Investing windfall -> down payment?

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Investing windfall -> down payment?

Postby nhpri » Fri Mar 15, 2013 11:55 am

I have been very fortunate, and will be receiving a mid-six-figure sum.
I'm in my late twenties, and am trying to decide how best to
invest/allocate this money aside from the basics of maxing out
tax-advantaged accounts.

Specifically, my concern right now revolves around how much money NOT to
invest for the long term. I'm currently planning to invest most of it in a
85/15 stock/bond mix. However, there is a possibility that I may want to
buy a house sometime in the next few years, and I'm wondering what to do
about saving for a down payment. Is it a reasonable strategy to invest the
entire sum and take a margin loan against the account if I need to pay for
something like a down payment? Is this even allowed?

Thanks for any help you can provide. I recognize that this is a nice
problem to have.
nhpri
 
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Re: Investing windfall -> down payment?

Postby ddj » Fri Mar 15, 2013 2:12 pm

Some on this forum (with a "few years" time horizon) save for down payments with bonds/ST bonds/CDs. Others lump their house down payment in with their retirement asset allocation and then withdraw money from a taxable account when they're ready to buy (and buy more or less house depending on how the invested money has done). You could do either, a hybrid, or something else with down payment money. I'm no expert, but taking out a loan (a margin or, essentially, line of credit) on invested dollars to make a down payment sounds like a bad idea.

Aside from and prior to deciding which method to use, consider these questions: How much house were you planning on buying prior to the windfall? How much now? Is there a difference, and if so, why? What was your pre-windfall financial situation (emergency fund? annual savings?)? I'm a big proponent of going slow with windfalls. Even ignoring them for awhile, as you define your goals.

http://www.bogleheads.org/wiki/Managing_a_windfall

And yes, nice problem to have :D
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Re: Investing windfall -> down payment?

Postby grabiner » Fri Mar 15, 2013 8:51 pm

nhpri wrote:Specifically, my concern right now revolves around how much money NOT to
invest for the long term. I'm currently planning to invest most of it in a
85/15 stock/bond mix. However, there is a possibility that I may want to
buy a house sometime in the next few years, and I'm wondering what to do
about saving for a down payment. Is it a reasonable strategy to invest the
entire sum and take a margin loan against the account if I need to pay for
something like a down payment? Is this even allowed?


You really have two different portfolios, for retirement and for a house. 85/15 is a reasonable allocation for your retirement funds; it is not a reasonable allocation for money you are going to spend in three years. The house down payment should be in something low-risk such as CD's.

If you have almost all your investments in stock, and then you take out a margin loan, you will then have more than 100% of your investments in stock. This is probably not a risk you want to plan to take. A portfolio which was 120% stock would have lost 75% of its value in the 2007-2009 crash; $120,000 in stock and $20,000 borrowed would have become about $46,000 in stock and $21,000 borrowed.
David Grabiner
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Re: Investing windfall -> down payment?

Postby MN Finance » Sat Mar 16, 2013 12:22 am

As mentioned you don't take out a margin loan to buy a house. You'll have a higher and variable rate and also be subject to a margin call if the market drops too far and have to put cash in. Invest the majority per your long term goals and then the house money in something safe
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