain through stress. The optimal strategy on paper is worthless if watching your down payment fund fluctuate causes you to abandon it mid-course.
The volatility that's acceptable for retirement money (money you won't touch for 20 years) becomes intolerable when the goal is 36 months away. This isn't weakness. It's rational response to timeline risk.
Why This Gap Exists
The financial industry is optimized for two conversations: emergency funds (keep 3–6 months in cash) and retirement investing (buy index funds and hold forever). The space between gets hand-waved.
Partially, this is an incentive problem. Aggressive portfolios generate larger balances and higher fees. Conservative diversification is less lucrative to manage and harder to market. "You might earn slightly less but sleep better" isn't a compelling tagline.
Partially, it's complexity. Addressing the 2–7 year horizon means dealing with things most advice prefers to ignore:
- Tax efficiency in taxable accounts
- Correlation patterns during different stress scenarios
- Tradeoff between stability and purchasing power protection
- Rebalancing discipline that actually gets followed
It's easier to say "just use a target-date fund" and move on.
But people are making major life decisions with this money. Buying homes. Starting businesses. Retiring early. The default approaches (cash or stocks) create unnecessary tradeoffs.
A Different Framework
What if there were portfolio designs specifically built for this timeline?
Not retirement money that's been de-risked. Not emergency cash that's been slightly enhanced. Money with a purpose and a deadline.
This means thinking about:
Maximum tolerable drawdowns. Not average volatility or long-term returns, but peak-to-trough declines. If your portfolio could drop 15% right before you need the money, is that acceptable? What about 25%? The answer determines everything else.
Asset diversification that matters under stress. Holding different types of bonds isn't true diversification if they all decline together during rate shocks. Real diversification means assets that behave differently during crises, some providing stability, some inflation protection, some growth potential.
Recovery time as a design constraint. Long-term portfolios can afford to be underwater for 2–3 years. Medium-term portfolios can't. This reality shapes every allocation decision.
Behavioral sustainability. A strategy that backtests brilliantly but causes panic-selling during 10% declines is a failed strategy. The goal is something you'll actually maintain when markets get difficult.
The specifics matter (which assets, in what proportions, rebalanced how often) but the philosophical shift matters more. Stop treating medium-term money like "short-term retirement funds" or "aggressive savings accounts." Treat it as its own category with its own requirements.
What Disciplined Implementation Looks Like
Theory is valuable. Execution is where most people stall.
Knowing you should "balance growth and safety" doesn't tell you what to buy, when to rebalance, or how to deploy new contributions without triggering emotional decisions. It doesn't show you what these portfolios actually did during 2008, 2020, or 2022. It doesn't provide the mechanical system that removes guesswork.
The detailed work (the actual portfolio designs, the historical testing across five different market periods, the spreadsheet that calculates rebalancing amounts automatically, the specific guidance on contribution handling and withdrawal planning) exists to solve a practical problem: making intelligent decisions without constant anxiety.
This isn't about predicting which assets will outperform next quarter. It's about establishing clear allocation targets, maintaining them mechanically, and letting the system handle the details while you focus on the goal itself.
The behavioral advantage of a systematic approach is underrated. When the market drops 15% and instinct screams to "do something," having a spreadsheet that shows your positions are still within acceptable ranges provides an anchor. When cash accumulates and you're wondering what to buy, having mechanical allocation guidance removes analysis paralysis.
Discipline over optimization. Systems over predictions. Clarity over complexity.
Who This Is Actually For
Not everyone needs this framework. Money needed in under 2 years belongs in cash or Treasury bills. Period. Money for 10+ years out can afford more aggressive allocations and longer recovery windows.
But for that specific 2–7 year range, when deadlines are fixed and market timing is involuntary, the standard advice creates unnecessary stress and risk.
This is for people who:
- Have specific medium-term goals with real deadlines
- Want growth above savings rates without gambling on market timing
- Understand that lower volatility is worth accepting lower potential returns
- Prefer systematic discipline over active trading
- Value peace of mind alongside performance
If you're comfortable with your current approach, great. If you've been sensing that neither "keep it in savings" nor "just invest it" feels quite right for money you'll need relatively soon, that instinct is probably correct. The full guide, complete portfolio designs, historical testing, and a working spreadsheet system is available for those who want the specific implementation rather than just the philosophy. It's designed for people who'd rather follow a tested system than reinvent one from scratch.
But whether you use this particular framework or build your own, the underlying principle remains: medium-term money deserves its own category, its own strategy, and its own discipline. Stop treating it like something it isn't.
The full guide—complete portfolio designs, historical testing, and a practical spreadsheet system—is available for those who want the specific implementation rather than just the philosophy.
It’s designed for people who would rather follow a tested system than reinvent one from scratch.
View the guide and spreadsheet
But whether you use this particular framework or build your own, the underlying principle remains: medium-term money deserves its own category, its own strategy, and its own discipline. Stop treating it like something it isn't.
No comments