AA for 5 year investment?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

AA for 5 year investment?

Postby greg219 » Wed May 01, 2013 3:30 am

Hi all,

I'm sure this topic has been discussed previously, but I can't find much on it (except for a short topic).

I'm planning to buy my own house/apt five years from now. To be able to put up a decent down payment, I will set aside $75k right away, and for every month for the coming five years, I'll contribute an additional $500. What asset allocation would you suggest for this, and why? Assume I'm currently 100 % in cash.

Intuitively, I wasn't planning on any stock at all, but rather 100 % bonds. But how about different bond maturities -- short vs long maturities?

Note that this investment will be done in a foreign currency (I plan to buy the house/apt in the corresponding foreign country), and that my options when it comes to mutual bond funds essentially are short term funds (maturities average 1 year) vs long term funds (maturities are 2-10 years with an average somewhere in between). For you to be able to relate, the typical long term bond fund I'm considering has averaged 4.5 % over the last 10 years; for the typical short term fund, this number is 2.8 %.

Looking forward to some discussion around this. Thanks!
greg219
 
Posts: 8
Joined: Sat May 26, 2012 3:57 pm

Re: AA for 5 year investment?

Postby Call_Me_Op » Wed May 01, 2013 7:05 am

5 year CD, since you need the money in 5 years. Stocks and bond funds are too risky for this time frame. Some would argue that an intermediate bond fund is OK since it has a 5 year duration. I would disagree, since it is theoretically possible for a large rate increase to occur right before you need the money, decimating your account.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Call_Me_Op
 
Posts: 4621
Joined: Mon Sep 07, 2009 3:57 pm
Location: Milky Way

Re: AA for 5 year investment?

Postby greg219 » Wed May 01, 2013 11:43 pm

Thanks for your input.

This seems overly defensive from my POV. The 5 year CDs I can find don't even beat inflation (they're like 1.60 % APY tops). What do you think of a bond fund with average maturities of one year?

Also, maybe you know of an earlier thread where this has been discussed? This certainly can't be the first time someone asked this.

Would love some other people's opinions as well.
greg219
 
Posts: 8
Joined: Sat May 26, 2012 3:57 pm

Re: AA for 5 year investment?

Postby Tortoise » Thu May 02, 2013 12:17 am

There are lots of threads on short term investments. (I searched bogleheads.org for "short term investment" and got 60,700 hits. You can reduce that quickly by using Google's "Search Tools" and clicking on a more-recent time period, like "Past month.")

I glanced at a few discussions, and most included I-bonds, CDs, and short term bonds. I-bond purchases are limited to $10k per tax-id per year, meaning that you can buy up to $20k in I-bonds if you are married, and up to $30 if you also have a living trust. Most people were on the fence as to what was best. Of course, I-bonds and CDs have no risk, short term bonds do.

Note that I-bonds did just reset to a lower rate of 1.18% for the next 6 months, so a 5 year CD is probably your best option for no risk. (5-year CD at Ally is currently 1.54%.)
"Always do right. This will gratify some people, and astonish the rest." --Mark Twain
User avatar
Tortoise
 
Posts: 351
Joined: Sat Aug 08, 2009 4:24 am
Location: San Jose

Re: AA for 5 year investment?

Postby Hastibe » Thu May 02, 2013 12:24 am

Barclays has a 1.75% APY five year CD, too.
Hastibe
 
Posts: 164
Joined: Sun Jan 20, 2013 12:33 am

Re: AA for 5 year investment?

Postby dbr » Thu May 02, 2013 9:54 am

greg219 wrote:Thanks for your input.

Also, maybe you know of an earlier thread where this has been discussed? This certainly can't be the first time someone asked this.




There are literally hundreds of threads that have been posted here where information germane to this question has been posted and discussed. I don't know of any tool that efficiently pinpoints the most recommended half dozen of them for someone's reading. There are so many threads because it seems to be easier to ask the same question over and over again and have it be answered over and over again than it is for anyone to supply a list of previous material to read. Also the best discussions often occur in the context of something that doesn't look like that topic at first glance.

There is also a permanent Wiki where one might or might not find an answer that is specific enough to be helpful. On some topics the Wiki is a super resource and on others may take some research and reading.

All of this is in the nature of a discussion forum. Perhaps one solution is for a person to spend some time everyday browsing the forum and reading stuff. Eventually one becomes educated on almost anything that might come up.
dbr
 
Posts: 14037
Joined: Sun Mar 04, 2007 10:50 am

Re: AA for 5 year investment?

