hypothetical savings question

[DVM gone riding]

If you were saving money for a dp on a house but knew it was going to be a while-say 5 years-where would you "store" the money??

Would you risk a brokerage acct in an index, just a money market, regular savings, CD, what?? I am not doing this now but thinking about it for the future.

[phil5185]

Would you risk a brokerage acct in an index, just a money market, regular savings, CD, what??

I've always accepted the risk and used equities for our short term needs - with the proviso that I had schedule flexibility or credit flexibility when the time arrived. I used Spyders, SP500 Index, etc.

Eg, if the market was at a low point, I could reschedule a new house for a yr or so. Or I could leave the money invested and borrow the dp.

Ultimately, over the past 35 or 40 yrs, I most often left our money invested and borrowed for dp's, cars, etc. Not because the market was at a low, but because it was averaging 10% or 14% and I was able to borrow at 5%, 6%, or 8% (mortgages were way more expensive yrs ago).

[debtheaven]

We did exactly that -- our line of thinking was "if you need the money in the next five years, it shouldn't be in the stock market".

Ours too. We did leave eight-10 year money in the stock market. I ended up selling at a loss, DH has kept his but it still hasn't come back. We invested our discretionary income in the stock market in Dec 1999, ie "the Lost Decade".

ETA: There is no right answer to this. A bird in the hand is worth two in the bush, risk and reward, etc. Statistically, your money is pretty sure to grow, but there are no guarantees. Past performance does not assure future performance.

So how would you feel if you end up having lost 30% when the perfect house comes up? Only YOU can evaluate the level of risk you are willing to live with. You have been here long enough to know that you will get different answers from different people. YOU have to make the decision and sleep at night.

Like Daphne, we have NEVER regretted the "safe" solution, but you are younger than me and DH. I don't know how old Daphne is. I LOVE Phil's wisdom but honestly I question whether it is applicable today. He has faith in the markets that I don't have. We have done VERY VERY well with our RE investments, with the market, not so much.

[debtheaven]

Daphne we are 51 and 54 now. We did not build our house but we live in a very HCOLA and we paid off our house in Aug 2007 when we were 47 and 50, in the fullness of time. We still feel warm and fuzzy about it all these years later LOL!

DVM, maybe you could / should do both? Put half of your DP money into something safe, and invest the other half? You're probably young enough to make that work for you.

Best of luck whatever you decide!

[pushingit]

I'd put it in the market in an index. Over 5 years you will have ups and downs. Especially if that 5 year point isn't set in stone, I'd have it in. Around the 4 year mark, if you're up, move it out. If not, let it ride. Maybe you'll be down at the 4 year mark and have to wait for the market to uptick.

Thing is, out of the market you know it'll take 5 years to save enough. In the market, it may only take 3 or 4.

[pushingit]

Also, I don't get people who move all of their money into safe investments 5 years before they retire because they listen to the "you shouldn't be in the market when you're getting ready to retire.

That isn't the correct advise. The correct advise is you shouldn't have money you need in the next 5 years all in the market.

Retirement can be a long time and you'd be losing out on a ton of opportunity if you went all out at 60 just because you're turning 65 within 5 years.

When you're 60 you should move a year's worth of money into something safe, and at 61 another year, so a retirement you have 5 years worth of expenses where it's safe and you can get to it. And if you keep doing that, each year, moving a little out, you should be fine.

But of course, that's just the level of risk I'm ok with.

[kinetickid]

Jan 9, 2011 18:50:42 GMT -5 DVM gone riding said:

If you were saving money for a dp on a house but knew it was going to be a while-say 5 years-where would you "store" the money??

Would you risk a brokerage acct in an index, just a money market, regular savings, CD, what?? I am not doing this now but thinking about it for the future.

We've been saving for a while now; we keep it all in money market accounts and CDs.

[Deleted]

We are also saving for a house purchase 5 year or so from now, and like the poster before me, it's all in savings and cd's.

[jk70]

I've been saving for a dp on a house for about 6 months and plan to buy in about 6 months (so my time horizon is only 1 year) and I came up against the same problem but I don't mind risk so put all of it into REITs and Preferred stock to get those high yields. Not that there isn't any risk that they won't go down but most of the time the REITs just sit around the same price and throw off cash.

Works for me but like I said, I don't mind risk

[mithrin]

Our DP fund is partly in Rewards checking (4%), and a small amount, about 10% in the market. I bought an ETF geared towards utility stocks with a good dividend history. It's been throwing off dividends at a rate of 7%+ compared to the purchase share price, which I move to the checking. It's moved up and down somewhat, by not by large amounts.

[Tiny]

How much are you saving every month and how big will the DP be? If you are shooting for 10K over 5 years - I'd go with sure and safe for the duration (maybe skimming money to CD(s) every time it hit 1000K). If you are saving 60K I'd start out sure and safe and in a year evaluate where the 12K savings could be doing the most good for the next 4 years, and so on.

[Deleted]

With a 5-year time horizon I'd be tempted to keep maybe 20% in a stock mutual fund or an ETF. That way you might get lucky and if the market tanks it won't be a disaster.

[The J]

If I was looking at a 5 year timeline, I'd probably go with a bond fund focused on short-term bonds.

[DVM gone riding]

Thanks guys really appreciate the thoughts. debtheaven Yeah I usually split the difference when it comes to Phil's advice-ie I lowered the extra amount to the low interest SL and increased the IRA contribution BUT I just can't resist putting a little extra every month on the higher rate mortgage!!

Since they are making you get to 20% for new homes, even primary residences, I think I will most likely end up splitting the difference, since we will be talking about a fairly large chunk of money. I like the idea of save for a year re-evaluate.

I haven't started saving yet for another house-right now just saving in general-it depends on what happens with DBF and whether I stay here or relocate.

I am going to have to go and check out those Utility ETF hard to beat a 7% return right now!!

[sunuva]

What's the return on a 5-year CD? I can't believe it's worth it for socking away a good chunk of cash. There are safe havens in the stock market if you want to cherry pick. If the past 2-3 years were disastrous in regards to the stock market on the equity side, simply pick those companies that went through those past 2-3 years relatively unaffected. However, given that implies a bit more risk then some sort of index would be the wisest choice. A second however, though, is that I don't know what your brokerage fees would be, but would they be much different than the fees for a 5-year CD?

[Deleted]

I would divide it in two piles with 2/5 going into cash; e.g. CD ladder and or T bills and 3/5 intermediate bond funds. I think your income is fairly high so it might make sense to look into whether tax exempt bonds make sense. Then every year for the next 3 years, take 1/3, then 1/2, then the remaining portion into cash instruments. That way the last two years you are sitting in cash with no risk to the principle. If you find that in year 3 you want to put off the decision for another year you can keep your money earning some interest.

[haapai]

dvm07, you mentioned a (low-interest) student loan. How many more payments do you have on it? If it's set to mature within the next five years, well there's your higher-than-a-money-market return.