Author Topic: Where to Put 180K Short Term  (Read 2134 times)

ThriftyStashMan

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Where to Put 180K Short Term
« on: June 30, 2017, 09:21:59 AM »
I have 180K in cash sitting in a money market account earning 1%. I need the money in 3 years to use as a down payment on a beach home. Any better options to generate a bit more return with marginal risk - CD, treasuries, corporate bonds, munis? Annual compensation is around 250K so taxes are a concern.

Lobo

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Re: Where to Put 180K Short Term
« Reply #1 on: July 01, 2017, 12:38:30 AM »
There are a number of banks paying 2% on 3 year CDs.

thriftycanadian

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Re: Where to Put 180K Short Term
« Reply #2 on: July 05, 2017, 06:19:57 PM »
Short term bond index

GoCubsGo

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Re: Where to Put 180K Short Term
« Reply #3 on: July 10, 2017, 12:02:48 PM »
I'm facing a similar scenario with an almost identical amount (although I'm saving for kids college costs, not a beach house unfortunately). 

I'm currently researching Muni's as they seem to have a very low default rate and have tax advantages.  I've just started looking into them but they seem like a very solid option.  I've looked into individual muni's for sale through Fidelity as they have a screener tool, but it may be easier to buy a Muni ETF.  Have you or anyone else here researched (or used Muni's for this purpose)?

ChpBstrd

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Re: Where to Put 180K Short Term
« Reply #4 on: July 10, 2017, 12:27:45 PM »
Sell put option credit spreads. Your potential loss is limited and your potential gain is predictable. You'll easily earn 5-15% annualized doing this each month.

Bonds might not live up to their reputation for safety if treasury yields are 2-3% higher in 3 years. Before buying a bond, run some valuation scenarios through an online calculator. It might be shocking.

I also like preferred stock funds. PFF yields close to 6% and is low volatility. Plus it can be hedged with put options very cheaply due to that low volatility.

L.A.S.

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Re: Where to Put 180K Short Term
« Reply #5 on: July 10, 2017, 12:31:52 PM »
I'm facing a similar scenario with an almost identical amount (although I'm saving for kids college costs, not a beach house unfortunately). 

I'm currently researching Muni's as they seem to have a very low default rate and have tax advantages.  I've just started looking into them but they seem like a very solid option.  I've looked into individual muni's for sale through Fidelity as they have a screener tool, but it may be easier to buy a Muni ETF.  Have you or anyone else here researched (or used Muni's for this purpose)?

Fidelity has some state specific Muni-bond mutual funds.  This would be the way to go for muni investing if available for your state since most states would allow you to avoid the state income tax on the interest as well as avoiding the federal tax.  Also a muni bond fund is more diversified and all the bond-trading work of reinvesting is handled by the fund.

Be careful with buying individual bonds (munis, or otherwise).  I believe there is still some mark-up at Fidelity even though their marketing seems to suggest otherwise.  Take a look at the depth of book and recent trades available at Fidelity or look up the bond price by CUSIP elsewhere e.g. at MSRB or FINRA to see what I mean -- and if you don't understand what you are looking at or know how to do this, absolutely do not buy a single individual bond until you do!  There will especially be markup if you are buying less than the minimum for the quoted ask -- which for munis is usually 5.  They also charge a dollar commission for each bond ($1000 worth of par value), so investing about 10K would cost $10 in commission. This will impact yield calculations, and might make a difference to you with razor thin yields these days. 

Also keep in mind that all bonds are essentially sold over the counter, so at some point if you want sell them for cash before maturity you may not get a great price.  With a bond fund, the mutual fund would be obliged to buy your shares at NAV at the end of a day if you need cash.
« Last Edit: July 10, 2017, 12:54:33 PM by L.A.S. »

GoCubsGo

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Re: Where to Put 180K Short Term
« Reply #6 on: July 10, 2017, 02:09:56 PM »
Thanks for the replies:

ChpBstrd:  I actually own PFF in one of my IRA's and hadn't really thought about that for this situation. I'm looking for low correlation to stocks in case of a couple large down years. Hedging it with put options is a good way to limit that. I don't have experience with put options but it's something I've always meant to research (I have the time, I just need to find a resource to easily learn the basics).  Maybe this is the impetus to do so. The 5.6% yield is very enticing in my situation....

