Need Help!. Best way to start saving for Home Downpayment?

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niket
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Joined: Thu May 26, 2016 9:44 pm

Need Help!. Best way to start saving for Home Downpayment?

Post by niket » Fri Jun 10, 2016 11:37 am

Hello Bogleheads, this is my second post in the forum. My goal with this thread is to understand and get ideas about how one can start saving (and invest) for home loan downpayment with taking risk into consideration. I had posted about my savings and portfolio related questions in a separate thread so I won't be going into much details about that. Because I want to focus solely on home savings on this one.

About me:

Emergency funds: 6 months of expenses.
Debt: $0 (I don't own a car or a house yet. However, that may change in near future).
Tax Filing Status: Single
Tax Rate: 25% Federal, 5.1% State
State of Residence: MA
Age: 27
Desired Asset allocation: 20% stocks / 80% bonds
Desired International allocation: 0% of stocks / 0% bonds


My goal is to start saving for home downpayment with 3-4 years of time horizon. Now I know that this can be very short-term for any investments to consider and it may be best advisable to park my savings in a high-yield savings account but I still want to venture a little further any consider other options.

I am planning to save around $60-$80K within next 3-4 years and I have $6K to start with today. My idea is to open taxable Personal Investment account at Vanguard (I already have 401K and IRA but of course for retirement purposes).

Questions:

1. Would it be advisable to invest my savings in a portfolio of 20% stocks low-cost ETF VOO and 80% bonds ETF?

2. If so, what would be the best bond ETF/MF for a taxable account, any suggestions on short-term government or corporate or tax-exempt bond ETF?

I know that this whole portfolio of 20% stocks and 80% bonds poses a risk for 3-4 years of time horizon. But any suggestions will be highly appreciated about thoughts and other strategies to save for short time horizon. I will ask any more questions if I have regarding this.

Thank you in advance!.

retiredjg
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by retiredjg » Fri Jun 10, 2016 12:25 pm

With a 3 to 4 year time frame, I'd suggest a savings account and maybe some in a short term bond (realizing that even short term bonds can lose some value).

When considering a down payment, think of saving, not investing. Any money that is invested is subject to losing value. If losing value is not acceptable (like just putting off the house plan), then don't invest.

Your 20% stock 80% bond idea will work, and possibly make a little money, if there is no market downturn. You have to decide if it is more important to make a little money or have your money guaranteed available when you want it.

orca91
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by orca91 » Fri Jun 10, 2016 12:33 pm

Savings account or CDs/CD ladder.

Don't overthink or try to outsmart this. :happy

Lafder
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by Lafder » Fri Jun 10, 2016 11:45 pm

I would consider your home down payment money and your emergency funds separately from your investment allocation.

Your down payment money and emergency fund should be held in a more guaranteed to not go down place, such as cash in a bank account or a money market account.

With your investments, I would suggest an 80% stock/20% bond. The 20/80 you are proposing is way too conservative, even in retirement in my opinion. Unless that is really the most risk you are willing to take.

If you keep the home deposit money out of the AA it really changes the % of your holdings.

If I were to invest for a short term goal, I might consider Vanguard Life Strategy conservative growth or income for a little more gain, hopefully, than a bank account.

lafder

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raven15
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by raven15 » Sat Jun 11, 2016 12:08 am

I think that 20/80 is a fine strategy. Vanguard's balanced fund page recommends their 20/80 fund for an investor with a 3-5 year time horizon, which seems to be you. https://investor.vanguard.com/mutual-fu ... estrategy/#/ I am looking into a similar investment strategy myself, though possibly with a vaguer time frame.

Playing around with Portfolio Visualizer, 10% stocks / 90% bonds was near the minimum volatility point during pretty much all of the past, with much higher returns than all bonds. 20/80 had the highest Sharpe ratio, I'm not sure if that is meaningful though. The length of time it took to recover losses was not substantially increased from 10/90 to as high as 40% stocks / 60% bonds. I'm leaning 30/70 myself or maybe 40/60, but that will include international stocks.

For very low stock %'s it looks like Total Bond has been pretty ideal. Above ~20% stocks treasuries may become more useful during market corrections. However the future is not the past and there are plenty of bond funds that are pretty similar. I am leaning Intermediate Term Bond Index myself, but could still go Total Bond or Intermediate Treasury. Depending on wifal input I may even end up in a balanced fund.
It's Time. Adding Interest.

niket
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by niket » Sat Jun 11, 2016 4:12 pm

Lafder wrote:I would consider your home down payment money and your emergency funds separately from your investment allocation.

Your down payment money and emergency fund should be held in a more guaranteed to not go down place, such as cash in a bank account or a money market account.

