Page 1 of 1

Investing to buy a home

Posted: Sun Dec 25, 2016 7:19 pm
by stevekozak2
I am new here, and know very little about investing. I am reading The Little Book of Common Sense Investing, which is what lead me here. I am mostly just reading on the forum right now, but do want to ask a question. I plan to buy a house as personal residence, in about 8.5 from now. I would like to know the best investment strategy to save money up for this. Ie: if I have $1000 a month I can put aside in an investment, for 8.5 years, what is the best product to do this with?

Re: Investing to buy a home

Posted: Mon Dec 26, 2016 2:48 am
by Dilbydog
High yield savings account. You don't have a large lump sum to place in a CD or treasuries, and a sharp drop in the market could seriously draw down your "savings" if kept in equities. This would be most unfortunate if it was to happen towards the end of your saving period. Then again, this is just some guy on the internets opinion, so please take it as such.

Re: Investing to buy a home

Posted: Mon Dec 26, 2016 3:59 am
by weedf16
There are a number of options available to you.

1. High yield savings account as previously mentioned.
2. CD's
3. Taxable investing

#1 and 2 are the safest courses of action as both bring with them FDIC backing. For #3, it is critical to consider your appetite for risk regarding this pot of money and your investment time horizon. As an example you could set an AA for this pot of money just like you have an AA for your retirement portfolio. Because your investment horizon is relatively short compared to a retirement time horizon your AA should be conservative, something like 20/80 stocks to bonds. For the stock portion of this pot of money, you should go with a standard equity index fund such as Vanguard Total Stock Market Index (VTSAX). For the bond portion, this will be highly dependent on your federal/state income tax rate as bond interest is considered earned income. For higher income tax brackets you should consider a tax-exempt bond fund such as Vanguard Limited-Term Tax Exempt (VMLTX) or Vanguard Intermediate-Term Tax Exempt (VWITX). If you are in the 15% Federal income tax bracket (or lower), it could be more beneficial to go with Vanguard Total Bond Market Index (VBTLX).

Good luck :sharebeer

Re: Investing to buy a home

Posted: Mon Dec 26, 2016 9:46 am
by stevekozak2
Thank you for the replies. This is the kind of information I was looking for!

Re: Investing to buy a home

Posted: Mon Dec 26, 2016 10:59 am
by Geist
Personally I used a much more aggressive AA to invest for buying a home. Something like 60/40 stocks/bonds. VTSAX for the stock portion, and whatever bond fund strikes your fancy. At the time I used a combination of GNMA & I-Bond, which worked for me, but may or may not have been entirely sound.

Bottom line is to do what you're comfortable with. I was perfectly fine being aggressive with it, but you might not be. So what works for you.

Re: Investing to buy a home

Posted: Mon Dec 26, 2016 11:57 am
by stevekozak2
Geist wrote:Personally I used a much more aggressive AA to invest for buying a home. Something like 60/40 stocks/bonds. VTSAX for the stock portion, and whatever bond fund strikes your fancy. At the time I used a combination of GNMA & I-Bond, which worked for me, but may or may not have been entirely sound.

Bottom line is to do what you're comfortable with. I was perfectly fine being aggressive with it, but you might not be. So what works for you.
Over what period of time wete you doing the investing for home buying? I have about an 8.5 year window.

Re: Investing to buy a home

Posted: Mon Dec 26, 2016 12:48 pm
by Geist
stevekozak2 wrote:
Geist wrote:Personally I used a much more aggressive AA to invest for buying a home. Something like 60/40 stocks/bonds. VTSAX for the stock portion, and whatever bond fund strikes your fancy. At the time I used a combination of GNMA & I-Bond, which worked for me, but may or may not have been entirely sound.

Bottom line is to do what you're comfortable with. I was perfectly fine being aggressive with it, but you might not be. So what works for you.
Over what period of time wete you doing the investing for home buying? I have about an 8.5 year window.
I initially didn't have a specific timeframe... But I started investing in 2006, and decided in 2010 I was going to buy in 2012. As I said, much more aggressive than most would recommend, but I was fresh out of college & completely willing to accept the investment risk. If I had lost my pants in the market, I would have simply delayed my purchase, or purchased with a lower DP (I ended up buying with a 25% DP). Notably, that was also the period right after the 2008 crash, so I sort of had the viewpoint that it was unlikely to go devastatingly down again so soon after the crash.

For my second home (which I just purchased in Sep, the first is now a rental), I built up the DP again from 2012-2016 with about a 60/40 with VTSAX for stocks, but instead of a bond fund I just used cash savings for the 40% non-stock portion (low opinion of bond prospects as I was building up my funds).

So if I were you, personally, I'd use my standard 60/40 mix, or just buy a single balanced fund to make it simple -- VWIAX (Vanguard Wellesley) comes to mind. An 8-year timeframe is plenty, and makes a 60/40 mix even more reasonable IMO.

Re: Investing to buy a home

Posted: Mon Dec 26, 2016 1:09 pm
by bligh
8.5 years out is a long time and a LOT can change. I would hate to hold cash for that long and miss out on the returns.

I would use a fund like the Vanguard Tax Managed Balanced Fund (VTMFX) (50 stock/50 tax efficient bonds) and call it my house fund. Of course, whether holding tax efficient municipal bonds makes sense for you will depend on your tax bracket. If I was in a tax bracket below 25% and likely to remain below that bracket, I would go with Vanguard Balanced Index Fund (VBIAX) (60 stock/40 bonds). I would also consider going with the Vanguard Target Retirement 2025 Fund (VTTVX) which would give me a glide path such that the investments get more conservative the closer I got to the "buy" date. Again, this would depend on how low/high my tax bracket was and would be.

Depending on a lot of factors such as the size of my downpayment, how close I was getting to buying a house, the overall size of my portfolio, I would keep some percentage in cash, or as I started to get about 2-3 years from the "buy" date, directing all new contributions to cash. Shoot for something like 25-40% in a CDs/Savings accounts, and 75-60% in the tax managed balanced index fund.

Hope that helps. :)

Re: Investing to buy a home

Posted: Mon Dec 26, 2016 1:25 pm
by Watty
stevekozak2 wrote:I plan to buy a house as personal residence, in about 8.5 from now.
How to invest in part depends on the details of the situation and if you have a good "plan B" for buying the house in case your investments don't do well.

With 8.5 years talking some significant risk would probably be very reasonable since you are are not investing an lump sum. For example if you invest $1,000 a month aggressively and the markets tank in six months then it will not be an insurmountable loss.

If you are not in a high tax bracket then on one option would be to use one of the Vanguard Life Strategy funds

https://investor.vanguard.com/mutual-fu ... estrategy/#/

How conservative of a fund to use would depend on your situation.

About five years before the expected purchase date I would start moving it to move conservative investments.