Push some of my house down payment fund in the market?

[Met Income]

I'm a 25 year old with an above average income and a very stable job (soon to be a CPA).

I contribute 15% of my salary to the 401K and have contributed the full amount to my IRA every year since I've been working (since 2005). Right now, these assets are worth about $25,000.

Whatever has been left over has gone into a money market account to save for a house. It's up to $30,000 right now. Unless the northern NJ RE market takes a huge hit, I believe that I will need about $50,000 to comfortably put 20% down with closing costs and have some cash left over for new house appliances and furniture.

I do not have a strong desire to buy a house. I enjoy my freedom as a renter and am not sure I want to be in this area long-term. I could possibly leave my job next year as well. I would like to have a house within 10 years, though.

I think the current market is a nice opportunity for me to make some long-term gains. I am thinking about putting a significant amount of my cash into tax efficient index funds with a long-term horizon.

I am not expecting this to pay off within 5 or even 10 years. I hope within 20 years that it will. I believe I'll retire between 50-60 years so if it works out in 25-35 years, I won't be disappointed.

I also should mention that I believe my risk tolerance is as high as I thought it would be. This downturn has not affected me one iota. Granted, it has not been that long. But I am young enough to view this as an opportunity. If I was 40+, I would feel differently and am sympathetic towards those close to retirement.

I realize that this will push off me having a house for several years. Possibly even a decade. However, I think it will be beneficial to me long-term. What do you think? Thanks in advance!

[Laura]

Met Income,

By making the move out of cash into the market you effectively limit your options. If you change jobs or if you move you may not be able to buy a home if you want to unless the market does really well. This doesn't mean your thinking is wrong, just that you must be comfortable with the potential downside consequences. The market has done almost nothing for the last 10+ years and none of us can say what it will do in the next 10+ years. Just remember the general rule of thumb for investing timeline is:

For money needed in
1-5 years stay in cash
5-10 years use bonds
10+ years use equities

If you want to take a half way approach stick with bonds. Alternatively you might go with a tax exempt fund right now. Returns are pretty good.

Laura

[Harold]

I max out my 401K (15%)

Sorry, I was distracted from your main point by what I quoted. Is this what most people mean by "max out"? (That is, unless your income happens to be exactly 103,333.33, making 15% the max.) I'm not being critical, but I am curious.

So my post isn't totally a waste. I understand your thinking, but think that the decision's more about whether you want a house or any other major expense now or later (or ever). To me, the investing decision is secondary to that. (Your post reads as if you're leaning in the direction of later, but haven't solidly decided, and are letting investing considerations direct that decision.)

[DaveTH]

Is this what most people mean by "max out"? (That is, unless your income happens to be exactly 103,333.33, making 15% the max.) I'm not being critical, but I am curious.

To me, "maxing out" ones 401K means contributing the full allowable annual amount (currently $15,500 for people under 50).

[YDNAL]

Harold, Dave,

Easy fellows.... must likely he meant $15K.

Regards,
Landy

[Met Income]

I max out my 401K (15%)

Sorry, I was distracted from your main point by what I quoted. Is this what most people mean by "max out"? (That is, unless your income happens to be exactly 103,333.33, making 15% the max.) I'm not being critical, but I am curious.

So my post isn't totally a waste. I understand your thinking, but think that the decision's more about whether you want a house or any other major expense now or later (or ever). To me, the investing decision is secondary to that. (Your post reads as if you're leaning in the direction of later, but haven't solidly decided, and are letting investing considerations direct that decision.)

Sorry, I max out in that I contribute 15% of my salary to 401K. I should have been been more specific. The max is company specific, I the max I can contribute is 15% of my salary. (About ~8500-9500 year). You're right, and I updated my post.

[YDNAL]

Whatever has been left over has gone into a money market account to save for a house. It's up to $30,000 right now. Unless the northern NJ RE market takes a huge hit, I believe that I will need about $50,000 to comfortably put 20% down with closing costs and have some cash left over for new house appliances and furniture.

I do not have a strong desire to buy a house. I enjoy my freedom as a renter and am not sure I want to be in this area long-term. I could possibly leave my job next year as well. I would like to have a house within 10 years, though.

