Best place to grow $40k house fund?

[dfree86]

Hi Guys,

So my new wife and I are just getting our finances in order and that includes saving up for a down payment on a house or NYC apartment. We're starting with $40k and contributing $2000/month for about the next five years. That would give us $160k if the money didn't grow at all, but obviously we'd like to put it somewhere that we can get maximum growth out of it over the next 4-5 years.

My question: where's the best place to grow this amount of money for this purpose in this time frame? At the moment, I've got it in three Vanguard funds in a pretty conservative balance.

70% Short Term Bond Index
20% Total World Stock Index
10% Small-Cap Value Index

Does this make sense? Or would you Mustachian fellows advocate for something else? Thanks for the input!

[frugaliknowit]

A house fund should only be "grown" minimally as it should be low/no risk.

That is a tough time frame.  It is too short to risk in stocks, and too long for a painful "near zero" return.
I would be out of the stocks completely as they are completely inappropriate for the purpose.  What is the
average maturity of the Short Term Bond fund? 

You could put the $40k into a 5 year Treasury note at around 1.7% (or a 5 year FDIC insured CD), then add money to a blend of Short Term Bond Fund(25% or less), C/D's, T-Bills, and high yield rewards checking (if you don't mind jumping through hoops).  You want zero or near zero risk.  No, this is not growth, this is risk aversion and some degree of purchasing power preservation.

[GGNoob]

I already have a house that I was able to purchase with 0% down with no PMI thanks to my VA loan. But had that not happened, I would gladly invest my house savings to try to get a good return out of it. But if you are putting your money at risk, you need to make sure that you and your wife are both flexible on when you will be buying the house. If you are near your $160k goal and the market crashes, are you willing to wait until the market rebounds to buy the house?

You could invest 100% in something like Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX). Otherwise a mix of stocks and bonds like you have could work just fine as well. Vanguard's Lifestrategy funds might be the simplest Vanguard fund to get exposure to stocks and bonds. But with the amount you are investing, you could easily invest in Admiral Shares funds in order to get lower fees.

Personally, I'm a Betterment fan so I would put my money there with a savings goal for 5 years. I changed my savings goal quick just to see what it suggests for saving for a house and wanting the money in 5 years. It suggests investing between 39% and 59% stocks with the rest in bonds. Then I'm sure it would have you adjust your allocation to more bonds as you get closer to your goal.

I really think it all comes down to how much risk you want for this money and how flexible you are on when you want to buy your house.

[blackomen]

Less than 1 year: Cash in a savings account
1-3 years: TIPS
3+ Years: Permanent portfolio

[beltim]

Consider looking at defined maturity bond funds like BSCJ. It has a higher yield than the Vanguard short term fund, and because it has a defined maturity, you don't have any interest rate risk if you hold to maturity.

[dfree86]

Any other thoughts here? This has already been very helpful!

[beltim]

Any other thoughts here? This has already been very helpful!

One other option, with much more risk but the potential of higher returns, would be a peer to peer lender like lending club.

[milesdividendmd]

Any other thoughts here? This has already been very helpful!

One other option, with much more risk but the potential of higher returns, would be a peer to peer lender like lending club.

I strongly disagree with the Lending club idea.  You are accepting the risk of a 100% equity portfolio with such an allocation, with less liquidity, higher fees and less upside.

OP's original allocation is far preferable in my opinion.

I would actually recommend Betterment for this purpose.  Set your time horizon and risk tolerance and forget about it.  This is a particularly good option for accounts greater than 50K since you can take advantage of their tax loss harvesting feature which should negate their management fees entirely.

[beltim]

Any other thoughts here? This has already been very helpful!

One other option, with much more risk but the potential of higher returns, would be a peer to peer lender like lending club.

I strongly disagree with the Lending club idea.  You are accepting the risk of a 100% equity portfolio with such an allocation, with less liquidity, higher fees and less upside.

OP's original allocation is far preferable in my opinion.

I would actually recommend Betterment for this purpose.  Set your time horizon and risk tolerance and forget about it.  This is a particularly good option for accounts greater than 50K since you can take advantage of their tax loss harvesting feature which should negate their management fees entirely.

