Mid-Term investing?

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yikesbikes
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Mid-Term investing?

Post by yikesbikes »

Hey guys,

I'm currently 26 and making pretty good money. I want to start investing for things like a house, kid's college, or whatever large purchases I might want in the future that I won't need for another 7-20 or so years. I'm wondering what your thoughts are on putting most, if not all of it, into stocks? I've been told that this is the best way to go but I wanted to get more opinions.

Let me know what you guys think.

Thanks!
Jeff
livesoft
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Re: Mid-Term investing?

Post by livesoft »

If by "stocks" you mean broadly-diversified index mutual funds, then Yes, by all means do so.
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Toons
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Re: Mid-Term investing?

Post by Toons »

Vanguard has a good read on investing. :happy

https://investor.vanguard.com/retiremen ... priorities
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venkman
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Re: Mid-Term investing?

Post by venkman »

yikesbikes wrote:Hey guys,

I'm currently 26 and making pretty good money. I want to start investing for things like a house, kid's college, or whatever large purchases I might want in the future that I won't need for another 7-20 or so years. I'm wondering what your thoughts are on putting most, if not all of it, into stocks? I've been told that this is the best way to go but I wanted to get more opinions.
Do you have an emergency fund in place, and are you already maxing out contributions to retirement accounts? If the answer to either of those is no, make sure both things are taken care before you start investing for anything else.

If your time horizon is 20 years, then low-cost stock index funds are a great idea. If your time horizon is 7 years, the stock market may not be the right choice. With the caveat that no one can accurately predict these things, the odds of there being a significant downturn/bear market at some point in the next 7 years are, IMO, rather high. If you were investing long-term, a downturn wouldn't be a problem because you'd have plenty of time to recover. On the other hand, if you were planning to take the money out in exactly 7 years, you might end up losing money; or at least not gaining nearly as much as you had hoped.

There aren't many great options right now for mid-term investing. Stocks are risky, and bond yields are low. The best choice might be to hedge your bets with a balanced stock/bond fund. Not as tax-efficient as a pure stock fund, but significantly less downside risk.
MotoTrojan
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Re: Mid-Term investing?

Post by MotoTrojan »

venkman wrote:
yikesbikes wrote:Hey guys,

I'm currently 26 and making pretty good money. I want to start investing for things like a house, kid's college, or whatever large purchases I might want in the future that I won't need for another 7-20 or so years. I'm wondering what your thoughts are on putting most, if not all of it, into stocks? I've been told that this is the best way to go but I wanted to get more opinions.
Do you have an emergency fund in place, and are you already maxing out contributions to retirement accounts? If the answer to either of those is no, make sure both things are taken care before you start investing for anything else.

If your time horizon is 20 years, then low-cost stock index funds are a great idea. If your time horizon is 7 years, the stock market may not be the right choice. With the caveat that no one can accurately predict these things, the odds of there being a significant downturn/bear market at some point in the next 7 years are, IMO, rather high. If you were investing long-term, a downturn wouldn't be a problem because you'd have plenty of time to recover. On the other hand, if you were planning to take the money out in exactly 7 years, you might end up losing money; or at least not gaining nearly as much as you had hoped.

There aren't many great options right now for mid-term investing. Stocks are risky, and bond yields are low. The best choice might be to hedge your bets with a balanced stock/bond fund. Not as tax-efficient as a pure stock fund, but significantly less downside risk.

Agreed. 7 years is too short. You'd be better off trying to find some decent CD's to keep up with inflation, and saving cash, but I would first focus on maxing out your 401K & IRA. That money will be sitting for ~40 years and can easily weather the storm, while compounding nicely. For what it's worth, I am 25, making pretty good money, and consider all of my investments (100% stocks) to be for ~15-25 years out for taxable, and my (Roth) IRA to be for retirement. You'll be disappointed if you load up in the market with expectations to use it in 7 years.
Topic Author
yikesbikes
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Re: Mid-Term investing?

Post by yikesbikes »

Thanks guys. I have an emergency fund and I'm contributing 15% of my income to my Roth IRA and 401k.

My next big purchase I want to be saving for is a house, which won't be for at least 7-10 years. I'm leaning towards a balanced mix of diversified stock and bond index funds.
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CaliJim
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Re: Mid-Term investing?

