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Cash on hand for two year horizon - suggested placement

Posted: Sun Sep 13, 2020 3:17 pm
by LyrehcLover
Hi Everyone. I have about $15,000 in an FDIC insured savings account which I plan to use to purchase a house within the next two years. I will be continuing to save income for a down payment on the home and adding it to this sum. I was thinking about storing the money in a TIPS fund like VIPSX or VTIP. I noticed that VIPSX has had years with negative returns, leading me to believe it is possible to lose money in TIPS (in 2018, the total return on VIPSX was -1.49% per Vanguard's yearly investment returns table). VIPSX also has an SEC yield of -1.28%, which I believe is the "real" rate for the fund not accounting for adjustments due to inflation within the last 30 days. For such a short time horizon, do you recommend I move this money into some sort of inflation protected security? Savings accounts and CD rates are extremely low based on my investigations, around 0.02%. Thank you for the suggestions!

Re: Cash on hand for two year horizon - suggested placement

Posted: Sun Sep 13, 2020 3:32 pm
by Doctor Rhythm
If it changes your thinking, high-yield savings accounts at some online banks are offering APYs of 0.6-0.8%, though no guarantee how long that will last. 1-2 year CDs are still around 1%.

Re: Cash on hand for two year horizon - suggested placement

Posted: Sun Sep 13, 2020 3:33 pm
by sunshinenc
Just keep it in the CD - with 15K even you get guaranteed 10% return ( which is unlikely these days) it will be $1500, that will not change your situation too much when you purchase your house in two years. Keeping the money safe will be the 1st thing in the mind, just my 2 cents.

Re: Cash on hand for two year horizon - suggested placement

Posted: Sun Sep 13, 2020 3:59 pm
by Actin
Two years is a really long time and life changes very fast. I would invest it into a taxable account with that time frame.

Re: Cash on hand for two year horizon - suggested placement

Posted: Sun Sep 13, 2020 4:14 pm
by sycamore
VIPSX holds, on average, TIPS of intermediate duration - around 7.9 years.

VTIP/VTAPX hold shorter-term TIPs, around 2.8 years.

Ideally you want to match your bond's duration to your horizon. In this case neither fund is a perfect fit, though VTIP is a bit closer. Assuming you don't want to risk losing any nominal principal, I'd go with sunshinenc's or Doctor Rhythm's suggestions of sticking with CDs or savings account (maybe a high-yield one). Another option is to seek out a sign-up bonus for moving the money to a new bank; no great amounts awaiting you there but it might make it a competitive yield compared to a HYSA or CD.

Re: Cash on hand for two year horizon - suggested placement

Posted: Sun Sep 13, 2020 4:23 pm
by hudson
LyrehcLover wrote: Sun Sep 13, 2020 3:17 pm For such a short time horizon, do you recommend I move this money into some sort of inflation protected security? Savings accounts and CD rates are extremely low based on my investigations, around 0.02%. Thank you for the suggestions!
LyrehcLover,

I would skip TIPS. You could lose money. I speculate that the loss would not be that much, so it wouldn't be catastrophic. If we did have unexpected inflation, you could gain.
For future house purchase money, I would use the best available NCUA/FDIC....US Gov't guaranteed accounts. That's the so called correct answer for your situation. Direct purchase of treasuries would also work. You would need to match durations.

Re: Cash on hand for two year horizon - suggested placement

Posted: Sun Sep 13, 2020 5:29 pm
by khart23
Your best bet is either a high yield savings account/keep your liquidity or use something like a cd/cds that you can ladder and/or have set to mature around when you want to buy. The only other thing (and disclosure: I haven’t set these for just a 2 year period) would be something like the ibond ETFs from blackrock: https://www.ishares.com/us/resources/tools/ibonds

You can play with the tool and see how things look with govt, municipal or corporate bonds. They have high yield as well but not sure if I would dabble there right now. Good luck!