OT: Best Way to Invest $20K for 2 Years

Submitted by TheCool on

FIRST POST!

My wife and I recently sold our house and moved to Houston, TX. Of the profit from the sale of our house is $20,000 that we are saving for the down payment for our next home which we plan to use 2 years from now when we find our "Forever Home". What is the best form of investment to use to get the greatest return with minimal risk in such a short time period? I know very little about investing so all information is considered helpful.

Thanks in advance for taking the time to help a brother out! GO BLUE!

wolverinebutt

August 23rd, 2015 at 1:11 PM ^

Buying that first home is a wonderful thing.

Keep the 20k safe.  As others noted the Houston real estate market is soon to get hit from low oil prices if the trend continues.  You might get the perfect timing to pound on a deal early.       

LloydCarnac

August 23rd, 2015 at 1:39 PM ^

In your two-year scenario of saving, the best return for you is return of investment. In this scenario, you have already realized a profit in your house sale. Now, you need to preserve that profit in the least risky manner. In this short term, cash is king. Keep your cash. Save it for the next day.

However, do not stop saving. This means supplement your sure and existing profit by penny pinching and saving as much as you possibly can. Increase your savings through additional earned income directed to savings. The end result will be profit preservation supplemented by additional cash flow of disciplined savings.

The stock market is volatile and risky right now. I am betting that it's going lower. I took some profit before the dive, am waiting for an additional drop, and will then reinvest. However, anything I reinvest is subject to partial or great loss. It's just how it is, buffered by investment strategy focussed on long term. This is 180 degrees from your situation.

004

August 23rd, 2015 at 1:38 PM ^

Given your short timeframe and the importance of the funds, you should be conservative. A saving account is a little too safe for my taste, but a mix of tax-free municipal bonds and corporate bonds (you should be able to find a mutual fund like this) should beat inflation while limiting risk. The stock market can move too much in 2 years for your purpose... If your horizon were 10 years or more, like a college savings 529 plan for a young child, then stocks would be the way to go. And no matter what, don't by a Rolex and expect its value to go up. Only one class of tangible asset has a good track record of appreciation - and that is real estate, as you just experienced. But no class of assets is without risk, even government bonds (See: Michigan, Detroit) * I'm not a financial planning professional, so take my advice with a bucket of salt, but I do have a UM MBA and think about this type of stuff a fair amount. Good luck and congrats on the recent profit.

BlueMan80

August 23rd, 2015 at 1:48 PM ^

Are probably the two things you need. Also, when you are talking about buying a home in 2 years, who knows, you may find just the right thing now vs. later. So, to,preserve capital and keep it liquid, go with a bond fund or municipal bonds assuming you have a broker to work with. While the stock market is usually the best long option, if you needed to sell stocks now, you'd be crying about the 10% dip the market just took. You never know when the market will turn on you. While gains are good, I think you'll be very upset if you are holding less than 20k when the time comes to buy the house.

Tex_Ind_Blue

August 23rd, 2015 at 2:41 PM ^

Welcome to Houston. Housing here is more affordable than other parts of the country. But there are pockets ias well, where you can spend a million for a decent place. Anyway, one way to keep your principal intact for this two years AND not lose value due to inflation would be CDs. Bankrate.com would be a good place. You should talk to a financial advisor who works on fees and not on commission from the products s/he sales. 

Wish you luck in whichever path you choose.

DenardIsMyHomeboy

August 23rd, 2015 at 3:09 PM ^

Hey buddy,

First off congratulations on growing the nest egg, and kudos to you for trying to responsibly grow it.

Second off, how satisfied would your wife be if in two years she asks you why your 20K turned into 3K and all you had to say was "Well this guy on the internet said..." None of these people have any risk in giving you advice, and some of them are giving the worst possible.

Buy this book (or maybe the tenth edition if you want it to cover the 2008 collapse):

http://smile.amazon.com/gp/product/0393330338?psc=1&redirect=true&ref_=…

(A Random Walk Down Wall Street, Burton Malkiel if the link doesn't work)

Read it, make the wife read it, and collectively decide on a course of action. (Hint: probably Bonds unless you want to roll the dice)

I'd be happy to discuss more, if PMing is possible feel free to do that or comment here and I'll look for it.

jblaze

August 23rd, 2015 at 3:32 PM ^

Put in something risky with a stop loss at say $5k. The reason is big deal if your $22k grows to $22k in 2 years with minimal risk. It's basically inflation.

If the market tanks everybody loses and any investment you have loses. That's why I'd bet big and limit my downside to $5K or so.

TheCool

August 23rd, 2015 at 4:16 PM ^

Good advice. I should've been more precise as I'm not really into playing the stock market, I was thinking CDs, mutual funds, etc. because of the short term nature of my situation.

DenardIsMyHomeboy

August 23rd, 2015 at 4:32 PM ^

Your answer, specifically the part where you say you're not into playing the stock market yet suggest you may invest in mutual funds, suggests that you don't quite understand what a mutual fund is.

A mutual fund is a collection of investments, often a mix of stocks, bonds, and cash, put together by a manager for a (GIANT) fee. So does it make sense that you don't want to invest in stocks, yet you want to pay someone a horrific fee, often upwards of two percent, to invest your money into stocks?

You're going to be offended by this next statement, but please don't lose the wisdom in it. You are in over your head.

In order of lowest risk/return to highest: Cash, CDs, Bonds, Stocks.

Stocks are too volatile for a two year horizon, cash is too conservative (in my humble opinion). Consider CDs and Bonds/bond funds, but know that you are in over your head and educate yourself (or perhaps pay a fee-only advisor if you don't want to educate yourself, that's still a smart move). Again feel free to message me or reply or what have you.

