Author Topic: Medium-Term Saving/Investing  (Read 5034 times)

2WheelsBeats4

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Medium-Term Saving/Investing
« on: December 05, 2014, 10:20:32 AM »
I am saving for a house and hope to purchase in 1-2 years.  It seems there are no good options to save for this time frame.  If I keep the money in cash I get a return of almost nothing and lose out to inflation.  Returns on bonds are not much better, plus carry the risk of losing value if rates go up (and they have nowhere else to go but up).  Index funds are okay for long term investing, but I do not want to lose the opportunity to buy a house if the stock market take a dip for several months.

Any input is helpful.  Thanks!

ZiziPB

  • Magnum Stache
  • ******
  • Posts: 3267
  • Location: The Other Side
Re: Medium-Term Saving/Investing
« Reply #1 on: December 05, 2014, 10:26:11 AM »
With 1-2 year horizon, I would definitely keep the money in a savings account or 1-2 year CDs.  You can get ~0.9% from on-line banks or see if you can beat that at a credit union.  The risk is too great to invest it otherwise.

WillPen

  • 5 O'Clock Shadow
  • *
  • Posts: 57
Re: Medium-Term Saving/Investing
« Reply #2 on: December 05, 2014, 12:02:43 PM »
I have this exact same question and I'm working with the same timeline. Besides a savings account or a CD, the only other thing I can think of is a balances mutual fund like VBIAX (https://personal.vanguard.com/us/funds/snapshot?FundId=0502&FundIntExt=INT)

Either that, or something that's 60% bonds, 40% stocks like the Betterment article that Logan T has shared before

https://www.betterment.com/resources/personal-finance/safety-net-funds-why-traditional-advice-is-wrong/


Dodge

  • Pencil Stache
  • ****
  • Posts: 790
Re: Medium-Term Saving/Investing
« Reply #3 on: December 05, 2014, 12:35:32 PM »
(and they have nowhere else to go but up).

You might not see it, but this is market timing.  Ignore the noise, the news reports, and the doomsday articles.  You can't guess where the market will go next.  Let's review what happened to bonds the last time interest rates soared:



Interest rates spiked pretty high from 1975 through 1981 (the peak).  Let's see what happened to intermediate term bonds during this time (orange line):



A $10,000 deposit grew almost 60%!

This is why we say ignore the noise.

Edit:  Updated graphic to show a worse time period.
« Last Edit: December 05, 2014, 12:53:59 PM by Dodge »

GGNoob

  • Pencil Stache
  • ****
  • Posts: 725
  • Age: 32
  • Location: Colorado
Re: Medium-Term Saving/Investing
« Reply #4 on: December 05, 2014, 12:51:29 PM »
If you don't want to lose any money, you're only real option for 1-2 years would be an online savings account. Here's a few options that will give you 1% interest:

Synchrony Bank
CIT Bank
SFGI Direct

If you are flexible on your purchase date (to not sell when stocks are down) or want to take the risk, then you may consider some type of balanced fund between 20% and 40% stock and the rest in bonds. This could be something simple like a LifeStrategy or Target Retirement Income fund from Vanguard. Otherwise you could create a portfolio at Wisebanyan (for free) or Betterment (for an asset based fee).

Personally, I'd go with the investment option as I hate having money sitting in accounts earning next to nothing.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4732
  • Age: 34
  • Location: Seattle, WA
Re: Medium-Term Saving/Investing
« Reply #5 on: December 05, 2014, 12:57:25 PM »
A savings account/CDs are the only sure option if buying a house within two years is extremely important to you. You're giving up on potential investment returns in exchange for the knowledge that your investment won't go down (besides inflation). If you could live with your investment going down, and would be willing to put off a house purchase for a while if the market does go down before you have saved enough, stocks give the best return on average. It all depends on your risk tolerance and how high of a priority buying a house actually is for you.

WillPen

  • 5 O'Clock Shadow
  • *
  • Posts: 57
Re: Medium-Term Saving/Investing
« Reply #6 on: December 05, 2014, 01:05:21 PM »
Vangaurd does have some suitable Life Strategy funds.

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

Life Strategy Income VASIX (80% bond 20% stock)
Life Strategy Conservative Growth Fund VSCGX (60% bond 40% stock)
Life Strategy Moderate Growth Fund VSMGX (40% bond 60% stock)

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Medium-Term Saving/Investing
« Reply #7 on: December 05, 2014, 01:38:08 PM »
You can always barbell. This refers to mixing a little bit of a high risk/high returns asset, with a lot of a safe asset.

So you could mix a 90% allocation to a 2 year CD  with a 10% allocation to small cap value, or emerging markets.

I wrote about barbelling in my most recent blogpost if you are interested.

Here is a wonderful Bogleheads post on barbelling.

http://www.bogleheads.org/forum/viewtopic.php?t=73669

Of course there is no reward without risk, all barbelling really accomplishes is decreasing the extent of downside risk, and improving the efficiency of the risk/return relationship.

RyeWhiskey

  • 5 O'Clock Shadow
  • *
  • Posts: 83
Re: Medium-Term Saving/Investing
« Reply #8 on: December 06, 2014, 02:11:50 PM »
The stock market holds it greatest risks in the shortest time frames. Investing a fixed amount of money you need in 1-2 years in equities is foolish and irresponsible. Dump it all into some CDs or high yield savings accounts and focus on something else.

GardenFun

  • Bristles
  • ***
  • Posts: 459
  • Location: Packers Hell - they're everywhere!
Re: Medium-Term Saving/Investing
« Reply #9 on: December 06, 2014, 02:21:25 PM »
Focus your effort on finding the right house for a great price.  Leave the money in a bank account/CD to keep it available when needed.

Say you have $50,000 for a down payment.  A 10% increase in stocks will generate $5,000 towards the down payment, but it may be a bumpy, stressful ride.  By switching the hand-wringing into house hunting effort, you can easily save $5,000 on the purchase cost by taking the time to learn as much about the house buying market in your area. 

I also second the barbell approach if you feel you must have some of it in stocks. 

2WheelsBeats4

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Medium-Term Saving/Investing
« Reply #10 on: December 06, 2014, 09:33:10 PM »
Thank you all for the replies.  I had never heard the term "barbell" before, but it appears that is what I am already doing.  I am putting $1125/month into a savings account, and $125/mo into an index fund.     I have about $17K now, so if I keep saving at the same rate, I should have a decent down payment for a first home (index fund gains or losses notwithstanding). 

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Medium-Term Saving/Investing
« Reply #11 on: December 07, 2014, 01:30:04 AM »
To really barbell, consider putting your $125/a month into a high risk/high reward index like a small cap value fund (I like RZV) or an emerging market fund (VWO).
« Last Edit: December 07, 2014, 10:31:42 AM by milesdividendmd »

GGNoob

  • Pencil Stache
  • ****
  • Posts: 725
  • Age: 32
  • Location: Colorado
Re: Medium-Term Saving/Investing
« Reply #12 on: December 07, 2014, 04:16:22 AM »
To really barbell, consider putting your $125/a month into a high risk/high reward index like a small cap value fund (I like RZV) or an emerging market fund (VNQ).

And by an emerging market fund, he means VWO. VNQ is a REIT fund.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Medium-Term Saving/Investing
« Reply #13 on: December 07, 2014, 10:31:23 AM »
Correct!  Duh.