I think the current market is a nice opportunity for me to make some long-term gains. I am thinking about putting a significant amount of my cash into tax efficient index funds with a long-term horizon.

Met,

Consider carrying costs of ownership vs. rent. Add your interest cost (net of tax benefit), RE taxes, insurance, regular maintenance (yard, etc.), corrective maintenance (broken A/C, fridge, etc.) and project this out against the cost of rent. As you and I previously discussed, this can be terribly out-of-whack in some locales, but in general, it works out with proper investment capital (downpayment).

Market returns are not guaranteed and can be really sucky. This is before the October blues for VTSMX.
Total Stock Mkt Idx Inv (returns after taxes on distributions)
1 Year –21.43%
3 Year 0.22%
5 Year 5.62%
10 Year 3.53%

You may be saying to yourself, wow in 2000-2002 the market dropped X% and in 2003-2007 it increased Y%. We are just entering a Y%-like period... but you must take it through October - when the 5-yr and 10-yr returns are wiped out.

edit: to correct spelling and correct link.

Regards,
Landy

[Easy Rhino]

Money needed in the short term (<5 yrs) is still money needed in the short term, and I wouldnt' recommend taking on more risk for it.

I do not have a strong desire to buy a house.

Interesting disconnect of saving for a house while not wanting one. The answer to that question will determine if the money is "needed" in the short term.

[Met Income]

Money needed in the short term (<5 yrs) is still money needed in the short term, and I wouldnt' recommend taking on more risk for it.

I do not have a strong desire to buy a house.

Interesting disconnect of saving for a house while not wanting one. The answer to that question will determine if the money is "needed" in the short term.

Well, my money market fund is my emergency cash/down payment fund. I couldn't use all of it for a down payment, since I'd still want to keep some extra cash on hand.

I'd like a house at some point, but I believe I'd be fine not having one for 5 years. Possibly longer. I'd rather have a higher net worth in 20 years without a house than have a lower net worth with a house.

[Sammy_M]

How about splitting the difference? Put half your cash in the market and delay buying a home for however long it takes to build your cash fund back up.

Are you contributing to an IRA as well?

[Met Income]

How about splitting the difference? Put half your cash in the market and delay buying a home for however long it takes to build your cash fund back up.

Are you contributing to an IRA as well?

Sounds reasonable. I wouldn't put all of it in... and might go as low as $5,000. I am contributing the max in my IRA every year since 2005.

The kick in the balls would be if stocks do not appreciate in 10 years and we experience a cheap RE market while I find "the one." But ya gotta take your chances.

[gassert]

Youre young, you dont have anything to lose, you dont "need" the house and yes, this is a great market to buy - even if youre wrong by 10 or 20%. Considering you have realized your risk tolerance is high (why wouldnt it be for a young person during this crash) I see no reason why plowing into the market is bad. You simply need to be okay with being wrong - ie, in 5 or 10 years seeing a flat/down market with cash componded return of 10 or 20% net.

In my case instead of putting all cash reserves into the market I've used options and leveraged up with 25% of cash - that way if the bet is wrong its only a 25% loss. And the time horizon is shorter so recovery is less certain, but i dont think it's an issue for the right risk tolerance.

[MDOmnis]

Sounds like you and I are in similar circumstances as far as age, amount saved, future plans, job, and most importantly, we are both Mets fans. I'm a little sad looking at some of the pictures of Shea being demolished.

Here's what I've chosen to do. I'm simply jacking up my contributions to my 401k to the point where I'm contributing around 24% of my salary to the combination of a Roth and the 401k. This has cut into the amount by which I'm increasing my cash savings each month. Currently my total cash is between 50 and 55k and I am comfortable with that as my emergency fund, car fund (I'm going to need a new used one here in the next year or so), house downpayment fund. I've thought about taking 20k and putting it into VTSMX or something, but I feel like I'd be trying to time the market and I'd be limiting my flexibility. So I've chosen to leave my cash savings intact and just increase investing to the point where I am not increasing cash by that much.

Hope that makes sense.

