What to do with 160K cash right now?

[Bearded Man]

Current assets: 3 houses, two mortgaged, one paid off. Primary residence and two rentals.

Total value about 750K.

I'm investing some of my disposable income/savings into more education (MBA).

No money in stocks, only recently learned about index investing after some bad experiences stock picking.

Have good credit, and am saving 80+K a year.

It's only 160K cash on hand, but will be increasing over the next few years if I keep hoarding cash.

Not sure I want to put money in at what could be the peak of the market, stock wise. Economists seem to predict a small down turn for three years starting in 2017, for real estate. So in a way, you could say it is likely the peak or near peak of real estate for a while.

Still considering buying another house to live in as I don't care for any of the areas I've lived. Crummy neighbors, traffic, crime, etc. I'd still be riding it up in value for a couple years if I buy, not to mention the principal pay down and tax benefits. At the same time, I worry about the transaction costs of cashing in my real estate portfolio eventually.

Reason I've considered selling is, as the prices on real estate have appreciated and the leverage wears off, my returns are basically that of a REIT index fund but with much more work and risk involved. It was a good investment that has paid handsome dividends, but the magic wears off over time.

I noticed FIFighter has sold much of his portfolio and is holding cash waiting for a down turn. He still has his rentals, just almost no stock.

I've considered doing the same, but...at least with RE, I still have potential for some gains in the short term. My areas market has not returned to it's pre crash level yet, and the principal pay down and tax benefits for a primary residence are something in the mean time. I want to put money into an index fund, but not comfortable putting it in with these valuations...

[ooeei]

Current assets: 3 houses, two mortgaged, one paid off. Primary residence and two rentals.

Total value about 750K.

I'm investing some of my disposable income/savings into more education (MBA).

No money in stocks, only recently learned about index investing after some bad experiences stock picking.

Have good credit, and am saving 80+K a year.

It's only 160K cash on hand, but will be increasing over the next few years if I keep hoarding cash.

All sounds good.

Not sure I want to put money in at what could be the peak of the market, stock wise. Economists seem to predict a small down turn for three years starting in 2017, for real estate. So in a way, you could say it is likely the peak or near peak of real estate for a while.

Did these same economists predict the last housing crash?  How about the recovery after?  Are they all filthy rich yet since they can predict the future?  There were people saying we were in another bubble on stocks 4 years ago, yet it's gone up significantly since.  Market timing is a losing game. 

Still considering buying another house to live in as I don't care for any of the areas I've lived. Crummy neighbors, traffic, crime, etc. I'd still be riding it up in value for a couple years if I buy, not to mention the principal pay down and tax benefits. At the same time, I worry about the transaction costs of cashing in my real estate portfolio eventually.

Reason I've considered selling is, as the prices on real estate have appreciated and the leverage wears off, my returns are basically that of a REIT index fund but with much more work and risk involved. It was a good investment that has paid handsome dividends, but the magic wears off over time.

I noticed FIFighter has sold much of his portfolio and is holding cash waiting for a down turn. He still has his rentals, just almost no stock.

I've considered doing the same, but...at least with RE, I still have potential for some gains in the short term. My areas market has not returned to it's pre crash level yet, and the principal pay down and tax benefits for a primary residence are something in the mean time. I want to put money into an index fund, but not comfortable putting it in with these valuations...

If you're nervous about moving into the stock market, put in a little bit at a time.  Maybe 10k/month into a basic total stock market index fund?  Based purely on the math it's not ideal, but will limit your downside in case the market does crash soon.

I'd also recommend reading: http://jlcollinsnh.com/stock-series/ since you're new to the stock market.  It sounds like you're really concerned about a downturn.

[FIRE me]

You've been here on MMM longer than I have, and you're more successful (defined as net worth and how much you're saving per year) than me.

So I feel a bit silly giving you advice.

That said, if you are concerned about a stock market downturn, why not go bond heavy with VBTLX?

[Bearded Man]

I neglected to mention equity in the houses is 351K, so I have 164K in cash and 351K in real estate equity, though the value of the real estate is about 750K right now. Hopefully you didn't think that my NW was 750K right now :-)

I guess the bonds idea is a good idea. I need to read up on the permanent portfolio, I have one of Harry Brown's (sp?) books and I like his ideas. I think at this point protecting capital is as important as growing it. The idea of having stocks, bonds, real estate, and cash is good in that when one is performing, I can cash out and buy the one that is not performing, and wait for the tables to turn. Isn't that ultimately what the PP is about?