With your investments, I would suggest an 80% stock/20% bond. The 20/80 you are proposing is way too conservative, even in retirement in my opinion. Unless that is really the most risk you are willing to take.

If you keep the home deposit money out of the AA it really changes the % of your holdings.

If I were to invest for a short term goal, I might consider Vanguard Life Strategy conservative growth or income for a little more gain, hopefully, than a bank account.

lafder

Hi Lafder, the 20/80 I proposed is only for my Home Downpayment savings with 3-4 years of time horizon. In my retirement investment savings, I have 90/10 portfolio allocation. The Life Strategy funds are a good option, I will look further into them. The only problem is that they have Total Bond Markets, which I heard are not tax efficient, and I will be putting my money in a taxable account.

niket
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by niket » Sat Jun 11, 2016 4:17 pm

raven15 wrote:I think that 20/80 is a fine strategy. Vanguard's balanced fund page recommends their 20/80 fund for an investor with a 3-5 year time horizon, which seems to be you. https://investor.vanguard.com/mutual-fu ... estrategy/#/ I am looking into a similar investment strategy myself, though possibly with a vaguer time frame.

Playing around with Portfolio Visualizer, 10% stocks / 90% bonds was near the minimum volatility point during pretty much all of the past, with much higher returns than all bonds. 20/80 had the highest Sharpe ratio, I'm not sure if that is meaningful though. The length of time it took to recover losses was not substantially increased from 10/90 to as high as 40% stocks / 60% bonds. I'm leaning 30/70 myself or maybe 40/60, but that will include international stocks.

For very low stock %'s it looks like Total Bond has been pretty ideal. Above ~20% stocks treasuries may become more useful during market corrections. However the future is not the past and there are plenty of bond funds that are pretty similar. I am leaning Intermediate Term Bond Index myself, but could still go Total Bond or Intermediate Treasury. Depending on wifal input I may even end up in a balanced fund.
Hi raven15, you made some good points. My thinking is that I only want to consider with 20-30% of S&P 500 Index fund and nothing else for stocks. Rest 80% I am looking for tax efficient bonds but may also consider short term bonds.

Thank you.

FedGuy
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by FedGuy » Sat Jun 11, 2016 5:33 pm

I agree with those who say to put the money someplace safe, where it won't lose value. As a data point, when I bought my condo about seven years ago, I had some money earmarked for my downpayment that I put into a conservative bond fund. I ended up losing money on that investment. It wasn't a huge loss, and it didn't derail my home purchase, but knowing that I would have had more money for my downpayment if I had simply kept it under a mattress pissed me off to no end. It's also worth noting that a more severe loss could easily have happened and would have complicated my timing and possibly what I could have afforded.

Bottom line: it's one thing to have a general understanding that investments can lose value; it's an entirely different thing when it happens to you. For something with such a short time frame (particularly given the whole "interest rates are likely to go up" thing), I don't think the risk is worth it.

niket
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by niket » Sat Jun 11, 2016 10:38 pm

FedGuy wrote:I agree with those who say to put the money someplace safe, where it won't lose value. As a data point, when I bought my condo about seven years ago, I had some money earmarked for my downpayment that I put into a conservative bond fund. I ended up losing money on that investment. It wasn't a huge loss, and it didn't derail my home purchase, but knowing that I would have had more money for my downpayment if I had simply kept it under a mattress pissed me off to no end. It's also worth noting that a more severe loss could easily have happened and would have complicated my timing and possibly what I could have afforded.

Bottom line: it's one thing to have a general understanding that investments can lose value; it's an entirely different thing when it happens to you. For something with such a short time frame (particularly given the whole "interest rates are likely to go up" thing), I don't think the risk is worth it.
Thank you for your response. Sharing your own story here helps me more to understand and decide which way to go further.

FedGuy
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by FedGuy » Sun Jun 12, 2016 7:54 am

niket wrote:Thank you for your response. Sharing your own story here helps me more to understand and decide which way to go further.
You're welcome. I hope it's useful to you. Whichever way you decide, good luck!

ddurrett896
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by ddurrett896 » Sun Jun 12, 2016 8:28 am

niket wrote: I am planning to save around $60-$80K within next 3-4 years and I have $6K to start with today.
With such a short time frame, save it in a bank account.