[Met Income]

Sounds like you and I are in similar circumstances as far as age, amount saved, future plans, job, and most importantly, we are both Mets fans. I'm a little sad looking at some of the pictures of Shea being demolished.

Here's what I've chosen to do. I'm simply jacking up my contributions to my 401k to the point where I'm contributing around 24% of my salary to the combination of a Roth and the 401k. This has cut into the amount by which I'm increasing my cash savings each month. Currently my total cash is between 50 and 55k and I am comfortable with that as my emergency fund, car fund (I'm going to need a new used one here in the next year or so), house downpayment fund. I've thought about taking 20k and putting it into VTSMX or something, but I feel like I'd be trying to time the market and I'd be limiting my flexibility. So I've chosen to leave my cash savings intact and just increase investing to the point where I am not increasing cash by that much.

Hope that makes sense.

Makes sense. My 401K and IRA are about 23-25% of my salary. I can't put more into tax-advantage accounts than I already am. Any additional cash goes into the money market.

Maybe I could just take new additional savings and put it into a tax-managed Vanguard fund instead of putting it into the money market. And possibly move a small amount of the money market ($5,000) into stocks.

I think I've come to the conclusion that I shouldn't do more than that since contributing 25% of my -pre-tax salary (which is all stocks) per year is a lot and I may never know what I might need the cash for (extremely attractive housing opportunity, family emergency, grad degree for an employment change).

[MDOmnis]

Okay I guess I misunderstood. You're probably making more money than me. I still have a bit of room before I reach $15,500 in my 401k, but if you're already taking full advantage of the tax advantaged accounts, then you are doing better than me!

I guess that changes things a little and it sounds like you're now thinking about putting 5k or so of your cash into the market and still keeping a substantial pile of cash on hand.

I think that is probably what I'd do in your shoes as well. I can't help but feeling this is a great buying opportunity, but having substantial cash on hand is also good for my peace of mind and allows me to not worry so much when I see my other investments tanking.

Good luck!

[Met Income]

Okay I guess I misunderstood. You're probably making more money than me. I still have a bit of room before I reach $15,500 in my 401k, but if you're already taking full advantage of the tax advantaged accounts, then you are doing better than me!

I guess that changes things a little and it sounds like you're now thinking about putting 5k or so of your cash into the market and still keeping a substantial pile of cash on hand.

I think that is probably what I'd do in your shoes as well. I can't help but feeling this is a great buying opportunity, but having substantial cash on hand is also good for my peace of mind and allows me to not worry so much when I see my other investments tanking.

Good luck!

Haha I do alright, but I'm not making 100K yet. For some reason, my employer caps my contribution rate at 15% of your salary. Not sure why, I don't like it. I won't hit the $15,500 limit, I'll be about $10,000.

$5,000 seems reasonable. I'd still have $25,000 cash on hand for emergencies -- plus the $5,000 in the market which could drop, not likely not to zero.

[DSInvestor]

Met,

When considering extra money to take advantage of current market levels, please consider asset allocation and rebalance. A large stock position certainly increases risk but doesn't necessarily guarantee higher returns.

I found some interesting historical return numbers from vanguard's fund listings that show how balanced portfolios performed relative to 100% stock portfolios in the past 10 yrs. Vanguard's fund listings have performance displays that can show cumulative returns, yearly returns and other modes.

Wellington VWELX (60% stock, 40% bond): 86.65% 10yr cumulative.
Wellesley Income VWINX (40% stock, 60% bond): 72.33% 10yr cumulative
Total Stock Market VTSMX (100% stock): 47.24% 10 yr cumulative

The Total stock fund was trailing the two balanced funds even before the big drop recently. The 10 year period covers the tech bust in 2000 so it's a good indication of how asset allocation handled the last big bust and recovery. Nobody can predict future returns, but the historical data can help us identify risk and help us allocate our investments to minimize risk.

This link will take you to a performance table of vanguard funds.
https://personal.vanguard.com/us/funds/ ... TB=perfTBI

Under the performance tab are sub tabs for Average Annual Month End, Average Annual Quarter End, Cumulative, Quarterly and Annually.

You'll see that there is lower volatility with the balanced funds. The inclusion of bonds seems to protect more on the downside but yet they still allow you to participate in the upside.