The Peanut Master

August 23rd, 2015 at 7:51 PM ^

I'm not sure you quite understand mutual funds too if you're claiming they can charge 2%. I challenge you to find even one mutual fund that charges even 1.5%, let alone 2%. Most mutual funds sit right in the 1% range. I'm not saying that's too high or too low, but only hedge funds are going to charge you 2%.

PeteM

August 23rd, 2015 at 6:06 PM ^

This is really just directed more at the prior responses than the OP, but many of the commenters are negative on mutual funds.  I realize some have excessive fees, but isn't there a range of fees and costs from different companies?  Given that a diversified portfolio of stocks requires owning many different companies over different sectors why isn't a mutual fund a sensible way to diversify for someone who's pot of money to invest is too small to buy stocks in 10-20 companies?

Lanknows

August 23rd, 2015 at 6:30 PM ^

Similar circumstances, though I was leaving a city that I knew I would come back to in 2 years.

I took the conservative investment route and regret it, because the west coast city I live in had real estate values go up WAY more than I earned on my investments.  I should have rented out my old place, or smarter yet - bought my current house and rented that out.  I didn't want the hassle, but property management companies can manage it for your for a not unreasonable cut of your rent.

I would say -- what are you waiting for?  Buy the house now.  Others on here have speculated that the Houston market will go down, which is obviously something that would play to your advantage.   BUT - it's a speculative risk, just like putting your money in stocks in the short run. You might come out ahead, you might come out behind.  Housing in Houston could go up too - like with the S&P, that's the most likely scenario.

If you're goal is to live cheap and save money to get more downpayment, just be house poor instead.  Sure, you'll have to borrow more, but you'll also have 2 years worth paid off. And bonus -- you get to live in the house you want to, starting making the repairs you want, brainstorm, etc.  So hit up family for a loan if you can, or buy a smaller house that you'll love for 5-10 years.  More often than not it's better to be on the home ownership ladder than a rentor.

Maybe you want to wait to figure out neighborhoods, get to know the city, etc.  but if so, I would say do it in a year, not two.

There are no profitable short-term options that aren't high risk.  You want the closest thing to a sure thing you can get -- buy your house already.

 

Drbogue

August 23rd, 2015 at 7:45 PM ^

Difficult to give advice without the other side of the coin. How much will you need for your "dream home" down payment? Assuming you are looking at 20% down payment - you are in the 100k market? Better advice might be to review your credit rating now, check available mortgages, and see what rate you can get. It may make more sense to start looking for that house now. In Florida, each 100k in mortgage will cost you ~$600 a month in P&I, taxes, insurance (Texas maybe be much lower than FL) for a 30yr fixed at 4%. Plenty of folks are getting mortgages under 3.8 which seemed crazy 7-8 years ago. Even if you got a return of 10% annual on that 20k, that only bumps you to 24k in 2 years. For your 20% down payment, you go from a $100k house to a $120k house. Either purchase the home you want now or stow that cash for savings/emergency fund. But don't fool yourself into thinking that 20k is going to turn into 40k in anything under 10 years.



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bgoblue02

August 23rd, 2015 at 9:20 PM ^

Probably too late to add my 2 cents but I will anyways - either put it in a robo advisor like betterment and chose one of their more conservative strategies like emergency fund that will be in all index bond funds. They have tax loss harvesting and only charge about 25bps (basis points, or $25 on every 10,000 / year). Or buy a 5 year CD from ally bank which pays 2%. Although it has a cancellation fee of 4 months interest (last I saw) you usually come out ahead after holding it about a year with the rate they pay for the 5 year; they also have a 2 year raise your rate CD which is an interesting product (note I don't work for either company or have any incentive to recommend them but do use both)



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bgoblue02

August 23rd, 2015 at 9:22 PM ^

Also - something I saw no one post - talk to an accountant, you may have a decent tax bill on that 20k. I don't own a home but I assume it counts as long term capital gains which is a 15% rate; so set aside 3k and then decide what to do on the rest



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Wolverine2349

August 24th, 2015 at 9:08 PM ^

5-6 years ago years ago, I think just sticking it in cash and no investment at all because home prices were flat or falling and not going up and had al;ready fallen a lot from insanely inflated levels everywhere in the United States. Now unfortauinetly home prices are back to insanely infalted levels and seem to keep gouing up in most areas unfortunately. Now there is a risk if you do not investment home prices could go up more and the purchaisng power of the monmey will be reduced in terms of how muich home you can buy as home prices could be even higher in 2 years.

 

5-6 years ago, there was practivally no chance that home prices would go up in a couple of years time. Then suddnely in 2012, home prices started to  surge and got close to their peaks in late 2014 to early 2015 and may have stopped going up but do not know for sure.

 

I bought my home in 2013 and had to pay quite a bit more than I would of had I bought anywhere from mid 2009 to early 2012. But still significnatly less than peak prices I would have had to pay in SE Michigan which were around 2004-2005. Now my home is worth close to the peak and way more than I paid. I rusghed to buy a home because prices going back up bothered me so much and I never htought it would happen so soon, but as of the point of 5-6 years ago, it looked like it would take longer than it did, but if you wiated until early 2012 or even 1st quarter, to buy a house you were fine getting a bottom price deal. But if you wiated longer the bottom passed you, but in early 2013 when I bought it was a much better price still than the peakl por even Spring 20078 when the market started to crash. It was more like the late Summer early Fall 2008 prices when he market was crahsing hard, but far from bottom.

Regalro

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