Where to put $38K with a 4-5 year horizon?

[ZiziPB]

I currently have a steady after tax investment program of $4K per month going into index funds (I am also fully funding any pre-tax accounts available to me) but I found myself with about $38K extra to invest at this point.  My goal is to retire in 4 years, so I'm thinking I need to dial down the risk profile a bit.  Any creative ideas?

[mandies]

We've got a similar situation, where we're going to want to use the money we set aside in 5 years to buy a house outright. We went for the Vanguard Moderate Growth Lifestrategy fund. (This is a 60% stocks/40% bonds fund).

[serhomeslice]

Any debt?  Pay it off.  I will have a little extra money this year, outside of my normal index fund investments, and I'm considering CDs, bonds, and bond funds.  I think (imho) that stocks are a little pricey right now, so you might wait for a dip or correction, and add on to your index funds.  With a 4 or 5 year horizon, I think more money in index funds might be a good idea.  I read a great article by MMM yesterday where he found a Vanguard fund that was 60% stocks and 40% bonds with very low fees.  Thought this was very cool and convenient.  I'm with Fidelity, so I might also try to find a bond/stock etf with low fees.  This is a new area to me, so I will be researching in the coming months. 

Good luck and let us know what direction you take.  I may follow suit.

Also, I have $55K left on the mortgage to pay off, which will probably take me 5 years to pay off.  I'm shooting for 2.

[ZiziPB]

Thanks.  I have no debt other than my mortgage (15 year term at 3%) which I don't particularly want to pay down.  I plan to sell my current house at retirement anyway and will move into another property that I own that is not mortgaged.

I am with Fidelity as well, although I have a lot of money invested in Vanguard products through them.

I don't really understand the details of bond investing but I always thought that since it is not tax efficient, you should avoid investing in bonds in your taxable account.

[serhomeslice]

Ok.  Well this will give me an opportunity to do a little research this morning.  I'm a big proponent of trying to keep things simple, so I always keep this in mind when trying to tackle most things.  I'm very familiar with ETFs, as they have been my main investment vehicle in taxable accounts over the last 2 years.  In your original post, I got the sense you were looking for investments ($38K) with a little less risk, to which I immediately think CDs and bonds (money markets don't pay anything any more and I'm not sure they will for quite a while).  My assumption is that an ETF will hold fixed income investments for you, and to you it would be handled (from a tax standpoint) as any other ETF (such as QQQ for example).  So a fixed income ETF would be taxed as income(any interest earned) if held under 1 year, and taxed as long term capital gains(any interest earned) after 1 year.  I may be wrong in my assumption, so I'm headed to Fidelity now, and I'll post again with what I find. 

I'm looking at the TIP fund on Fidelity (commission free trade if trading with Fidelity), and I'll be back.

[serhomeslice]

This is from the Fidelity Website, and I think it sums it up beautifully.  I've highlighted a portion that may fit your particular circumstance.

Choosing the Right Bond ETF for You

As with any type of investment, bond ETFs have defined risk/reward characteristics. You should determine your own risk/reward profile for the ETF portion of your portfolio and then choose Bond ETFs that correspond to that profile. For example, if you want to minimize risk, you should choose a short-duration, government bond fund. If you’re willing to take on maximum risk (within the Bond ETF market) in exchange for a higher return, you should choose a high-yield Corporate Bond ETF.

Investors in a high tax bracket might want to consider Municipal Bond ETFs because they can provide tax-exempt income and a steady income stream. While tough economic times and reduced tax revenues possibly might create difficulties for some states in re-paying municipal bonds,credit risk can be reduced by focusing on ETFs which invest in higher credit quality issuers.

Probably because fixed income instruments are generally not as volatile as stocks, most investors pay less attention to the fixed income side of their portfolio than stocks. But with ETFs now available on every duration and sector in the fixed income market, as well leveraged and inverse products, investors would be advised to at least understand the variety of Bond ETF products and how they perform in different interest rate and economic environments.

[serhomeslice]

So, you get all the benefits of low volatility bonds(compared to stocks), thru an easy to purchase and trade vehicle (ETF).  And as MMM would say, make sure the fund has low fees (TIP with fidelity has a .2% fee - which is the fee amount I try to stay at or under).  Now may be a good time to buy a bond fund as most of them I have reviewed recently are in dips.  Again, I am a rookie with investing so heed any of my advice with caution.  As the fund prospectuses almost always say, ..."you could lose some or all of your invested money...".  The other thing I keep in my head about bonds from my investment reading, is that they tend to do well when stocks aren't doing well, and vice versa, so they should be a pretty good hedge against your stock investments.

[serhomeslice]

One last thing I always do when reviewing a product to invest in, I always review the 1, 5, and 10 year return totals looking specifically at "Return After Taxes on Distributions and Sale of Fund Shares".  This will give you the most accurate picture of what you would have received over those time frames.

Whew, I got on a roll.  Now to get some work done, so I'll have more to invest.

[arebelspy]

My goal is to retire in 4 years, so I'm thinking I need to dial down the risk profile a bit.

Your investment time horizon is not the next four years.

It is the rest of your life that you're planning on living on that money.

Plan your AA around that.  Not the next 4-5 years.

[ZiziPB]

@serhomeslice, thank you for the research.  I like the idea of muni bonds and need to do some more research in that direction before I make my final decision.