Postby inbox788 » Thu May 02, 2013 2:02 pm

greg219 wrote:I'm planning to buy my own house/apt five years from now. To be able to put up a decent down payment, I will set aside $75k right away, and for every month for the coming five years, I'll contribute an additional $500. What asset allocation would you suggest for this, and why? Assume I'm currently 100 % in cash.

Intuitively, I wasn't planning on any stock at all, but rather 100 % bonds. But how about different bond maturities -- short vs long maturities?

Note that this investment will be done in a foreign currency (I plan to buy the house/apt in the corresponding foreign country), and that my options when it comes to mutual bond funds essentially are short term funds (maturities average 1 year) vs long term funds (maturities are 2-10 years with an average somewhere in between).


Why not buy now? What's missing? Not enough down? Insufficient cash flow? There are many risks to consider and hedge for the mid range period you specify. Usually, near term property purchases assume sufficient down, and preserving that necessary down payment is essential. If you're short, you're trying to build up a down payment with return on investment on the cash you have with additional cash contributions. The risk is that real estate prices rise and the down payment goal run away from you.

https://personal.vanguard.com/us/funds/ ... IntExt=INT

Another twist is foreign currency. What country and currency are you talking about? One interesting option is an international REIT in the country you wish to purchase. Diversified international REIT may or may not be an adequate proxy if country specific option isn't available. I'm suggesting this as an imperfect, almost flawed proxy for the property you want to purchase. Buying a lower priced similar property today and use the additional savings in 5 years to upgrade is another way to offset some of the risks. No perfect answer, even knowing what risks you're most concerned about.

So, stocks? Maybe. Short term bonds? Maybe. Long term bonds? No. Too little return, chance of losses from bubble crash.
inbox788
 
Posts: 855
Joined: Thu Mar 15, 2012 6:24 pm

Re: AA for 5 year investment?

Postby greg219 » Fri May 03, 2013 12:29 am

inbox788 wrote:Why not buy now? What's missing? Not enough down? Insufficient cash flow? There are many risks to consider and hedge for the mid range period you specify. Usually, near term property purchases assume sufficient down, and preserving that necessary down payment is essential. If you're short, you're trying to build up a down payment with return on investment on the cash you have with additional cash contributions. The risk is that real estate prices rise and the down payment goal run away from you.

I currently live in the US and not Norway which is the country I'm planning to buy the property in. I'm renting my current place and planning on doing so until I leave (in five years). To clarify my situation even further, I'm already above the required down payment (30+ % above given today's prices).

inbox788 wrote:What country and currency are you talking about?

Norway and NOK.

inbox788 wrote:So, stocks? Maybe. Short term bonds? Maybe. Long term bonds? No. Too little return, chance of losses from bubble crash.

How can stocks be "maybe" and long term bonds "no" -- don't we expect stocks to be more volatile?
greg219
 
Posts: 8
Joined: Sat May 26, 2012 3:57 pm

Re: AA for 5 year investment?

Postby inbox788 » Mon May 06, 2013 10:21 am

greg219 wrote: I'm already above the required down payment (30+ % above given today's prices).
...
Norway and NOK.

inbox788 wrote:So, stocks? Maybe. Short term bonds? Maybe. Long term bonds? No. Too little return, chance of losses from bubble crash.

How can stocks be "maybe" and long term bonds "no" -- don't we expect stocks to be more volatile?


To pure AA, it could be viewed as market timing, but I'm glad Warren agrees with me. :greedy

http://www.reuters.com/article/2013/05/ ... AO20130506

Risk/reward just isn't there for me.

There are Norway Country ETFs, which partly hedge Norway economy and currency. It doesn't hedge real estate. International REITs are also popular, but don't know how Tokyo, London, Rio, etc. real estate investments correlate with Norway real estate, not to mention the local neighborhood you're planning to move to. If your plans are certain, and you have the cash flow, the best thing to do is buy ASAP, and you could even rent it out to make the numbers work out. 5 years should be long enough to make back most one time investments, and you'd be tied to your goal, rain or shine. You'd suffer if prices crash, or gain if it shoots up in the next 5 years.
inbox788
 
Posts: 855
Joined: Thu Mar 15, 2012 6:24 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: binaryhermit, Bing [Bot], camillus, Epsilon Delta, finmanjim, Gnirk, hevyd, lee1026, mreesa, sari, Skeet and 64 guests