There are a couple of reasons why Dave (presumably a financial advisor) might recommend investing in mutual funds for at least five years.
- Market fluctuations: The stock market goes up and down over time. In the short term, these ups and downs can be significant. By investing for at least five years, you ride out some of these short-term dips and are more likely to experience the overall upward trend of the market.
- Compounding: Compounding is often referred to as “interest on interest.” When you invest in mutual funds, your returns are reinvested, and you earn returns on those returns as well. The longer your money is invested, the greater the impact of compounding. Five years allows compounding to start working its magic more effectively.
There may be other reasons specific to Dave’s financial philosophy, but these are two of the main reasons why a financial advisor might recommend a five-year investment horizon for mutual funds.