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Intermediate term investing, loathe to lose to inflation

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  • Intermediate term investing, loathe to lose to inflation

    I am new to investing and looking for advice on how/where to invest $100,000 for the intermediate term. I am currently living in a rented town home but want to use this money as down payment on a house in the next 2 to 5 years. This money is not needed for anything else. My finances are basically in good order: I have 5 months emergency savings, adequate insurance, save 20+% for retirement, and have no debt. Fixed income investments seem like they will just lose value to inflation. Equity investments seem too volatile for the time frame. The time frame is flexible so I could delay purchasing a home if it meant not losing to inflation but I also don't want to get stuck waiting 10 or 15 years to buy a house. Any advice on specific investments or thoughts to help clarify the strategy would be appreciated.

  • #2
    If less than 5 years then cash/cash equivalents (such as I-bonds).

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    • #3
      you could consider putting a portion in cryptocurrency stablecoins (USDC, GUSD, USDT) on a platform like blockfi, celsius, there are others, currently paying around 10%. would not consider risk free but personally over a 2-5 year time frame I would consider far less risk than equities.

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      • #4
        I would never hold cash for five years. Especially now. But Cord is also not wrong--it's a decent enough default recommendation, and you could certainly do worse. I like the I-bond location for this as well. But good luck saving for a down payment at $10k per year.

        Personally--and I know this will absolutely cause some here to stroke out--I put all of our money for this intermediate (2-5 year) term you are inquiring about in the Vanguard High-Yield Tax-Exempt Fund (VWALX). I understand the risk, and take it willingly.

        Generally, when people are speaking of the intermediate term, they for some reason frame it as though it's a complete disaster if you lose a few percent. My view--who cares. It's not going to nosedive as equities might, and in the current environment if you park it somewhere with very limited return potential, you are guaranteed to be losing money in real terms.

        Now, if you absolutely cannot lose a single cent of principal under any circumstances whatsoever, then yes, hold cash or buy I-bonds. Now, I-bonds are probably a good option regardless. But you're severely limited there, as mentioned.

        But if it's okay for you to just plump it back up a few percent with contributions should it be required, I think you can afford to expand a bit beyond cash or cash-equivalents.

        Someone mentioned Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX) in another thread, and I like that as well.

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        • #5
          Do not chase returns, whatever you choose.

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          • #6
            ​​​​​​Well, you are not alone.

            I hate this situation too, and it comes in a few flavors.

            People near retirement wanting to have a cash cushion to avoid SORR feel insane for holding cash too, but it is for security/presevation, not wealth accumulation.

            Your question:

            The classic answer is cash for less than 5 -10 years.

            How willing are you to continue renting?

            If you are flexible then you could do 1/2 in stocks and 1/2 in cash.

            If you are really flexible and have some big balls, 100% stocks.

            If stocks tank, you either use a smaller down payment or rent longer.

            It is a personal decision and depends on flexibility and risk tolerance.

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            • #7
              Why dont you just buy the house then? Its by far the best inflation (not that its guaranteed to stick around) hedge out there. Otherwise equities.

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              • #8
                If you really want to have a 100,000 down payment for a house in 2 years, hold the cash equivalent. If you want to gamble , any of the above options are available. You could even buy a Telsa now and trade up then, maybe you would get lucky. I suspect though, that you have a good income , so you could easily make up for a 20-30 thousand loss easily. Personally , it would be painful to me, to sell stocks at a 30% loss . Sometimes the best options in life are the boring ones.

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                • #9
                  You need to be clear with yourself when you want to buy. If truly not in the next one year then I would grab $10k i-bonds now and $10k in January, also do that for spouse if married, that is $20-40k making 7% annually and indexed to inflation. Of course read about them and realize you can't take that money out for 12 months after getting the I bond, but otherwise very little downside. Keep doing that each year.

                  I would probably take the rest and split it into taxable account holding a US large cap fund and the other portion in a money market or high yield savings account, with the breakdown based on whatever risk tolerance feels right to you. If I was truly ok waiting 5 years to buy, I personally would probably put it all in taxable large stocks, but you have to figure out what is right for you.

