Author Topic: Medium Term Investing  (Read 3808 times)

TPGW

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Medium Term Investing
« on: January 14, 2015, 12:17:17 PM »
I have approximately 20k in cash that I'm going to put into my Vanguard accounts in the next month.  I use Vanguard for both retirement and non-retirement savings. 

Retirement is in index funds and targeted funds--I'm in my early thirties so it's over 90% stocks. 

My non-retirement (or non-tax advantaged--it could be used one day for retirement) money is also in mostly index funds.  I do own one fund with a small percentage of bonds, but the overall breakdown is approximately 95% stock to 5% bond.   

I may need some or all of the non-retirement money in approximately 6-7 years for a down payment on a new home.  With that in mind, is it advisable for me to invest this current 20k chunk with an eye towards bringing up the bond percentage in my non-retirement funds?  I'm not asking for advice on where the market is going to go, just what a reasonable stock to bond ratio is for money that may be needed in 5-7 years.  Is there any right or wrong answer to this, or does it simply depend on my own tolerance for risk? 

Any advice is much appreciated.   

Dodge

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Re: Medium Term Investing
« Reply #1 on: January 14, 2015, 12:27:09 PM »
Based on Vanguard's Life Strategy Fund page, they'd probably recommend a 40/60 stock/bond split:

https://investor.vanguard.com/mutual-funds/lifestrategy/#/

After filling out their fund recommendation tool with the information you gave, I also got a 40/60 stock/bond split:

https://personal.vanguard.com/us/funds/tools/recommendation

GGNoob

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Re: Medium Term Investing
« Reply #2 on: January 14, 2015, 12:38:54 PM »
Like Dodge said, I would do the 40/60 stock/bond split. My emergency fund is actually invested in the Life strategy Conservative Growth Fund.

hodedofome

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Re: Medium Term Investing
« Reply #3 on: January 14, 2015, 02:25:28 PM »
40/60 stocks/bonds ain't bad, though I'd personally try to equalize the volatility of both stocks and bonds which would historically put you at about a 25/75 stock/bond split. Rebalanced annually. The industry buzz-word for this is 'risk-parity.' You basically make no judgement as to which asset class is going to do better, you just want to hold them both according to their volatility. Stocks are more volatile than bonds so you would hold less stocks and more bonds. If you do the math, over the long term it ends up being about 25/75.

Your main goal should be that the $20k you have is at least $20k 5 years from now. You should not be trying to make the most $$ in that timeframe, rather you should be protecting it while just trying to keep up with inflation. Anything more than that should be considered gravy.

TPGW

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Re: Medium Term Investing
« Reply #4 on: January 14, 2015, 07:16:08 PM »
Thank you!  Much appreciated.

One follow-up: is the Vanguard Total Bond Market Index the way to go for bond investments?  Are there any other Vanguard Bond Funds I should be looking at?

Dodge

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Re: Medium Term Investing
« Reply #5 on: January 14, 2015, 08:11:21 PM »
Thank you!  Much appreciated.

One follow-up: is the Vanguard Total Bond Market Index the way to go for bond investments?  Are there any other Vanguard Bond Funds I should be looking at?

Yes, that is the one.  I wouldn't look at any others.

RapmasterD

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Re: Medium Term Investing
« Reply #6 on: January 14, 2015, 08:32:40 PM »

40/60 stocks/bonds ain't bad, though I'd personally try to equalize the volatility of both stocks and bonds which would historically put you at about a 25/75 stock/bond split. Rebalanced annually. The industry buzz-word for this is 'risk-parity.' You basically make no judgement as to which asset class is going to do better, you just want to hold them both according to their volatility. Stocks are more volatile than bonds so you would hold less stocks and more bonds. If you do the math, over the long term it ends up being about 25/75.

Your main goal should be that the $20k you have is at least $20k 5 years from now. You should not be trying to make the most $$ in that timeframe, rather you should be protecting it while just trying to keep up with inflation. Anything more than that should be considered gravy.

Ding ding ding. The winner...seriously. We will likely hit the crappers within your time frame.

surfhb

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Re: Medium Term Investing
« Reply #7 on: January 15, 2015, 03:06:40 AM »
Down payments and ER funds ARE NOT INVESTMENT CAPITAL!!   They are for your primary residence and insurance in case something bad happens.....you know, like an extended bear markets or crash where you lose employment. ;)

Jeez!  We're you guys not investing in 2002 or 2008? :)

clifp

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Re: Medium Term Investing
« Reply #8 on: January 15, 2015, 03:49:50 AM »
I'd answer it differently. You gave a range of years 5-7. Is that because you are unsure when want to buy a house or that because that is how long you think you'll need to save up for the down payment? Or to put it another way if you had inheritance tomorrow that gave you enough money for a down payment, would you start looking or would still wait 5-7 years, because of work/personal decisions.

If you basically have the money for a down payment than sticking in the bond market or I think better a 5 year CD would be best choice.  If on the other hand the the thing that is keeping you from buying house today is the lack of down payment. Then I'd invest more aggressively in accumulating the down payment quicker. The problem with total bond market is between taxes and inflation best case you keep up with inflation.  Worse case is say interest rates 3% in the next 5-7 years total bond market would lose about 15% in NAV which would pretty much wipe out the interest earned during that period.

TPGW

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Re: Medium Term Investing
« Reply #9 on: January 15, 2015, 07:35:44 AM »
"You gave a range of years 5-7. Is that because you are unsure when want to buy a house or that because that is how long you think you'll need to save up for the down payment?"

Here's a bit more information.  My wife and I bought a home about two years ago with 20% down.  It's 1600 square feet and is more than enough for us now, will be more than enough when kid no. 1 comes along early this summer, and will be enough when hypothetical kid no. 2 arrives in 2-3 years.  But if hypothetical kid no. 3 arrives, it might start to feel a little cramped. 

My plan currently is to use savings for a down payment and rent our current house.  Hence--I might need some money for a new house in 6 or 7 years.  So it's more about when we'll need the house than when we'll have the money.  I think we'll probably have enough money in 1-2 years, depending on the dent in savings that this kid makes. 

BUT--it isn't a drop-dead deadline, as with college or (to a lesser extent) retirement.  If the market crashed, it wouldn't be a huge burden for us to remain in the current place for a few more years until the market recovers.  Also, we might decide not to have three kids, in which case we may not need a new house at all.   

surfhb--I started investing in 2006, so I know all about market crashes.  I was down 15k on a 30k (mostly stock) portfolio in March 2009.  But that experience actually gives me confidence--five years later I'm back to 6.1 percent returns.  Even the worst crash in recent history can be rode through in a relatively short time-frame.   

So, considering that I will have some flexibility to wait out the market if necessary, wouldn't a higher ratio of stocks be advisable?     

 
« Last Edit: January 15, 2015, 07:43:08 AM by TPGW »

hodedofome

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Re: Medium Term Investing
« Reply #10 on: January 15, 2015, 08:00:37 AM »
The stock market recovered somewhat quickly (took over 5 years though) in the US but plenty of other stock markets around the world haven't been so lucky. The Vanguard Int'l Index fund took 7 years and is now back below the highs set in 2007. This includes dividends.

StressLess

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Re: Medium Term Investing
« Reply #11 on: January 15, 2015, 08:39:25 AM »
I'm in the same boat so thanks for everyones input.

to the main poster, make sure the $$ is in a high yield online savings account for the time being...  ally or CIT yield ~1%.

if the recent volatility turns into a bear, you will have more reason to go after equities