I'm not trying to sell VWELX or VWINX in particular. They're a good example of a balanced portfolio of stocks and bonds with automatic rebalancing. They happen to have more extensive history. Vanguard's Target retirement funds are other balanced funds that will automatically rebalance but they don't have a 10 yr history.

It is possible to construct your own portfolio of funds to achieve the same allocation, but if you're just starting out it may be easier to pick a balanced fund or asset allocation that matches your desired allocation and let it ride. The fund manager will automatically rebalance for you.

VWELX and VWINX are active funds but they still have very low expense ratios of 0.27% and 0.25% respectively, Target Retirement funds are aound 0.19%.

There are some additional articles on "fine tuning your asset allocation" and "risk vs reward at www.fundadvice.com. The asset allocation article is in the must read retirement section on the right side of the page.

You sound like you've got a great handle on things. I wish you the best of luck.

Best regards,
DS

[Met Income]

Met,

When considering extra money to take advantage of current market levels, please consider asset allocation and rebalance. A large stock position certainly increases risk but doesn't necessarily guarantee higher returns.

I found some interesting historical return numbers from vanguard's fund listings that show how balanced portfolios performed relative to 100% stock portfolios in the past 10 yrs. Vanguard's fund listings have performance displays that can show cumulative returns, yearly returns and other modes.

Wellington VWELX (60% stock, 40% bond): 86.65% 10yr cumulative.
Wellesley Income VWINX (40% stock, 60% bond): 72.33% 10yr cumulative
Total Stock Market VTSMX (100% stock): 47.24% 10 yr cumulative

The Total stock fund was trailing the two balanced funds even before the big drop recently. The 10 year period covers the tech bust in 2000 so it's a good indication of how asset allocation handled the last big bust and recovery. Nobody can predict future returns, but the historical data can help us identify risk and help us allocate our investments to minimize risk.

This link will take you to a performance table of vanguard funds.
https://personal.vanguard.com/us/funds/ ... TB=perfTBI

Under the performance tab are sub tabs for Average Annual Month End, Average Annual Quarter End, Cumulative, Quarterly and Annually.

You'll see that there is lower volatility with the balanced funds. The inclusion of bonds seems to protect more on the downside but yet they still allow you to participate in the upside.

I'm not trying to sell VWELX or VWINX in particular. They're a good example of a balanced portfolio of stocks and bonds with automatic rebalancing. They happen to have more extensive history. Vanguard's Target retirement funds are other balanced funds that will automatically rebalance but they don't have a 10 yr history.

It is possible to construct your own portfolio of funds to achieve the same allocation, but if you're just starting out it may be easier to pick a balanced fund or asset allocation that matches your desired allocation and let it ride. The fund manager will automatically rebalance for you.

VWELX and VWINX are active funds but they still have very low expense ratios of 0.27% and 0.25% respectively, Target Retirement funds are aound 0.19%.

There are some additional articles on "fine tuning your asset allocation" and "risk vs reward at www.fundadvice.com. The asset allocation article is in the must read retirement section on the right side of the page.

You sound like you've got a great handle on things. I wish you the best of luck.

Best regards,
DS

Duly noted. The only caveat is that this new money will be in a taxable account, so re-balancing wouldn't make a lot of sense for me. I could, however, allocate my 401K/IRA funds into some bonds. However, given the stock downturn and my long-term horizon, I will probably wait for a run-up. I bet I'll have to be patient.

[trefoil]

I'm in a similar situation: I have some taxable money separate from retirement savings. I might use it for a house deposit, car replacement, or to start a business in the 3-10 year time frame, but there's no specific deadline or amount that I'm going to need.

About half of it is in equity index funds and half is in cash. I'm prepared to accept the risk that if relative prices shift adverse I'll need to wait longer or buy less. I am not so bold as to put it all in equities. The nice thing is that though it's risky it's also very liquid and fungible, unlike a house.

Recently I've been finding the "time does not reduce risk" argument quite compelling (a good summary is here), and it fits in well with that approach. I would in theory be happy holding shares even for a house deposit in less than 12 months, as long I had enough cash to be sure of the minimum required deposit.