I'm a fairly new investor as I finished digging my way out of debt at the end of 2017. I started 2018 off by maxing out all of the tax-advantaged accounts I have access to. Additionally, I have some money in an online savings account (earning 2.2%) which includes a 6-month emergency fund as well as money to replace my old car when it dies.
Within the next several years, I'd like to buy a duplex as my first house hack where I'll live in half and rent out the other half. I'm saving for a down payment and have started saving some additional money in an online savings account; however, I'm so tempted to put this in the market. Typically, the advice I've been given is if I'm saving for something which will occur in less than 5 years, park it in a money market account. I know if I invest it in the market I risk losing some in a correction and not having enough time to let it bounce back. I just hate missing out on compound interest, though. For now the solution, in my mind, seems to be a combo of both - invest some in the market and put some in a money market account.
What do you think? I'm all ears to your advice. Should I do the safe thing and just keep saving in an online savings account? Invest in the market? Or a combo of both?
The issue with investing money you'll need in the short term isn't just that you might not have enough after a drawdown. It's that the market historically overshoots its mark heading down. the S&P roughly doubled from its bottom in 2009 in just over a year. Pulling money out of the market near a bottom just destroys wealth.
If you're redeploying the cash into real estate, at least you're trading one undervalued asset for another, but the recovery in home prices wasn't anything like the recovery in stock prices.
So the way I'd think about is that after a reasonably large decline you should consider your invested assets frozen.
Now, you could always delay the purchase of the house. And if the market starts declining 4 years out you could always switch savings to a money market account and just be more aggressive. So having some of your savings in the market with a plan to scale it back over time and wiggle room in your savings rate it could be a fine strategy. But it depends on how much risk in not buying this house on your schedule you're comfortable with, how your psyche is likely to hold up against large losses, how the rest of your wealth is distributed, how active you want to be shifting allocations over time, etc.
I really appreciate your thoughtful reply. I have a lot to consider.
Sounds like a good strategy. Five years is still pretty far away, and I agree, you should do both.
This post is literally for you and talks about how to invest your down payment money based on your time frame:
https://www.financialsamurai.com/how-to-invest-your-down-payment-if-youre-planning-to-buy-a-house/
I so appreciate the vote of confidence, Sam. Additionally, thank you for sharing your post specific to my query. I'm going to delve in...