                  As mentioned, you can't predict the future. My highest yielding money in the recent past is the down payment on my home. If you want to be in a home, and all the other factors are right, consider buying sooner than later. (Not saying it's an investment as of course you need a place to live, but the equity has grown much faster there)

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                  • #10
                    My personal preference, assuming you have a reasonable cashflow, would be to max out the ibonds. Then invest the rest at an asset allocation like you normally would with long-term investments (stocks:bonds etc). Then just try to re-save the down payment. Worse come to worse, you’re a little short of a 20% down payment when you buy a house and you have to put less down with a doctors loan.

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                    • #11
                      Many thanks for the advice that helped clarify the options and personal considerations. I read about I-Bonds this morning and like the plan for $10k this year, $10k in January to protect some of the money from inflation. One question about buying I Bonds in 2022: would it be better to buy in January at the current rate or wait until after the new rate is set in May? I tend to live by the adage "a bird in hand is better than 2 in the bush" so would think January is better but wondered what others think with the way inflation has been trending.

                      I plan to move out of the area where I live in a few years when the kids are through college so truly do not want to buy a house now. I could probably rent indefinitely but want to buy a home as a real estate investment in the future. I actually do not have a high cash flow which is why equities concern me--it would take some time to recoup a significant loss in equity value from my cash flow but could probably cover a 10-20% loss with emergency cash savings if needed for the right home buying opportunity. I will read about VWALX and VWIUX as options and also consider a stock:bond asset allocation strategy for the other $80k.

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                      • #12
                        Originally posted by amheath View Post
                        One question about buying I Bonds in 2022: would it be better to buy in January at the current rate or wait until after the new rate is set in May? I tend to live by the adage "a bird in hand is better than 2 in the bush" so would think January is better but wondered what others think with the way inflation has been trending.
                        There's no way to know for sure, because we don't know what the inflation rate will be in May. Option #3 would be to buy $5k worth of I Bonds in January, and another $5k in May. But none of those three choices are bad! Just pick the one you like best and go for it.

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                        • #13
                          Originally posted by jacoavlu View Post
                          you could consider putting a portion in cryptocurrency stablecoins (USDC, GUSD, USDT) on a platform like blockfi, celsius, there are others, currently paying around 10%. would not consider risk free but personally over a 2-5 year time frame I would consider far less risk than equities.
                          This stuff just seems like an alternate universe or something. Like planet Arakis. I need to listen to that podcast you recommended. I will likely never buy but it seems like SCI Fi. Crazy that it exists. Interesting and difficult.

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                          • #14
                            Originally posted by Tangler View Post

                            This stuff just seems like an alternate universe or something. Like planet Arakis. I need to listen to that podcast you recommended. I will likely never buy but it seems like SCI Fi. Crazy that it exists. Interesting and difficult.
                            maybe the alternative universe is the one that is heavily manipulated with interest rates suppressed to the floor....

                            stablecoins are gonna be a thing. treasury just put out a whole report. i think im at about 30k interest this year

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                            • #15
                              Actionable plan would be to have a separate brokerage account designated for "wealth accumulation". Your seed money is in cash equivalents. Continue building the balance. You never indicated how long or you how you saved these funds. Keep you new savings going into the fund. NEW funds go into the market. Surely your AA would be $100k safe and it depends how the market goes and for how long you continue renting. That account will grow and benefit from market returns and leave your down payment safe. Hmmm. the thought is your allocation in this account is different than the retirement accounts. You can take market risk with the new funds but you might end up with $500k to use as you wish. I don't care when you buy the house. You will be able to afford it and still participate in market gains. Just because you have saved the down payment does not mean you should stop accumulating wealth that you can spend or "invest" in a house or whatever. You could actually do a 100% physicians loan and keep the safety net or you could pay cash for the house.
                              Mental gymnastics that avoids the FOMA and accumulates reserves that market fluctuations do not impact you. Savings above planned needs can be repurposed. Just like retirement savings, the contribution are the important piece and the allocation is based on when it is needed.

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