Post by CaliJim »

yikesbikes wrote:Thanks guys. I have an emergency fund and I'm contributing 15% of my income to my Roth IRA and 401k.

My next big purchase I want to be saving for is a house, which won't be for at least 7-10 years. I'm leaning towards a balanced mix of diversified stock and bond index funds.
Here is how I suggest you think about it:

Use a 'bucket of money' approach when saving for a specific near term goal, like a house down payment.

Think of this the 'bucket' as having an AA that is different from your retirement AA. Think of using a liability matching approach for this bucket.
You would want to use investment vehicles for this bucket that are low in risk (ie. mostly short and medium term fixed income).
Because of that, your savings rate will be more important than your ROI.

If you reach for the stars (high equity allocation) with a bucket of money that you hope to spend in 5 years, you may find that the bucket has a hole in it.
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Topic Author
yikesbikes
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Re: Mid-Term investing?

Post by yikesbikes »

I'll look into it. Thanks CallJim!
BackToSchoolDad
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Re: Mid-Term investing?

Post by BackToSchoolDad »

Sorry for the necro bump, but my question didn't seem worth a new thread.

I'm in a similar position as the OP and wanted some thoughts on how I'm planning to approach this. We have a 6 month EF in a high yield savings account. Currently maxing out my IRA and putting money into my 457b/pension at work. With my pension match I'm contributing about 35% of my earnings to retirement so I feel like I've got that covered. I have excess savings room leftover each month and I'm considering allocating it to a mid term taxable account. I'm good with budgeting and the concept of bucketing my money a bit appeals to me.

My needs for this money would be things with an undetermined timeline: new car, roof, appliances, home upgrades, etc., so maybe a 5-15 year timeline. I'm also thinking it will serve as a second tier EF if needed. My goal would be to keep up with inflation and some growth. I'm comfortable with a 10-15% drop here, if the market tanks when it's time for a new car I can make do. My retirement accounts AA are 100% equities, so I don't currently have any other money that I would consider useable in such a scenario aside from my EF. I'm currently in the 12% bracket and will be for the foreseeable future, so long term capital gains and qualified dividends will be taxed at 0% for me.

What I was thinking I'd do is something like 75/25 short term bond fund/Vanguard Total World Stock ETF. This would provide some growth and still offer a significant amount of downside protection. Is this a reasonable plan for my situation and goals?
pharmermummles
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Re: Mid-Term investing?

Post by pharmermummles »

I was actually looking for advice on the same topic, so your necro bump was a nice surprise! One of the conclusions I have come to is that a lot might depend on how flexible the need for the money is. My intermediate term goals include a down payment on our forever home in 7-10 years. One of the factors I'm considering is how open I would be to delaying a home purchase in 7 years if stocks are down at the time, and if I would be comfortable delaying another few years if necessary. I'm contemplating a roughly 50/50 stock/treasuries allocation (which I wouldn't really include in my asset allocation overall, any more than I would my current home equity). If I were more inflexible, I would probably stick to CDs or all treasuries.
gblack
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Re: Mid-Term investing?

Post by gblack »

With an indefinite mid term time horizon, I split around 50-50 between dividend stocks and bond funds. When I know a precise date when I'll spend the money, or actively being shopping for house, car, etc, I move to cash or CD. If I were in the situation today, I might do 33 (stock) - 33 (bond) - 33 (cd or equivalent). But that's just me.
BackToSchoolDad
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Re: Mid-Term investing?

Post by BackToSchoolDad »

pharmermummles wrote: Thu Apr 30, 2020 9:16 am I was actually looking for advice on the same topic, so your necro bump was a nice surprise! One of the conclusions I have come to is that a lot might depend on how flexible the need for the money is. My intermediate term goals include a down payment on our forever home in 7-10 years. One of the factors I'm considering is how open I would be to delaying a home purchase in 7 years if stocks are down at the time, and if I would be comfortable delaying another few years if necessary. I'm contemplating a roughly 50/50 stock/treasuries allocation (which I wouldn't really include in my asset allocation overall, any more than I would my current home equity). If I were more inflexible, I would probably stick to CDs or all treasuries.
One option I was considering was putting all the money initially into the bonds, and then once that bond amount reaches a set amount, (another 6 months of expenses probably) put all the remaining contributions into the stock portion of the account. That way, the chunk of money that I can reasonably expect to need will be secure and anything extra will grow. If there's a severe downturn, I'll still have the bond funds available.
Coltrane75
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Re: Mid-Term investing?

