Save or Invest

[Eric9064]

Background - My wife and I currently live in a smallish house (2 bedrooms, 1 1/2 baths, ~800 sq ft). It is plenty of space for us and the little one we are expecting in March. However, in 5 years, we are planning to upgrade. Main reasons for doing so is that we are planning to have a second child and, more importantly, it is when the first will be starting school and we are not thrilled with the school district we are currently in.

My specific question is what is the best way to save for this next house? My plan is to save approximately 100k by December 2022. Currently I am saving $1200 a month towards this goal with planned increases in each subsequent year as necessary to reach 100k.  This money is currently sitting in a savings account and I waiver between keeping it there or investing it. The concern is that the market will go significantly down and I will not have the amount I planned to have when it comes time to by the house. Alternatively, if things go well, I could have much more than I anticipated.

Appreciate any thoughts/suggestions. 

[PoutineLover]

I think for short term savings, it's better to keep in more secure holdings. Maybe look into a GIC or something that has a specific time limit and interest and becomes mature when you need it. It's not as high as the potential gain from an investment, but you will definitely not lose anything and it might be a bit better than a savings account.

[boarder42]

worst 5 year return ever 1932 -60%
Best 5 year return ever 1999 213%

likely neither happen.  i'm personally of the mind set that i'd rather take the risk in the market of it going down some (which is much less likely) than the risk of not having it invested and it going up (much more likely)

you could go 50/50

[marielle]

What about keeping the amount needed for a down payment in a short term low risk investment and the rest in a long term investment? Worst case scenario you take out a loan for the house minus the down payment. Or are you set on paying 100% cash for it?

[trollwithamustache]

The longer you can keep money in the stock market, the longer you're likely to see a better rate of return... So I'd propose a modification to the 50/50 stocks/savings account suggestion by bender... put the first 2 years of savings into the stock market and the last 3 into the savings account.  I know I know its not 50-50 exactly, but it gives you some time for some upside on the first couple years of savings, and protects you from the temporary downsides with the last few years.

[Eric9064]

Thanks for the replies. I should have clarified that the savings for the house are the savings I am allocating specifically to a housing "fund". I am still/will still be investing additional money as I save for the house (maxing 401(k)s, IRAs and contributing to taxable accounts).

I like the idea of keeping the housing savings in a short term low risk investment. I am still a newb at this and would appreciate some recommendations on the type of investment vehicles I should look into. Right now the 401(k)s and IRAs are in Vanguard target retirement funds and the taxable investments are in VTSMX.

trollwithamustache: your proposal is also interesting. If I were to do this, would you recommend placing the first two years in VTSMX or utilizing a lower risk investment option?

[Smokystache]

I'm not an expert on this, but what about a balanced fund like Vanguard Wellington? Still get Vanguard-low expenses and Wellington's worst 3 year period (for a fund that has been around since 1929!) was only -1.08%. I can only assume there wasn't a 5 year span in its 90 year history where it had a negative return.

https://finance.yahoo.com/q/pm?bypass=true&s=VWELX&ltr=1

[Eric9064]

Smokeystache: Thanks for the input. Looking at Vanguards balanced funds, of which wellington is one, there seem to be several good options which have a moderate risk profile.

[trollwithamustache]

Personally I would be comfortable with the first two years worth of savings going into VTSMX. Note I have a relatively high risk apatite/tolerance. As things get closer you could try a lower risk fund but I think you really get stuck with the money market account type stuff or the savings account.  The market goes up and down or down and up. or up up and down. or down down and up, ect ect. But over time it goes up. That also means if you put money in VTSMX and it immediately goes up a bunch over historical market returns at say 2.5 or 3 years, you probably have to start moving it out of the fund and into a savings account. There remains a risk that you need until year 6 or 7 to get up to historical market returns.

 A lot of "low risk / lower return" funds also go up and down in value, so you can't get too fancy waiting to the end to pull money out. the same argument about pulling money out after a good run applies.

The less firm your 5 year target to buy is, the more flexible you are with time in market.

[Landlady]

I do think low risk funds are a good way to go like others before me noted. That said, sometimes it takes good timing to find the right house especially if you are in a hard market or looking for something specific. You may want to look at your timeline as more like 4 years since you may want to start your home search a year prior to actually needing it for a kindergarten start. One house took me 3 months to find, my second house took me a year, and my property took me 2 years to find. So my advice is to give yourself flexibility in case you find the perfect house and you need to strike on it.

Your plan seems wonderful though! I hope to see a post from you in 5 years with a beautiful house, money to spare and two smarty-pants kids!

[ysette9]

I'll share our story since it is similar in some ways. When we got our first townhouse we knew it wasn't going to be the forever place, and we had a 5-year plan in place to save and upgrade to a nicer area. We started putting our downpayment savings into a mix of intermediate and short-term bond funds. I still think it was the right decision (conservative) on where to put money that we felt we would need relatively soon.

In the interim we had the crazy stock market run-up in the 2009+ timeframe and we missed out on substantial gains by having that money not in the market. However, the market could have easily gone down or done nothing in that time frame, so that has no bearing on whether it was a good decision or not.

Looking back on it though, I think we should have spent more time thinking about our goal. The 5-year plan sounded like a good rule of thumb, but really, there was nothing really pushing us to keep to that timetable. What we are doing now is that we want to eventually buy some place, but we have all of our money in the stock market. The reasoning is thus: we don't HAVE to move any time barring our landlords doing something uncharacteristic for them. Even if we did get booted out, that is not a reason to buy but merely find another place to live. If we don't HAVE to buy on a timeline, then we are free to buy when a) we find a good place for us and b) the market has not dumped. Your risk appetite might be very different, and that is fine. I'd encourage you to put a lot of thought into your goal and your timeline to make sure they are appropriate, and then figure out what place to park your money accordingly.

[Eric9064]

Reviving this thread as I have put some more thought into this issue and am hoping for additional input. Thanks again for the suggestions that have already been given.

I considered putting the house money is VTSMK, but ultimately I am not comfortable with the level of risk given the shorter time horizon (~5 years) and this being a dedicated house fund.

I am leaning towards investing in either Vanguard's Wellesley Income fund (https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0027) or the Wellington fund (https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0021).

I am leaning towards the Wellesley fund given its bond allocation and focus on dividend producing stocks, which seemed to result it the fund handling the 2008 recession particularly well (relatively speaking). This fund seems to limit downside risk while still having the opportunity for modest growth.

Specific questions: 1) Are my conclusions regarding the Wellesley fund correct; 2) Any reason to select the Wellington fund over Wellesley; and 3) Are there any other funds you would recommend given my risk tolerance and time in the market?

Thanks in advance!