L.A.S:  Depth of book/pricing as was precisely what I was researching. I live in Illinois so I would likely want to stay away from those given the current climate and potential downgrades (they are higher yield though and many of the  muni funds I researched hold Illinois muni bonds).  I'm thinking a muni funds should be the route I go for a portion of this money as the liquidity issue is something I should factor (thanks for reminding me of that). VWITX is probably something I should consider but the returns aren't super exciting. The tax advantaged status helps for my tax bracket.

I'm not looking for home runs but would like non-correlated holdings that allow me to continue to grow the account while being able to not worry all that much about it.  Trying to avoid being lazy and dumping it into a CD...

teijoluis

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Re: Where to Put 180K Short Term
« Reply #7 on: July 13, 2017, 06:59:05 AM »
Sell put option credit spreads. Your potential loss is limited and your potential gain is predictable. You'll easily earn 5-15% annualized doing this each month.

Bonds might not live up to their reputation for safety if treasury yields are 2-3% higher in 3 years. Before buying a bond, run some valuation scenarios through an online calculator. It might be shocking.

I also like preferred stock funds. PFF yields close to 6% and is low volatility. Plus it can be hedged with put options very cheaply due to that low volatility.

@chpbstrd - what reading material would you suggest on put option credit spreads? thank you!

ChpBstrd

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Re: Where to Put 180K Short Term
« Reply #8 on: July 13, 2017, 09:16:38 AM »
Sell put option credit spreads. Your potential loss is limited and your potential gain is predictable. You'll easily earn 5-15% annualized doing this each month.

Bonds might not live up to their reputation for safety if treasury yields are 2-3% higher in 3 years. Before buying a bond, run some valuation scenarios through an online calculator. It might be shocking.

I also like preferred stock funds. PFF yields close to 6% and is low volatility. Plus it can be hedged with put options very cheaply due to that low volatility.

@chpbstrd - what reading material would you suggest on put option credit spreads? thank you!

Definitely do not wade into options until your understanding is thorough. Here are some good starting points.

https://optionalpha.com

https://www.optionseducation.org/strategies_advanced_concepts/strategies/bull_put_spread.html

schneider

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Re: Where to Put 180K Short Term
« Reply #9 on: July 13, 2017, 11:47:06 AM »
As a non-homeowner who may want to own a home someday, this topic is sufficiently near to my heart that I went ahead and incorporated it into my IPS. For me, that helps me not think about it and actually live my life.

My perspective, as someone who isn't a professional investor and doesn't want to be one, is that the only instruments that aren't correlated with the stock market that are worth considering are savings accounts, CDs, and bond funds (and even that last one is dicey). Screwing around with options and preferred stock funds wouldn't be worth it to me at all.

If one accepts that premise, the question would then comes down to whether you “need” the money in three years or could stomach some fraction of it evaporating in market shenanigans. If the former, CDs are really the only way to go.

If you are comfortable with the risk, I agree with L.A.S.: If Vanguard (or whomever) has a muni fund in your state, it seems like a great option. But last I checked (it's been a while), muni funds didn't yield enough to be worth it for me and my tax situation — CDs came out ahead after-tax.

An even simpler option: if your annual compensation is $250K and you're on this forum, it seems like it shouldn't be that hard for you to come up with $180K when you need it? So you could just mix it with the rest of your post-tax funds wherever they normally live, and assume the money will be there when the time comes. Sure there may be a couple of down years, but none of us know which years those will be and if you're still getting paid during that time (a big "if" for me, maybe not for you!) then you could always just stop funding your post-tax accounts until you've saved up the capital?

But I do get the appeal of having cash to buy a beach house during a recession — unfortunately, market timing is just a fact of life when dealing with real estate.

Oil Patch Adams

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Re: Where to Put 180K Short Term
« Reply #10 on: July 16, 2017, 07:52:08 AM »
An even simpler option: if your annual compensation is $250K and you're on this forum, it seems like it shouldn't be that hard for you to come up with $180K when you need it?
This.

ThriftyStashMan

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Re: Where to Put 180K Short Term
« Reply #11 on: July 22, 2017, 02:43:02 PM »
Thanks for the input. I think a CD will be the way that I will go.