$60,000 - $6,000 = $54,000 / 48 months = $1,125/month to save
$80,000 - $6,000 = $74,000 / 48 months = $1,541/month to save

Dottie57
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by Dottie57 » Sun Jun 12, 2016 9:51 am

niket wrote:
FedGuy wrote:I agree with those who say to put the money someplace safe, where it won't lose value. As a data point, when I bought my condo about seven years ago, I had some money earmarked for my downpayment that I put into a conservative bond fund. I ended up losing money on that investment. It wasn't a huge loss, and it didn't derail my home purchase, but knowing that I would have had more money for my downpayment if I had simply kept it under a mattress pissed me off to no end. It's also worth noting that a more severe loss could easily have happened and would have complicated my timing and possibly what I could have afforded.

Bottom line: it's one thing to have a general understanding that investments can lose value; it's an entirely different thing when it happens to you. For something with such a short time frame (particularly given the whole "interest rates are likely to go up" thing), I don't think the risk is worth it.
Thank you for your response. Sharing your own story here helps me more to understand and decide which way to go further.
I agree with the majority here. Put money in savings.

I am just an average investor without the knowledge of many here. One of the best decisions I have made is buying and keeping a lower cost home in a good neighbor hood. The size of the home has limited my spending on it and has made fully funding my 401k much easier. Living a modest life really does help your investments.

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BeBH65
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by BeBH65 » Sun Jun 12, 2016 10:39 am

Hello Niket,

Money for a house downpayment in a few years should not be risked on the stock and bond market: High yield savings accounts or CDs are better.

... unless you are willing to change your house plans in the event the market drops:
1/ Don't buy the house and just keep renting until the stocks recover and future savings gets you back to where you want to be.
2/ Maybe houses will be cheaper in an economic downturn and you can still buy it with your decreased amount.
3/ Maybe houses will be cheaper and you can use a mortgage with < 20% down, leaving your investments intact.

Regards,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

ks289
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by ks289 » Sun Jun 12, 2016 11:54 am

I like the 20% equity : 80% bond model when you have a pretty rapid rate of savings and flexible timeframe.
Advantages:
1. possible return exceeding safe assets
2. possible tax loss harvesting opportunity in the event of a loss

Disadvantages:
1. Loss (mitigated partially by TLH)
2. Delay in accumulation of target amount (bad outcome would probably be 10-15% loss which could delay your purchase by 4-5 months at your rate of savings). To me this seems fairly brief.

RobInCT
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by RobInCT » Sun Jun 12, 2016 12:14 pm

I think having some bonds and equities for your downpayment fund is fine as long as you're truly flexible about timing of purchase and would be able to hold off, potentially as much as a few years, in the event of a serious downturn at or around the time you were initially planning to purchase.

I started saving for a downpayment with a 4-5 year event horizon and was in 1/3 stock, 1/3 bonds, 1/3 cash and gradually shifted those allocations, primarily through strategic placement of new money, until I was more like 20/20/60. We're now about 6 months out from purchasing and switched to all cash about a month ago. We were going to do it in January, when we were about 1 year away, but then the market decline caused us to hold off. If the market had continued to decline instead of rebounding, we might have had to explore other options including 1) waiting another year or two before buying, 2) making a smaller down payment based on just our bond/cash reserve, 3) adjusting our price target for houses so as to avoid having to cash out the stocks. We were fine with accepting the risk that we might have to do any of these things, so it worked for us, and I'd do it again this way.

If you have some flexibility, having a portion of your downpayment in stocks and bonds isn't a bad thing. If you don't have flexibility, it's a different story.

One thing I noticed is your single status and your age. How sure are you this won't change in the next 3-4 years? At your age and status one of many people's biggest unknowns is whether they're going to meet someone who suddenly changes their priorities, goals, resources, and outlook.

niket
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by niket » Sun Jun 12, 2016 1:52 pm

RobInCT wrote:I think having some bonds and equities for your downpayment fund is fine as long as you're truly flexible about timing of purchase and would be able to hold off, potentially as much as a few years, in the event of a serious downturn at or around the time you were initially planning to purchase.

I started saving for a downpayment with a 4-5 year event horizon and was in 1/3 stock, 1/3 bonds, 1/3 cash and gradually shifted those allocations, primarily through strategic placement of new money, until I was more like 20/20/60. We're now about 6 months out from purchasing and switched to all cash about a month ago. We were going to do it in January, when we were about 1 year away, but then the market decline caused us to hold off. If the market had continued to decline instead of rebounding, we might have had to explore other options including 1) waiting another year or two before buying, 2) making a smaller down payment based on just our bond/cash reserve, 3) adjusting our price target for houses so as to avoid having to cash out the stocks. We were fine with accepting the risk that we might have to do any of these things, so it worked for us, and I'd do it again this way.

If you have some flexibility, having a portion of your downpayment in stocks and bonds isn't a bad thing. If you don't have flexibility, it's a different story.