[James]

If you have been here for a while, and really been here reading all the posts, then you really should know what the answer is. Just dump that sucker into index and you are set.


Sure, you can get all fancy and dollar average into the market, spread some into bonds, try to time the market (because I'm sure you know better than everyone else where the market is headed right?), sink it into property, or whatever else you want to do. But if you are asking us, then I really don't see any correct answer other than dump it into the market already and move on. :)

[Bearded Man]

Yes, I've read that all over, but I don't agree with the philosophy. Yes, the people who are predicting a slight down turn in RE are the same people who predicted the last crash, and the one before that.

[James]

Yes, I've read that all over, but I don't agree with the philosophy. Yes, the people who are predicting a slight down turn in RE are the same people who predicted the last crash, and the one before that.

Good luck...

[Bearded Man]

Yes, I've read that all over, but I don't agree with the philosophy. Yes, the people who are predicting a slight down turn in RE are the same people who predicted the last crash, and the one before that.

Good luck...

You think the market will go up forever? I actually did the same thing before the 2007 crash that I'm doing now. I pooled cash and waited for an opportunity. When the market crashed, I only had enough cash to buy ONE house paid in full. But over time I saved up more and bought more while the market was depressed. Seems like it worked out well for me. Economies have their cycles.

Keep in mind, I'm not saying I am unwilling to invest. I am just not willing to invest in stock index funds right now. Bonds maybe. Real estate, even if the value goes down, is still earning me money with cash flow and principle pay down and I still see some up side in the next two years.

As witnessed in another thread about the trailing returns of a popular stock inded fund over the past 15 years, just blindly throwing money into something because some study says so isn't always the right move. According to some posters in that thread, if you had invested just before the dot com crash, you have actually LOST money on inflation adjusted basis over the last 15 years.

 

[James]

Sorry, I should not have been so dismissive, I apologize for my snark.

Everything you are saying "sounds right". The problem is that I've heard too many people who have "sounded right", who then turned out to be wrong. I wish you well in your choices, people have certainly made great money over the years wisely investing nice chunks of money like you have. Our NW is similar, but our investment allocation is much different, I'm following my own advice with index funds. But I don't disagree that some people have a knack for figuring out where to make great money. I am highly cynical if those timing the market, and would hope you understand that cynicism, but despite that I don't doubt some have the skill, whether that is timing real estate, bonds, stocks, etc. And those that don't eventually find that out. The only way of knowing is after the fact.

If I was a betting man I would go with real estate, but not being a betting man I will stick with index funds. Regarding whether it will go up forever, you could say that about any investment... but historically I think it has proved itself, and the future is the big question.

Edited to ask, can you do the math and look at what your $160k cash on hand would be worth had you funneled it into the market asap over the last few years?

[Bearded Man]

Off, the top of my head, I can say I would probably have been up 50%. Thing is, I have been letting it sit in cash because I lost a hefty sum speculating. I tried stock picking, penny stocks, swing trading, etc. Only thing that worked for me consistently in an up or down market was swing trading. But even then, I would only do that with money I can afford to lose, as I've learned my lesson there. So I learned about index funds, on a few forums, and I'm still skittish about putting money into the stock market, even an index fund. If I did buy in now and it tanked, I don't think I would be willing to ever get back in. Hence the hesitation.

My gut churns at the thought of putting that much money into the stock market right now. If it was 50% discounted, I would jump on it, because I know it would go back up soon. But I just know it will tank not long after I buy in. That's what has ALWAYS happened to me. I bought Cisco and Intel as they were going up in 2000. It even went a little higher after I bought. BAM! Next thing you know, my stocks are worth pennies on the dollar, and they stayed that way for a long time, only recovering about 30% of their value in a decade or so.

Real Estate I would do. I would feel comfortable enough buying another house right now, even two cheaper ones. The Tacoma East Side has houses for 150K all day, and these are remodels that were getting 160-170K this summer. It seems like the prices there have come down for the season and I can buy a couple cash flow positive properties there and still have 70-90K left over...

