Saving/Investing for Down Payment

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lawlord
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Saving/Investing for Down Payment

Post by lawlord » Sat Jan 18, 2014 12:11 pm

My wife and I are saving for a down payment on a new house. At our current rate, we expect to have saved the entire amount in 3.5-4 years. It seems that most personal finance experts would advise us against investing these savings in the stock market because of the short-term risk. I'm still inclined, however, to pour these savings into mutual funds with the hope that the market will speed us along to our goal.

What would you Bogleheads advise?
- Should I follow the PF experts and keep this money in a savings account.
- Or should I take some risk by investing in good growth or income stock mutual funds?
- Or perhaps you will tell me to do something else altogether.

I'm open to all suggestions, so please fire away.

Twins Fan
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Re: Saving/Investing for Down Payment

Post by Twins Fan » Sat Jan 18, 2014 12:50 pm

lawlord wrote: I'm still inclined, however, to pour these savings into mutual funds with the hope that the market will speed us along to our goal.
Hope in one hand, and you know what in the other.... :D

Risky and good luck if you chose that route.

Many threads in here about this type of question. Most will say any money needed within 5 years should not be invested in risky investments... equities.

No need to reinvent the wheel... just save up for the down payment and throw it all in a savings account of some sort. My vote anyway.

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LAlearning
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Re: Saving/Investing for Down Payment

Post by LAlearning » Sat Jan 18, 2014 12:57 pm

lawlord wrote:My wife and I are saving for a down payment on a new house. At our current rate, we expect to have saved the entire amount in 3.5-4 years. It seems that most personal finance experts would advise us against investing these savings in the stock market because of the short-term risk. I'm still inclined, however, to pour these savings into mutual funds with the hope that the market will speed us along to our goal.

What would you Bogleheads advise?
- Should I follow the PF experts and keep this money in a savings account.
- Or should I take some risk by investing in good growth or income stock mutual funds?
- Or perhaps you will tell me to do something else altogether.

I'm open to all suggestions, so please fire away.
The market can speed you a long, and bring your dreams to a crawl.
--Some equities (and I mean like 10%) given your time-frame would be the amount of risk I would take. If you lost 50% of it (5%) could you still buy the house? If so, then you can take that risk. If you cant, well then...you know.
--Consider IBonds and CDs.
--Consider a short term bond fund with a duration <4 years.
I know nothing!

MichaelM24
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Re: Saving/Investing for Down Payment

Post by MichaelM24 » Sat Jan 18, 2014 12:59 pm

A place like https://www.betterment.com would give you the feeling you are doing the most you can with your money, w/o being crazy risky.

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grabiner
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Re: Saving/Investing for Down Payment

Post by grabiner » Sat Jan 18, 2014 9:22 pm

lawlord wrote:My wife and I are saving for a down payment on a new house. At our current rate, we expect to have saved the entire amount in 3.5-4 years. It seems that most personal finance experts would advise us against investing these savings in the stock market because of the short-term risk. I'm still inclined, however, to pour these savings into mutual funds with the hope that the market will speed us along to our goal.
What would happen if you had done this strategy in 1998-2002 or 2005-2009? In either case, a big chunk of your down payment would evaporate in the final year, which would greatly delay your ability to buy a house.

The exception would be if you have a large taxable account in addition to the money for the down payment. I made my home down payment with stock sales from my taxable account, but I could do this because my taxable account was still large enough to make the down payment even if the market lost half its value, and if that happened, I could sell a larger portion of my taxable account at no tax cost. (I do hold bonds, but I hold them all in my retirement account.)
Wiki David Grabiner

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lawlord
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Re: Saving/Investing for Down Payment

Post by lawlord » Sun Jan 19, 2014 3:20 am

Sounds like you are all largely on the same page. This actually helps me say no to another pitch that I've been considering --whether to have a fee-only investment advisor (1% of my portfolio per year) manage these savings/investments. If I'm not going to invest in equities given the short time horizon, I'm certainly not going to cough up the 1% per year. (I know it's very un-Bogle-like to retain personal finance advisors, so I didn't add bring up this consideration initially, but your advice has made this decision much easier.) Thanks to all who responded.

Swampy
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Re: Saving/Investing for Down Payment

Post by Swampy » Sun Jan 19, 2014 6:05 am

we expect to have saved the entire amount in 3.5-4 years
Open a CITBANK savings account. It's the highest yielding one that I know of with immediate (non penalized) access to your funds.

However, I want to address something nobody else has.

We were in a similar position about 25 years ago. We saved diligently for the requisite time. When the time came for us to buy, home prices had (once again) climbed further out of reach and we ended up with a smaller, less expensive home than what we originally wanted. Even so, a house always costs more than you plan - at least for the first 1-2 years. In retrospect, the smaller home was a blessing in disguise.

So, if you think you need $$$$ to afford a home now, in a few years, it might be $$$$$. Put another way, what is slightly out of reach now, could potentially be further out of reach then.

It cuts both ways, real estate may tumble and you might get a nicer home for less money - but I wouldn't count on it. Don't even think about a home as a profit center! It's a roof over your head and a place you can rest your head on a pillow at night as well as getting a few tax deductions.

Lastly, you indicate you want to buy a 'new house.' Would this be brand new construction from a builder or a resale?

Personally, I think buying a resale is a much better option.
If you fail to plan, you plan to fail. | Failure is not an option. | If I have seen further, it is because I was carried on the shoulders of giants.