One thing I noticed is your single status and your age. How sure are you this won't change in the next 3-4 years? At your age and status one of many people's biggest unknowns is whether they're going to meet someone who suddenly changes their priorities, goals, resources, and outlook.
Hello, thank you for your planning insights. My time frame is also a bit flexible with 3-4 years in mind. But my single status may change in near future as well. For example, if I get married in few months or a year and most likely if my spouse would also be earning decent then we may end up saving for the downpayment a lot quicker than 3-4 years, maybe like 2 years. That would be something which I would also consider before making any decision on this. So cash savings would be a better option in that case.

Seahawk
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by Seahawk » Sun Jun 12, 2016 10:38 pm

Pretty informative thread! I'm in a similar position.

I'd like to buy a house in the next 2-3 years (not ready just yet). This isn't a "Chee, maybe it'd be neat to own a home someday", I'd definitely like to be sitting in my own house this time in 2019 (ideally sooner, but realistically - it'll be at least 18 months before I start making offers).

Please note that I've read most of the recent posts regarding down payments on this forum (about 15 easy), and I'm not planning on investing any of my down payment money in equities.

SO.. with that said, here's some detail:

Current Emergency Fund: 8 months expenses.
Current "down payment" fund: $12k.
Current Taxable account fund: $5.5k.
Debt: $1000 (I'll pay off my car loan in about 2 months).
Tax Filing Status: Single (no idea when/if this will change)
Tax Rate: 28% Federal, 0% State
State of Residence: WA
Age: 30

I max out my 401(k), and DCA $1000 per month in my taxable account (100% equity, Total Market Index for both).

Current plan of growing my "Down Payment Fund":

- I have about 25k worth of stock (at today's valuations). I plan to get rid in the next 3 months or so with a view to move that money into a "safer" place.
- I plan to DCA a $1000 per month into my down payment fund (in addition to the aforementioned taxable account).


I want to keep my principal (and not chase yields), but I do want to explore the possibility of getting a better deal than the current 0.3% I'm getting in my Savings account.

==> Any suggestions for high yield CDs? The best I can get right now is 0.45% APY in a credit union.

==> Has anyone ever used an online bank like Ally? Apparently, you can get 1%...

==> Also, I understand (though not very well) that Bonds may be an "investment" and therefore may lose value, but is this true for all bonds? I was considering one or both of the following two funds:
  • Vanguard Short-Term Federal Fund Investor Shares (VSGBX)
    Vanguard Short-Term Treasury Fund Investor Shares (VFISX)
I don't want to lose money I'm setting aside as down payment. I'm already going to lose some value due to inflation :annoyed

If you need to provide more information, I'd be happy to oblige.

Thanks to everyone who reads this! :happy
Price is what you pay, Value is what you get.

retiredjg
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by retiredjg » Mon Jun 13, 2016 6:18 am

Lots of people use online banks like Ally. If you search in the google box in the upper right, you will find old threads.

Short term bonds can lose some value if interest rates go up. And example: If the duration of a short term bond fund is 3 years, if interest rates go up 1% the value of the bond will go down 3%. Interest rates usually don't go up 1% at a time, so you see the loss in value would be small.

In the 28% tax bracket, you should probably be using tax-exempt bonds instead of the ones you listed.

For CD and online banking rates, you can use bankrate.com to find current information.

reneeh63
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by reneeh63 » Mon Jun 13, 2016 8:26 pm

Most folks on here would say even 20% stocks is too risky for only 3-4 years out. The key is how tied are you to 3-4 years? Let's say you're getting married in a year and were set on getting a home by that point? Or, what would be the harm if you lost some money and it took you 1 or 2 extra years to make it up? Do you have a set amount that you must have saved or only a general amount? So is your budget set in stone or if you were $10k short would you go ahead and settle for a little less of a house or in a little less than ideal location?

So yes, it's risky if you MUST have the money saved in 4 years. If you can hold off and don't mind or it does not matter, or you can make due with a less than ideal house (truly) then you can take on more risk. Flexibility gives you options - so that's for you to consider.

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raven15
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by raven15 » Tue Jun 14, 2016 12:44 am

reneeh63 wrote:Most folks on here would say even 20% stocks is too risky for only 3-4 years out.
If you are investing in a bond fund then including 20% stocks basically is noise as far actually losing money is concerned, but the stocks also greatly increase the chance of higher returns. If you have a bond fund you may as well have a 10%-30% in a stock fund as well.

https://www.portfoliovisualizer.com/eff ... igin=false

If you have CD's or individual bonds which you will hold to maturity then 20% stocks may not be worth the risk, because either there are no price fluctuations in the "safe" portion or the fluctuations are irrelevant.
It's Time. Adding Interest.