[James]

I had to chuckle at your comments, we each come at this with our life experiences and resulting bias. I purchased, at a very "great deal", a house at the top of the market. It was a mistake that in the end cost me over $300k, and it has given me heartburn for years. And while real estate has lost me hundreds of thousands, index funds have made me many hundreds of thousands... it's normal for our life experiences to color our choices... just something we each should be careful of as well.

[Bearded Man]

I had to chuckle at your comments, we each come at this with our life experiences and resulting bias. I purchased, at a very "great deal", a house at the top of the market. It was a mistake that in the end cost me over $300k, and it has given me heartburn for years. And while real estate has lost me hundreds of thousands, index funds have made me many hundreds of thousands... it's normal for our life experiences to color our choices... just something we each should be careful of as well.

Don't you belong in some parallel universe? lol. You know what I mean then, and my reasons. Don't get me wrong, I will likely get into index funds someday, I just won't do it when it is valued so high. Real estate is a different story, as it still earns me money from the rents and principal pay down and is a tax shelter for me.

[Tjat]

The trepidation makes sense. However, I don't think this is the right time for bond funds given the likely interest rate increase pending. Nothing is without risk, so you have a choice to accept lower returns for reduced risk or avoid risk and park your money in cash. The latter isn't 0% returns if you ladder long term CDs or something. Another option is to pursue individual high quality corporate bonds. If you diversify, less likelihood to crash and if you ride them out to term, who cares what the price drops to when rates rise? You'll still get the same payments and your principle.

[ooeei]

As witnessed in another thread about the trailing returns of a popular stock inded fund over the past 15 years, just blindly throwing money into something because some study says so isn't always the right move. According to some posters in that thread, if you had invested just before the dot com crash, you have actually LOST money on inflation adjusted basis over the last 15 years.

That would be true, assuming someone plopped in a lump sum at exactly the wrong time, and never bought any before or after that moment.  Even then you're up 30% plus dividends (so basically kept up with inflation). 

So someone invested all of their money 100% into stocks at the worst time in recent history, never invested before or after, never had bonds to rebalance with during the crashes, and are back at square one without losing anything.  Maybe I'm crazy, but considering all of the stuff that had to go totally wrong for that to happen, it just doesn't seem that bad.

Sure, if someone had been saving money in a savings account their whole life and put $750k into 100% stocks in March of 2000, and immediately retired, they would be kind of screwed.  On the other hand, that's a CRAZY thing to do.

[James]

I had to chuckle at your comments, we each come at this with our life experiences and resulting bias. I purchased, at a very "great deal", a house at the top of the market. It was a mistake that in the end cost me over $300k, and it has given me heartburn for years. And while real estate has lost me hundreds of thousands, index funds have made me many hundreds of thousands... it's normal for our life experiences to color our choices... just something we each should be careful of as well.

Don't you belong in some parallel universe? lol. You know what I mean then, and my reasons. Don't get me wrong, I will likely get into index funds someday, I just won't do it when it is valued so high. Real estate is a different story, as it still earns me money from the rents and principal pay down and is a tax shelter for me.

I guess I would simply say I learned my lesson, but I still own my own house because I have rationally looked at housing in my area, and despite losing $300k in housing, owning our own house is the right thing to do financially. It was really hard to buy a house, and I hate the very idea of owning a house, but I am glad I'm not renting right now because it's the wrong financial move even if it would feel better.

And I would argue that despite losing a big chunk of money in stocks, having the bulk of your investments in the full index is the "right" thing to do right now objectively. It doesn't matter if things seem "high" right now, over the long term stocks have the best chance of providing good return. Your mistake was not buying the full index and holding for the long term, so you would not be repeating what failed in the past. If you can't dump it in, and dollar cost averaging all of it doesn't work for you, I would at least take half that $160k and start to dollar cost average it into the market. Maybe 10k a month or so.

Obviously fortunes are made in real estate for some, so that is an option. I think bonds are a losing game over time, and especially right now. But at the end of the day we all do what seems right, and I hope your choices work out for you.

[Bearded Man]

Yeah, I hear ya. DCA, keep investing even if it goes down. It's just tough to put more money in when you've lost so much before and are watching it go down. I will say one thing I thought about recently, is having a lot of cash gives me OPTIONS. I held cash instead of paying off my loans and it paid off. Right now being house rich and cash poor, or asset rich and cash poor is not good either. Money gives me options. I like options. It's FU money.