Topic Author
lawlord
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Re: Saving/Investing for Down Payment

Post by lawlord » Sun Jan 19, 2014 8:16 am

So, if you think you need $$$$ to afford a home now, in a few years, it might be $$$$$. Put another way, what is slightly out of reach now, could potentially be further out of reach then.
Great comment. This is one of our biggest concerns -- and part of the reason why we've considered taking the risk of investing our savings.
Lastly, you indicate you want to buy a 'new house.' Would this be brand new construction from a builder or a resale?
The house would probably be a resale. Home prices in our area -- near the beach -- are just very high. Hence the need to save for so long.

Note that we currently own a house and a rental property in this same neighborhood. In a few years we will want to move into a bigger home and do not want to take any of the equity out of the two properties.

Longtimelurker
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Re: Saving/Investing for Down Payment

Post by Longtimelurker » Sun Jan 19, 2014 8:42 am

Here is what I did (we are currently looking for a house to buy):

- 2 years ago we had a 75/25 AA, where the 25 in bonds would not quite cover the 20% down payment and all bonds were in tax deferred
- Within the brokerage we were 100% equities

The thought process at this point was to project taxable savings (after 401k's and IRA's are maxed), and figure out when we wanted to buy a home. We decided that anytime in the subsequent 7 years would be fine to buy, and we project ~$60k per year in taxable savings (highly volatile). With this we:

- maxed out ibonds these last two years ($40k)
- continued to invest 100% equities in taxable
- maintained 75/25 AA INCLUDING funds reserved for home

Fast forward 2 years - we made ~$30k on our taxable investments after taxes. This pushed us into a position where we can do the 20% down, keep a 6-month EF, buy a second car for cash. This extra $30k was a result of adding more risk to the portfolio, as the money needed for the downpayment was NOT segregated from the AA. Just two weeks ago we did:

- Sold equities in taxable and moved to savings account
- Sold bonds in tax advantaged and purchased the same equities we owned in taxable
- maintained 75/25 AA including funds reserved for home
- Savings now going entirely to building up more liquidity

We will likely buy within the next couple months, or at least within the next 18 months. At that point we will:

- Build liquidity reserves to 12-months expenses
- rebalance to 75/25 through contributions only
- Once we have 12-months expenses liquid again, we will take our taxable savings (~$60k per year, highly volatile) and use that to pay down the mortgage and perhaps some light renovations

Once house is paid off (projected 4-7 years) we will:

- do renovations based on experience with home
- build a 529 for kids with taxable savings and funds that would normally go to a mortgage
- rebalance to 60/40 through contributions only

It worked out very well for us to keep risk on while saving up to do this. But we were well aware of the risks and comfortable with Plan B, should an event like 2009 occur again. We continue to be comfortable with the risks of the go forward plan - as we will have a 4-7 year focus on liquidity improvements and liability reductions - both very conservative actions.

Hope this helps
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.

ks289
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Re: Saving/Investing for Down Payment

Post by ks289 » Sun Jan 19, 2014 10:03 am

grabiner wrote:
lawlord wrote:My wife and I are saving for a down payment on a new house. At our current rate, we expect to have saved the entire amount in 3.5-4 years. It seems that most personal finance experts would advise us against investing these savings in the stock market because of the short-term risk. I'm still inclined, however, to pour these savings into mutual funds with the hope that the market will speed us along to our goal.
What would happen if you had done this strategy in 1998-2002 or 2005-2009? In either case, a big chunk of your down payment would evaporate in the final year, which would greatly delay your ability to buy a house.

The exception would be if you have a large taxable account in addition to the money for the down payment. I made my home down payment with stock sales from my taxable account, but I could do this because my taxable account was still large enough to make the down payment even if the market lost half its value, and if that happened, I could sell a larger portion of my taxable account at no tax cost. (I do hold bonds, but I hold them all in my retirement account.)
Excellent point, which a later poster touched on also.
If there is a taxable account (likely for a different and longer term goal such as retirement), you have the option/flexibility to use this money to supplement the down payment. Therefore, as Grabiner did, you could afford to take more risk with the down payment funds and sometimes come out ahead.

Is it wise to plan to do this? Perhaps with a small % of the funds. I used some stock mutual fund gains to account for about 15% of my down payment last decade. If it were 2008-9 though, it would have been zilch/negative.

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grabiner
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Re: Saving/Investing for Down Payment

Post by grabiner » Sun Jan 19, 2014 10:56 am

ks289 wrote:Excellent point, which a later poster touched on also.
If there is a taxable account (likely for a different and longer term goal such as retirement), you have the option/flexibility to use this money to supplement the down payment. Therefore, as Grabiner did, you could afford to take more risk with the down payment funds and sometimes come out ahead.

Is it wise to plan to do this? Perhaps with a small % of the funds. I used some stock mutual fund gains to account for about 15% of my down payment last decade. If it were 2008-9 though, it would have been zilch/negative.
And I wasn't taking on extra risk; I made an asset location decision, not an asset allocation decision. I have always had enough bonds for the down payment; however, I chose to hold the bonds in my retirement plan and keep my taxable account all-stock until I was about to need the cash.
Wiki David Grabiner

DidItMyWay
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Re: Saving/Investing for Down Payment

Post by DidItMyWay » Sun Jan 19, 2014 11:28 am

lawlord wrote:Sounds like you are all largely on the same page. This actually helps me say no to another pitch that I've been considering --whether to have a fee-only investment advisor (1% of my portfolio per year) manage these savings/investments. If I'm not going to invest in equities given the short time horizon, I'm certainly not going to cough up the 1% per year. (I know it's very un-Bogle-like to retain personal finance advisors, so I didn't add bring up this consideration initially, but your advice has made this decision much easier.) Thanks to all who responded.
I think you are on the right track. IMHO, I would skip the advisor, and agree with the majority who say that, if you need the $ in less than 5 years, I wouldn't invest this money in the stock market.

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