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raven15
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by raven15 » Tue Jun 14, 2016 12:52 am

Seahawk wrote: ==> Any suggestions for high yield CDs? The best I can get right now is 0.45% APY in a credit union.


==> Also, I understand (though not very well) that Bonds may be an "investment" and therefore may lose value, but is this true for all bonds? I was considering one or both of the following two funds:
  • Vanguard Short-Term Federal Fund Investor Shares (VSGBX)
    Vanguard Short-Term Treasury Fund Investor Shares (VFISX)
I don't want to lose money I'm setting aside as down payment. I'm already going to lose some value due to inflation :annoyed
Bond funds are not the answer if you absolutely do not want to lose money, because all of them have that possibility. CD's have no risk of losing principal and generally have higher rates to boot (depending on duration). There may be better sources, but you can compare CD rates at https://www.nerdwallet.com/rates/cds/be ... =nw_gn_3.0
It's Time. Adding Interest.

Seahawk
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by Seahawk » Tue Jun 14, 2016 9:29 pm

Thank you. I'll keep my (down payment) money out of the market.
Price is what you pay, Value is what you get.

momvesting
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by momvesting » Tue Jun 14, 2016 9:54 pm

I agree with others that your horizon is too short so I would keep it in FDIC insured accounts. I know savings rates are pretty dismal right now, so you might consider chasing down a few bank bonuses. For example, I know Chase is doing a $300 bonus for checking, and another $200 for savings if you have a $15k balance. After you've met the time requirements you can move the money somewhere else for more bonuses, like the $300 bonus for Discover Checking. There are several blogs that keep track of and report these bonuses. Also, check on CD rates at credit unions in your area. This may be regional but I have seen as much as 2.54% on 5-yr CDs with a one-time rate adjustment and a 6 mo of interest penalty for early withdrawl in my area. Good luck.

manedark
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by manedark » Sun May 06, 2018 8:47 pm

I have a similar decision in front of me, posted details here. Can people here advise if Muni Bonds are good option for me?

Jesteroftheswamp
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by Jesteroftheswamp » Sun May 06, 2018 9:07 pm

Capital One offers 1.6% APY with a $10,000 balance on their money market account. Just in case you are considering something extremely safe and liquid.

manedark
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by manedark » Mon May 07, 2018 1:21 am

I am currently with Ally Bank at 1.5% and I like their customer service. But problem is that I am in a high tax state - CA - total marginal rate is 24 (Federal) + 9.3 (CA) = 33.33%, that is why want to explore the tax advantaged muni bonds.

Jags4186
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Re: Need Help!. Best way to start saving for Home Downpayment?

Post by Jags4186 » Mon May 07, 2018 7:50 am

niket wrote:
Fri Jun 10, 2016 11:37 am
Hello Bogleheads, this is my second post in the forum. My goal with this thread is to understand and get ideas about how one can start saving (and invest) for home loan downpayment with taking risk into consideration. I had posted about my savings and portfolio related questions in a separate thread so I won't be going into much details about that. Because I want to focus solely on home savings on this one.

About me:

Emergency funds: 6 months of expenses.
Debt: $0 (I don't own a car or a house yet. However, that may change in near future).
Tax Filing Status: Single
Tax Rate: 25% Federal, 5.1% State
State of Residence: MA
Age: 27
Desired Asset allocation: 20% stocks / 80% bonds
Desired International allocation: 0% of stocks / 0% bonds


My goal is to start saving for home downpayment with 3-4 years of time horizon. Now I know that this can be very short-term for any investments to consider and it may be best advisable to park my savings in a high-yield savings account but I still want to venture a little further any consider other options.

I am planning to save around $60-$80K within next 3-4 years and I have $6K to start with today. My idea is to open taxable Personal Investment account at Vanguard (I already have 401K and IRA but of course for retirement purposes).

Questions:

1. Would it be advisable to invest my savings in a portfolio of 20% stocks low-cost ETF VOO and 80% bonds ETF?

2. If so, what would be the best bond ETF/MF for a taxable account, any suggestions on short-term government or corporate or tax-exempt bond ETF?

I know that this whole portfolio of 20% stocks and 80% bonds poses a risk for 3-4 years of time horizon. But any suggestions will be highly appreciated about thoughts and other strategies to save for short time horizon. I will ask any more questions if I have regarding this.

Thank you in advance!.
You should be 100% in cash. Instead of wasting time investing in a 20/80 portfolio that may or may not make you money, you should seek out checking and savings account bonuses. Over 4 years and with some leg work there should be no reason why you wouldn't be able to get at least $10000 in new account promotional bonuses.

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