Where to put short- to mid-term savings

kjm · Post by **kjm** » Sun Dec 13, 2009 2:00 pm

I'm saving for a down payment on a house, which I hope to purchase 2 to 3 years from now. Where should I stash the money? Keep in mind this will be in a taxable account. I'm thinking of the Pimco 1-5 Year U.S. TIPS Index Fund (STPZ). The reason why I'm leaning towards TIPS is because I feel that inflation is a very real threat. What do you guys think?

livesoft · Post by **livesoft** » Sun Dec 13, 2009 2:07 pm

All bond funds will go down in value if interest rates go up.
That is: inflation is not exactly the same thing as interest rates going up.
That is: TIPS do NOT protect you from rising interest rates and they can lose money.

I myself would just save for a house down payment in 2 to 3 years in a balanced fund or a large cap value fund. If you are DCA'ing into the investment, what is the worst that can happen?

chaz · Post by **chaz** » Sun Dec 13, 2009 2:26 pm

Bank CDs are safe short term things.

baw703916 · Post by **baw703916** » Sun Dec 13, 2009 2:28 pm

I would recommend the Vanguard Limited-Term Tax Exempt Bond Fund. It's suitable for a taxable account and the average maturity of its bonds is almost exactly the same as your time frame for the house purchase.

Brad

happymob · Post by **happymob** » Sun Dec 13, 2009 3:15 pm

I would max out IBonds before buying TIPS, in the scenario you describe.

Buying a 5-year TIP creates a risk that real interest rates spike before you want to buy, creating a situation where you are forced to sell at a loss. Granted, with only 2 to 3 years left on your 5-year TIPS, your loss would be small, but it is a real risk.

IBonds avoid the interest rate risk completely, give you essentially the same real rate as a 5-year TIP right now (with a potentially huge added bonus that the growth is tax-deferred), have greater deflation protection, and you avoid the interest rate risk. The 3.36% yield for the next 6 months (and 0.3% real yield past that) is an added bonus. Note that you will have to give up 3 months of interest when/if you redeem them early.

A reasonable alternative is short-term safe investments, such as 6-month CDs. If inflation really does pop up, short-term rates should spike as well (with a bit of lag), protecting you from the worst of it.

Buying TIPS that mature in 2 years on the secondary market is also a possibility. You avoid the interest rate risk (since you are holding to maturity) and gain inflation protection. You will not have deflation protection, however, and I suspect (without looking) that a TIP maturing in 2 years is pretty unattractive compared to a 1-year CD right now. Your STPZ idea accomplishes basically the same thing.

KyleAAA · Post by **KyleAAA** » Sun Dec 13, 2009 3:23 pm

CDs or maybe the ltd-term tax exempt fund at Vanguard. I'd keep the duration under 3 years for sure.

gouldnm · Post by **gouldnm** » Sun Dec 13, 2009 5:16 pm

I use a combination of limited term and intermediate term tax-exempt bond funds.

sport · Post by **sport** » Sun Dec 13, 2009 5:27 pm

If you are considering a short term CD, also take a look at a longer term CD, such as 5 or 7 years, as long as you can withdraw early with a penalty. It may be that the longer term CD will yield more short term, even with the penalty. Just make sure that early withdrawals are allowed, and the CD is FDIC or NCUA insured.

Jeff

stevewolfe · Post by **stevewolfe** » Sun Dec 13, 2009 5:29 pm

I agree with the poster above on I-bonds. i'd go that route or FDIC insured account (CD or high yield online account). I definitely would not put a penny in the stock market with that short a time horizon.

richard · Post by **richard** » Sun Dec 13, 2009 5:49 pm

livesoft wrote:I myself would just save for a house down payment in 2 to 3 years in a balanced fund or a large cap value fund. If you are DCA'ing into the investment, what is the worst that can happen?

Rapidly rising prices followed by a massive drop shortly before you need the money

lmpmd · Post by **lmpmd** » Sun Dec 13, 2009 6:00 pm

I'd think about VWSTX for this money, but I'm far from an expert. You can do a search in this forum on this fund (as an alternative to a money market fund). I've posted some questions regarding it. See:
http://moneycentral.msn.com/detail/stoc ... mbol=vwstx

comptalk · Post by **comptalk** » Mon Dec 14, 2009 2:32 am

Really depends what state you are in. I know some great tax free NY/NJ/CA munis paying close to 5.8% tax free.

MYN - NY
MYC - CA
MTF - Federal Tax free

Anyway, they are all BLACKROCK MUNIYIELD's. Nuveen has some great ones too.

Matty G · Post by **Matty G** » Mon Dec 14, 2009 3:07 am

I'd probably put most of it in the Vanguard Total Bond Market fund (VBMFX). But it is possible for bond funds to go down, so I might hedge that bet a little bit.

What I would definitely not do is put money I need for a house in the short term of 2-3 years.

lmpmd · Post by **lmpmd** » Mon Dec 14, 2009 7:18 am

Matty G wrote:I'd probably put most of it in the Vanguard Total Bond Market fund (VBMFX). But it is possible for bond funds to go down, so I might hedge that bet a little bit.

What I would definitely not do is put money I need for a house in the short term of 2-3 years.

The OP is using this money to buy a house in 2 years. So it's not clear to me what your proposing. Are you advising he use the VBMFX for this? The bond maturities in the VWSTX are shorter in term, there's the tax exempt status, and there seems less chance of fluctutation. No?

Bogleheads.org

Where to put short- to mid-term savings

Where to put short- to mid-term savings

?VWSTX