What to do with *invested* down payment $ if I no longer want a house?

[jnv8kk]

I've saved about 25% of my net worth in a short term brokerage account that's 50/50 stocks/bonds. I'd originally intended to use that for a 20% down payment on an apartment. But I no longer think I want one, so long as I stay single. What should I do with the money?

For some more context:

• I'm interested in retiring early but even at my age it's a little far away, so the rest of my portfolio is much more stocks than bonds.
  
  I already have an emergency fund. I'd be open to treating this short term brokerage account as a second tier emergency fund (i.e., only touched after my HYSA is exhausted) but the sheer quantity of cash still feels a bit much.

I'm wondering how should I work to change my asset allocation? Should I sell the investments? Or just keep it and more slowly change my allocation by investing elsewhere?

It's not just that it's 25% of my net worth. Regardless of whether it was 10% or 50% of my portfolio, it's a lot of money. Maybe even more than enough for a down payment unless it's a home for a single-income household of 2, and certainly far more than 1 year of expenses (which I already have saved separately in a HYSA). That's the rationale for selling to buy more stock indices. I don't think my goals will change, and if they do, I'll get a clear signal at least 2-3 years in advance by getting hitched.

But selling the 50/50 stock/bond fund to buy a stock indices seems to go against Boglehead advice, given the churn.

I'm getting heartburn either way - too much money in a conservative fund vs. extra churn. What should I do?


Asking portfolio questions data

Emergency funds: Done

Debt: None

Tax Filing Status: Single

Tax Rate: 35% Federal, 6% State

State of Residence: VA

Age: 30

Desired Asset allocation: 85% stocks / 15% bonds; actual is 77% stocks / 23% bonds
Desired International allocation: 35% of stocks

Portfolio size: High six figures ($500k-$1M)

Current retirement assets

Taxable short term fund, adds up to 50% bonds, 50% stocks
0% cash (for investing – do not include emergency funds)
2.5% Vanguard long term bonds
2% Vanguard 2065
12.3% Vanguard Conservative life strategy
9% Vanguard Moderate life strategy

Taxable early retirement fund (adds up to ~85% stocks)
12% Vanguard 2040
11% Vanguard 2055

401k
37.5% Vanguard 2060

HSA
4% Vanguard 2055

Roth IRA at Vanguard
11% Vanguard 2055

All expense ratios under 0.1%, except for life strategy funds, which are around 0.11 and 0.12%.

Contributions

New annual Contributions
$60k 401k (negligible match)
$7k IRA/Roth IRA
$50k taxable (for retirement, not short term goals)

[jackholloway]

If it is more conservative than you want, sell it and buy what you do want. Taxes are the price of wealth, and it’s better to change course as you get new information.

I would give a different answer if it was a stock fund, but maybe not a perfect stock fund.

[retired@50]

... What should I do?

Consider posting your portfolio and questions in the Asking Portfolio Questions format that is typically used in this forum.

Welcome to the forum.

Regards,

[livesoft]

If the half is invested in a Total US Stock Market Index such as with the ETF VTI, then I don't think folks will argue that you sell those shares of VTI.

But the half in fixed income is another matter. But you hinted it was in a single 50/50 fund, so that is problematic.

Clearly, advice will depend on your response to "Asking Portfolio Questions"

[ensign_lee]

Sell the fixed income and put it into stocks *according to your set asset allocation*.

As an extreme example, if your asset allocation would ordinarily be 100% stocks, then you'd sell all of the bonds (pay any taxes in the process or harvest any losses), then buy equities with them.

If your asset allocation is only 90%, then sell enough bonds to convert, but leave 10%.

[tesuzuki2002]

I would set a target asset allocation you want to achieve.. and then start making that money money over there.. in such a way you can capture losses and or harvest gains with minimal taxes etc.

I accidentally filled up my brokerage account with more money than I ever planned on... a decent bit of tax drag etc now... but If I need financial resources.. I get get them quickly by selling some assets. So there is that benefit.

You never know where life will lead you. I've shifted my focus in life and working towards a move to Colorado... When that opportunity becomes real... money won't be an issue in buying a property there....

[Chadnudj]

1. Turn off reinvesting of dividends/interest in this account.

2. Tax-loss harvest (and/or tax-gain harvest) this account, moving towards the AA you desire as that occurs.

3. At some point in your investing life you may want/need bonds. Well, now you have them. So maybe just hold them so that you don't need to "buy them" at that later stage. That frees you up to be more aggressive in investing your new contributions until you reach your target asset allocation factoring in this 50/50 account.

4. There are plenty of worse things than having a 50/50 account like yours. I think you idea of thinking of this as an extra emergency fund is a sound one, in fact.

[Global100]

Just guessing here:

Maybe this 20% down payment fund is $100K in the 50-50 fund, that could mean about $50K worth of bonds in this fund.
If this $100K is 25% of assets (and no owned residence yet), then net worth could be $400K.
Maybe the Emergency Fund of 1 year expenses is $50K.
Stated that 2-3 years forewarning can rebuild the down payment, so I'll guess annual $50K disposable money after taxes, expenses, and 401k.
If rest of Net Worth is 100% stock, then $300K Stock + $100K Bonds/EF. Allocation would be 75-25. That's a reasonable allocation.

Careful of Fear of Missing Out.

Instead: could pour the new $50K each year (dollar cost averaging) into 100% stock that you won't touch for a decade.
In 3 years' time you could be nearing 80-20 allocation. And you'd still have this 50-50 down payment fund if a home buying opportunity arises.