@arebelspy, I may have a convoluted way of thinking about it, but I see my investments in two distinct buckets: I am planning to live off my taxable investments for about 10 years after retiring (so that is my short(er) term bucket that needs to be available in 4 years and last 10 years), then switch over to retirement funds when I'm 60 or so.  I am comfortable with the current amount, rate of saving and AA for my retirement accounts, but my taxable investments are still a work in progress in terms of coming up with a consistent AA.  And situations like this (getting a larger than anticipated bonus) throw me off even more.  Last year I committed to automatic investments in my taxable account and I am very happy with that, but dealing with an unanticipated chunk of money somehow feels different.

[foobar]

I think splitting money into 2 accounts just makes your life hard. You have a big chunk of money and you need to figure out how to invest it so that you can draw what you need, minimize taxes (both now and in 30 years), and have it grow. Splitting it into 2 piles makes doing this analysis a lot harder.

@serhomeslice, thank you for the research.  I like the idea of muni bonds and need to do some more research in that direction before I make my final decision.

@arebelspy, I may have a convoluted way of thinking about it, but I see my investments in two distinct buckets: I am planning to live off my taxable investments for about 10 years after retiring (so that is my short(er) term bucket that needs to be available in 4 years and last 10 years), then switch over to retirement funds when I'm 60 or so.  I am comfortable with the current amount, rate of saving and AA for my retirement accounts, but my taxable investments are still a work in progress in terms of coming up with a consistent AA.  And situations like this (getting a larger than anticipated bonus) throw me off even more.  Last year I committed to automatic investments in my taxable account and I am very happy with that, but dealing with an unanticipated chunk of money somehow feels different.

[arebelspy]

I think splitting money into 2 accounts just makes your life hard. You have a big chunk of money and you need to figure out how to invest it so that you can draw what you need, minimize taxes (both now and in 30 years), and have it grow. Splitting it into 2 piles makes doing this analysis a lot harder.

I don't know, buckets of money can help one conceptualize it.

In any case though, I'd look at all the information, and all the scenarios, not compartmentalize in a vacuum.  Look at the overall picture and the next few years, then see what makes the most sense for your AA.

[ZiziPB]

Thanks for understanding.  I have been a decent saver all my life but I am a very new investor, so I am still learning :-)  Buckets definitely help in my thinking.

[arebelspy]

Thanks for understanding.  I have been a decent saver all my life but I am a very new investor, so I am still learning :-)  Buckets definitely help in my thinking.

Cool.

I would still evaluate what total amount you have, what you have coming in pensions or SS and at what ages, etc. etc.

www.cfiresim.com is a great tool.

[ZiziPB]

That is a really cool tool!  Just ran my basic numbers and it returned 0 failure, 100% success.  I have to play with it some more with different assumptions ;-)  Thanks!

[arebelspy]

That is a really cool tool!  Just ran my basic numbers and it returned 0 failure, 100% success.  I have to play with it some more with different assumptions ;-)  Thanks!

Nice, congrats!  Sounds like you're doing awesome.  :)

[wild wendella]

What do you think about lending club?  MMM's posts about it sparked my interest.  You may view it as too much risk, but on the surface it looks like a neat way to get pretty good returns.

[foobar]

I did it for a year and quit. It is a lot of work to fund loans and the after tax return wasn't more than I expect to get out of stocks and I expect the risk to be about the same.

What do you think about lending club?  MMM's posts about it sparked my interest.  You may view it as too much risk, but on the surface it looks like a neat way to get pretty good returns.

[aj_yooper]

You could consider some Vanguard funds with a lower beta, like the Utility index, the  Consumer Staples index, or the  Health fund.  Personally, I think the concept of buckets is smart. 

[ZiziPB]

Lots of ideas to think about - thank you all.  I think I will make a separate thread about "buckets" and see what people think.

I think we should have a separate Case Study category in Investor Alley - where people could post their portfolio details and get advice on how to optimize it.  Something similar to Case Study in Ask a Mustachian but instead of a budget, it would be all about investing your portfolio.  What do you think?

[arebelspy]

Lots of ideas to think about - thank you all.  I think I will make a separate thread about "buckets" and see what people think.

I think we should have a separate Case Study category in Investor Alley - where people could post their portfolio details and get advice on how to optimize it.  Something similar to Case Study in Ask a Mustachian but instead of a budget, it would be all about investing your portfolio.  What do you think?

That's a lot trickier, because while everyone can cut a cell plan and get the same service, or can learn tips to optimize their grocery spending, AA is a more personal thing.  It completely depends on the individual's age, goals, risk tolerance, etc. etc.

I mean, yeah, people post that stuff and we comment, but it's just stuff for the person to consider, because they need to decide for - and be happy with it - themselves.

But yes, this happens, and feel free to post whatever you'd like and I'm sure people will chime in with thoughts and try to help.  :)

[ender]

Lots of ideas to think about - thank you all.  I think I will make a separate thread about "buckets" and see what people think.

I think we should have a separate Case Study category in Investor Alley - where people could post their portfolio details and get advice on how to optimize it.  Something similar to Case Study in Ask a Mustachian but instead of a budget, it would be all about investing your portfolio.  What do you think?

I guess I've always felt the boglehead forums are a lot better place for that sort of questions and never would have even thought to post that type of request here...