What questions to ask when constructing an individual account. (Non-tax advantaged)

jlev

My fiance and I continue our slow trot towards tying the knot. (Relatedly, I continue my slow trot towards finishing my Ph.D. thesis.) She runs our monthly budgets, while I run the investments and last week she suggested deploying some more of her savings into an individual account (Roth IRA and 457 deposits have been maxed), and asked for my recommendation of where and how to invest. The investment time span is likely two-five years after which time it would likely be used as part of a down-payment on a house. A year ago we had this discussion and split the money between the Schwab (her account holder) US and International index funds. Seemed cost effective, tax efficient and at the time we were not planning directly for where/when the money would be used. Now that there is a better defined time-horizon I'm less sure of how to proceed and figured I'd ask for your collective wisdom.

I had a few different thoughts:
1. Just DCA into the index funds over the course of the coming year, the reasons they are good have not changed, and if there is a significant loss when we would want to take the money out there is at least tax-loss harvesting
2. Try using a fund that balances growth with downside protection, a balanced fund or absolute value fund (PRWCX - before it closes, RWGFX or SEEDX as potential examples)
3. Look at a fund like RSIVX or other bond fund for assumed more stable returns despite likely inefficient tax-effects.

Long Term investing strikes me as less complicated, because in the long run, the market always recovers.
Tax-effects and shorter term thinking are new to me and I'm having trouble thinking about which questions to ask, and how important each consideration is.
I don't feel particularly worried that the market is going to crash tomorrow, but if it doesn't strongly correct between now and 2018 I'll be rather pleasantly surprised. Your collective advice on how to approach this is much appreciated.

Mark

IF it's money that will absolutely be needed then RSIVX or similar is the way I'd go.

If you put the funds in on Monday would you be able to handle a 10-20% drop on Tuesday? I'm not saying it will happen but it could. Also index equity funds tend to take the bigger bashing in a market fallout.

I'm not worried about the market either, I only follow the price action. If you can't do that, then better to be safe. You never know when the institutional investors will pull the plug.

jlev

I wouldn't describe it as absolutely needed. But also wouldn't describe it as superfluous. If we lost it all it would not affect our daily lifestyle. It might affect where we choose to live or cause us to rent another year etc.

rjb112

"The investment time span is likely two-five years after which time it would likely be used as part of a down-payment on a house".........."I had a few different thoughts:
1. Just DCA into the index funds over the course of the coming year"

A certified financial planner or other financial professional managing your account would likely say that your time frame is too short to be in equities. Certainly the two year time frame is way too short to be in equities. The five year time frame is on the edge/borderline.

Historically, over a five year time frame, there is roughly a 25% chance that an equity investment will be down. So if you invest $5,000 in an equity index fund tomorrow, there is about a 25% chance that the market value of that account will be less than $5,000 five years from tomorrow. That is just statistically speaking, over a long historical period. As to what the next five years will be like, that is unknown.

So certainly your ideas about an income fund or conservative balanced fund are very worthy considerations. You mentioned PRWCX; another option is FPACX, as well as many others. Maybe even a Vanguard Wellesley or Wellington?

For two year money that you need as a down payment for a house, you are better off in an FDIC insured online only bank, unless you don't care that much about getting a house! Check out bankrate.com for no minimum savings accounts that pay up to 0.95% interest, or certificate of deposits for a better interest rate. Names like Ally, GE Capital Bank, Barclays Bank, American Express Bank, Sallie Mae......

You know what I mean.......you choose to go the equities route......the market goes down, so all of a sudden you don't get a house? What's up with that?

jlev

It would happen later, but yes. This is why I ask your collective advice. It seemed too aggressive, but I was not quite sure what a realistic level of aggression was.

rjb112

jlev said:

It would happen later, but yes. This is why I ask your collective advice. It seemed too aggressive, but I was not quite sure what a realistic level of aggression was.

The "realistic level of aggression", as you put it, is entirely dependent on how you feel about the matter. There are some on MFO who would go 100% equities with this money, others who might go 100% fixed income, and everything in between. It also depends on where along the time frame of 2-5 years this really ends up to be. Very few individuals who are knowledgeable about stock market history would feel comfortable putting two year money into equities, because it is very much a hit or miss proposition. Especially when you are talking about a down payment for a house. If you are talking 5 year money, more people would be willing to play the odds on that 75%/25% statistical proposition discussed above. Where do you stand on the risk taking continuum? Are you on one end, a born risk taker by nature? Are you on the other end, very conservative by nature [with respect to risks]? You mentioned, "it would happen later"....which I take to mean you would get into a house either way, but later. So how important is it to you to do it sooner, rather than later? If super important to do it sooner, that should guide the decision towards a conservative investment posture. If it's not important, that might skew the decision in another direction. Consider the need to take risk and the desire to take risk. And consider how it would affect [or not affect] your life if you chose a certain investment posture and had a certain result, e.g., you go 100% equities and equities experience a bear market; you go 100% equities and stocks do very well, as well as the other scenarios. FWIW.

heezsafe

What do you imagine the rate on your mortgage loan will be if you take it out 2 yrs from now, versus if you take it out 5 yrs from now? What will your monthly payments be to service that debt? Not knowing your financial situation, but assuming your credit history is O.K., the down payment you are able to make on whatever loan is available to you, in 2 yrs vs. 5 yrs, could be very important to the lifestyle you are able to have after you move into that house. Might be best not too get to cute with this investment egg. As noted by rjb112, in so many words, there are things you might do for the 5 yr target that wouldn't be considered all that aggressive, but if you did them with a 2 yr target they would be much more so.
Instead of either/or, why not consider a little into both broad suggestions mentioned above? The Future can be wickedly fickle.

scott

"The investment time span is likely two-five years after which time it would likely be used as part of a down-payment on a house."

As for the home purchase process - prepare for stress - I think as easy as it was several years ago, it swung in the opposite direction. That's not saying that it is not worth doing, not at all. Rents just keep soaring and interest rates are still low. If you do it, I'd say go to a local or regional bank versus one of the majors.

"What do you imagine the rate on your mortgage loan will be if you take it out 2 yrs from now, versus if you take it out 5 yrs from now? "

I'll ask this question, as well.

Personally, I say go for down payment if you find a place that works for you and that you feel is a value.

mrdarcey

@jlev Congrats on the engagement and thesis finishing. Both are long roads.

Assuming a longer rather than shorter time frame, maybe look at any of BERIX, GRSPX, or AOK. I was under the impresion BERIX had never lost money over any rolling 5 yr period, and AOK is available w/o commission @ TDA.