If my guess is way off and your Bonds allocation is too high for your liking ("heartburn"):
Be careful of capital gains affecting NIIT, Roth limit, deductible IRA contributions or ACA subsidies, etc.
Maybe exchange part of this 50-50 fund (realizing CGs) during this tax year 2024 and other part during tax year 2025.

[jnv8kk]

Consider posting your portfolio and questions in the Asking Portfolio Questions format that is typically used in this forum.
Regards,

For sure, will do next time!

Just guessing here:

Maybe this 20% down payment fund is $100K in the 50-50 fund, that could mean about $50K worth of bonds in this fund.
If this $100K is 25% of assets (and no owned residence yet), then net worth could be $400K.
Maybe the Emergency Fund of 1 year expenses is $50K.
Stated that 2-3 years forewarning can rebuild the down payment, so I'll guess annual $50K disposable money after taxes, expenses, and 401k.
If rest of Net Worth is 100% stock, then $300K Stock + $100K Bonds/EF. Allocation would be 75-25. That's a reasonable allocation.

The exact values are different but the percentages are right on the dot. Indeed, my portfolio-wide allocation (excluding cash emergency fund but including the short term brokerage) is right around 75-25. The stock percentage will very slowly increase over time as I save with 90% stocks, or a bit more quickly if I sell the bonds and reinvest.

Careful of Fear of Missing Out.
Instead: could pour the new $50K each year (dollar cost averaging) into 100% stock that you won't touch for a decade.
In 3 years' time you could be nearing 80-20 allocation. And you'd still have this 50-50 down payment fund if a home buying opportunity arises.

Yup, I'm not proud to admit it but some of my desire to sell is a bit of FOMO. I am still thinking about whether my personality is better suited to having two tiers of emergency funds (1: cash; 2: that 50/50 stock bond fund) but I think the rationale to not sell here makes sense.

Also, to be clearer, I'm describing the short-term fund as a 50/50 stock/bond fund as a shorthand because that's what the numbers add up to. It's really a combination of a few index funds that could be simplified, but essentially it's just 50% stocks and 50% bonds.

[jnv8kk]

... What should I do?

Consider posting your portfolio and questions in the Asking Portfolio Questions format that is typically used in this forum.

Welcome to the forum.

Regards,

I've updated the post!

[ScubaHogg]

Yet another plug for tpawplanner.com

Also read the entire TPAW thread

[retired@50]

Tax Rate: 35% Federal, 6% State
...
Taxable short term fund, adds up to 50% bonds, 50% stocks
0% cash (for investing – do not include emergency funds)
2.5% Vanguard long term bonds
2% Vanguard 2065
12.3% Vanguard Conservative life strategy
9% Vanguard Moderate life strategy
...
Taxable early retirement fund (adds up to ~85% stocks)
12% Vanguard 2040
11% Vanguard 2055
...
$50k taxable (for retirement, not short term goals)

Thanks for making the updates.

Your situation cries out for tax efficiency. You're in a high bracket and you're holding funds that contain taxable bonds in your taxable account. This is creating additional annual income that you don't really need, and it's costing you additional income taxes each year.

See link: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Post back if you have additional questions.

Regards,

[jnv8kk]

Your situation cries out for tax efficiency. You're in a high bracket and you're holding funds that contain taxable bonds in your taxable account. This is creating additional annual income that you don't really need, and it's costing you additional income taxes each year.

See link: https://www.bogleheads.org/wiki/Tax-eff ... _placement

That's true. My thing is that I do want lower risk investments (bonds) in the taxable account since that's what I'm actually able to withdraw for a down payment or emergency. I wouldn't be able to do the same if they were in a 401k. I could go for US government or local government bonds for tax efficiency. The Vanguard tax managed fund seems to go for that strategy. But my initial (only mildly informed) take on that was that that'd be a bias when those specific bonds are already reflected in the total bond market funds I've invested. So unless I'm going for zero real returns from money market funds, it feels like a catch 22: I need funds that are lower risk (bonds) and I need them in a place that I can withdraw from on somewhat short notice (taxable account).

By default though, I am first maxing out my 401k (megabackdoor) and putting all excess savings in a taxable brokerage that's more tax efficient with the stocks. I'm not putting anymore into the bonds.

There is the question on whether I sell the bonds and reinvest in stocks that's the focus of this thread, but I'm initially thinking about that more through the lens of risk/return rather than tax efficiency.

[retired@50]

Your situation cries out for tax efficiency. You're in a high bracket and you're holding funds that contain taxable bonds in your taxable account. This is creating additional annual income that you don't really need, and it's costing you additional income taxes each year.

See link: https://www.bogleheads.org/wiki/Tax-eff ... _placement

That's true. My thing is that I do want lower risk investments (bonds) in the taxable account since that's what I'm actually able to withdraw for a down payment or emergency. I wouldn't be able to do the same if they were in a 401k. I could go for US government or local government bonds for tax efficiency. The Vanguard tax managed fund seems to go for that strategy. But my initial (only mildly informed) take on that was that that'd be a bias when those specific bonds are already reflected in the total bond market funds I've invested. So unless I'm going for zero real returns from money market funds, it feels like a catch 22: I need funds that are lower risk (bonds) and I need them in a place that I can withdraw from on somewhat short notice (taxable account).

By default though, I am first maxing out my 401k (megabackdoor) and putting all excess savings in a taxable brokerage that's more tax efficient with the stocks. I'm not putting anymore into the bonds.

There is the question on whether I sell the bonds and reinvest in stocks that's the focus of this thread, but I'm initially thinking about that more through the lens of risk/return rather than tax efficiency.

You should read the wiki page on placing cash needs in a tax advantaged account.
See link: https://www.bogleheads.org/wiki/Placing ... ed_account

Regards,