It's risky, sure.  But it's an idea, and an investment with different characteristics than what was mentioned before.

[milesdividendmd]

Any other thoughts here? This has already been very helpful!

One other option, with much more risk but the potential of higher returns, would be a peer to peer lender like lending club.

I strongly disagree with the Lending club idea.  You are accepting the risk of a 100% equity portfolio with such an allocation, with less liquidity, higher fees and less upside.

OP's original allocation is far preferable in my opinion.

I would actually recommend Betterment for this purpose.  Set your time horizon and risk tolerance and forget about it.  This is a particularly good option for accounts greater than 50K since you can take advantage of their tax loss harvesting feature which should negate their management fees entirely.

It's risky, sure.  But it's an idea, and an investment with different characteristics than what was mentioned before.

Fair enough. It is an option.

[surfhb]

Keep it in a savings account at your local bank.   Its already working for you since you're using it to buy a house.

[YoungInvestor]

It all depends on how important your timeframe is to you.

If you don't mind delaying by a year or two in case of an untimely market crash, definitely an index fund. If you do, that'S a different matter entirely.

[Astatine]

I'm super-conservative. If it was me, I'd be putting it in an online bank account (ING or similar, one that earns more than your average bank account) or rolling term deposits (I think they're called CDs in the US?).

[YoungInvestor]

Keep it in a savings account at your local bank.   Its already working for you since you're using it to buy a house.

It will be once he actually buys said house. Right now it isn't doing jack.

Which is ridiculous for such an amount over 5 years.

[dfree86]

Keep it in a savings account at your local bank.   Its already working for you since you're using it to buy a house.

It will be once he actually buys said house. Right now it isn't doing jack.

Which is ridiculous for such an amount over 5 years.

So what's your view YoungInvestor? Are you cool with my current allocation?

[YoungInvestor]

Keep it in a savings account at your local bank.   Its already working for you since you're using it to buy a house.

It will be once he actually buys said house. Right now it isn't doing jack.

Which is ridiculous for such an amount over 5 years.

So what's your view YoungInvestor? Are you cool with my current allocation?

It's conservative, and you say so in the first post. If that's how you prefer to do things, that's great. Your expected return is lower than that of a more aggressive strategy obviously, and the balance is yours.

I'd mostly treat it in the same way as retirement funds and gradually bring it back to a more conservative portfolio as you get closer to your objective (perhaps the last 12-18 months), if you're cool with a probability of delaying the purchase by a bit of time.

[RyanAtTanagra]

Good question, I had to make the same decision about a year ago.  Similar savings amount for a house and a similar time frame.  I decided on VSCGX which is 60% bonds/40% stocks, which is probably too aggressive for the use case but it's not going to ruin anything if the stock market plummets right when we're ready to buy, so I'm ok with it.  And I'll probably move it out to something more conservative as we get closer.  I was just sick of having that much money sitting in a savings account and losing to inflation and missing out on returns.

For a more conservative approach your allocation is good, I'd be hard pressed to come up with good reasons to change it.

[blackomen]

Good question, I had to make the same decision about a year ago.  Similar savings amount for a house and a similar time frame.  I decided on VSCGX which is 60% bonds/40% stocks, which is probably too aggressive for the use case but it's not going to ruin anything if the stock market plummets right when we're ready to buy, so I'm ok with it.  And I'll probably move it out to something more conservative as we get closer.  I was just sick of having that much money sitting in a savings account and losing to inflation and missing out on returns.

For a more conservative approach your allocation is good, I'd be hard pressed to come up with good reasons to change it.

You could also try 60/40 reits plus bonds (vnq plus tlt)..  cash is not necessarily the safest place to keep downpayment money for more than a few years since real estate prices tend to appreciate faster than inflation, depending on your area.  Best thing is something correlated with RE but even reits are not a perfect match.

[dude]

Consider a Vanguard GNMA fund.  See the second Q&A here:

http://assetbuilder.com/scott_burns/reverse_mortgages_are_becoming_a_financial_planning_tool

Here's the fund sheet:

https://personal.vanguard.com/us/funds/snapshot?FundId=0036&FundIntExt=INT

I recently dumped $20K into this fund.