Post by Coltrane75 »

BackToSchoolDad wrote: Thu Apr 30, 2020 9:05 am Sorry for the necro bump, but my question didn't seem worth a new thread.
Vanguard Lifestyle Income Fund might be one you like, its 20/80 stocks/bonds. It's just one fund to manage.
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anon_investor
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Re: Mid-Term investing?

Post by anon_investor »

gblack wrote: Thu Apr 30, 2020 9:38 am With an indefinite mid term time horizon, I split around 50-50 between dividend stocks and bond funds. When I know a precise date when I'll spend the money, or actively being shopping for house, car, etc, I move to cash or CD. If I were in the situation today, I might do 33 (stock) - 33 (bond) - 33 (cd or equivalent). But that's just me.
Are you just buying total bond for your bond fund?

I am considering doing 50/50 VTSAX (total U.S. stock market index)/VLGSAX (long term U.S. treasury index) with the proceeds from an expiring CD.
BackToSchoolDad
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Re: Mid-Term investing?

Post by BackToSchoolDad »

Coltrane75 wrote: Thu Apr 30, 2020 10:03 am
BackToSchoolDad wrote: Thu Apr 30, 2020 9:05 am Sorry for the necro bump, but my question didn't seem worth a new thread.
Vanguard Lifestyle Income Fund might be one you like, its 20/80 stocks/bonds. It's just one fund to manage.
I considered a balanced fund, but I like the idea of being able to add/withdraw from the stock or bond portion separately.

Is the Vanguard Lifestyle Income Fund good in a taxable account?
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anon_investor
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Re: Mid-Term investing?

Post by anon_investor »

BackToSchoolDad wrote: Thu Apr 30, 2020 10:18 am
Coltrane75 wrote: Thu Apr 30, 2020 10:03 am
BackToSchoolDad wrote: Thu Apr 30, 2020 9:05 am Sorry for the necro bump, but my question didn't seem worth a new thread.
Vanguard Lifestyle Income Fund might be one you like, its 20/80 stocks/bonds. It's just one fund to manage.
I considered a balanced fund, but I like the idea of being able to add/withdraw from the stock or bond portion separately.

Is the Vanguard Lifestyle Income Fund good in a taxable account?
It is not great, like a balanced fund you cannot draw from the stock or bond portion separately.

Also, it kicks off annual st/lg capital gains distribution that creates an unnecessary tax drag.

It would be more tax efficient to hold separate stock and bond funds.

That being said, there is some benefit of a simple set it and forget it investment, where you just have to worry about putting in more money.

The question is whether the convenience outweighs the tax inefficiency.
BackToSchoolDad
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Re: Mid-Term investing?

Post by BackToSchoolDad »

anon_investor wrote: Thu Apr 30, 2020 10:25 am The question is whether the convenience outweighs the tax inefficiency.
For me, I'll take tax efficiency over convenience, so I'm gonna go with separate funds.
gblack
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Re: Mid-Term investing?

Post by gblack »

anon_investor wrote: Thu Apr 30, 2020 10:09 am
gblack wrote: Thu Apr 30, 2020 9:38 am With an indefinite mid term time horizon, I split around 50-50 between dividend stocks and bond funds. When I know a precise date when I'll spend the money, or actively being shopping for house, car, etc, I move to cash or CD. If I were in the situation today, I might do 33 (stock) - 33 (bond) - 33 (cd or equivalent). But that's just me.
Are you just buying total bond for your bond fund?

I am considering doing 50/50 VTSAX (total U.S. stock market index)/VLGSAX (long term U.S. treasury index) with the proceeds from an expiring CD.
I use total bond fund now - Schwab SCHZ or equivalent. In the past, I've had Dodge and Cox Bond Fund (I think they call it Income Fund) or short term bond fund SCHO at Schwab. Maybe not the right thing to say here, but I don't think it makes much of a difference.
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