In January 2023 I decided I wanted to buy a house within 4 years and have been putting away roughly $3k/mo since, leaving me with $120k in treasuries. I did this in line with the conventional wisdom mentioned in the post title.
My gains were obviously awful compared to what VOO returned, but was my decision wrong?
The more I look at charts of historical S&P returns (there’s less of a chance of loss over a 4 year period than I would have assumed), the more that I think about the fact that even a 20% downturn would be able to get replenished relatively quickly (I’m now putting away $5k/mo thanks to a promotion) makes me think this was a horrible decision in hindsight, which goes against the advice that most experts who are way smarter than me seem to offer.
Is the adage of “if you need the money within 5 years don’t invest in the stock market” still relevant?
byu/Objective_Boat4216 inpersonalfinance
Posted by Objective_Boat4216
18 Comments
Yes highly relevant. Stocks can fall by 89% and take years, even decades, to fully recover. We’ve been fortunate, since the Great Recession to enjoy a long secular bull market, with only a few short duration downturns, but that isn’t always the case. Japan is instructive – At the lowest point in 2003, the Nikkei had dropped approximately 80%–82% from its 1989 peak. That’s 14 very long years of almost continuous decline.
https://www.lazyportfolioetf.com/allocation/us-stocks-rolling-returns/
Yes, it is still sound advice.
Probably now more than most times
Yes. The idea being that you want to buy within 5 years and that investing in the market would potentially prevent you from doing so. The assumption is you want a 100% chance of buying in 5 years. If actually you only want a 90% chance of being able to buy and you are fine not being able to then sure go for it.
Did you not look in your crystal ball in Jan 2023? Would you have asked this same question if market would have tanked 50%?
This recommendation of ‘5 yrs or less in safer options like HYSA or treasuries’ is to safeguard against any market downturns because we don’t know what market is going to do next. If there is a downturn we don’t know how long it would take to recover.
Thats what’s so tough about hindsight. It only looks like a bad idea now because the market went up. What if the market dropped 20% like you mentioned. Would you had the fortitude to hold back then while watching your house fund drop that much or would you have panic sold to save what was left? If you sold then you’d likely have been hesitant to put it back in when the market corrected fearing another drop and then you’d be down a chunk of your money and missing out on all that recovery.
Its all about risk mitigation. You saved that money as a down payment, not as an active investment and it gave you exactly what you wanted.
If you’re flexible (I need it in 4-6 years) – stick in the stock market and you can pull it out when you’re up and in a closer window.
if you need that money for a large expense in exactly 5 years then yeah you MIGHT get better returns in the stock market but if you put it in a savings account you will know exactly how much you’ll have at the time you need it. Wouldnt want to have been the person who needed the money at the height of the COVID crash.
“past results don’t guarantee future results” or whatever the saying is.
Yes, and your example is good evidence of this. Imagine if you’d invested the money into VOO and the returns had been the opposite. You can’t know the future.
when it is a bull market, everyone regrets not putting enough money into the stocks. What if the stock market crashed? It is all about risk.
Pretty much.
The math is a little different with bonds that actually yield anything, though.
Consider buying a 4.5% four year bond. You can actually allocate 27.8% to stocks and still be protected against a 50% market drawdown (i.e., you’d still have your $120k starting amount at the end – assuming no addition of capital).
The feature of this is that ***stocks and housing prices will likely be correlated, especially at extremes***. So if stocks fall by 50% (or more), housing is also probably coming down. Stocks could go to zero, and you’d still have 86% of your starting capital. *What do you think the housing market would look like if stocks went to zero?*
Meanwhile, if stocks continue to rally, you capture at least some of that upside.
Note that the “protection” status goes away if you purchase before 4 years. You can scale the equity exposure accordingly. But your max downside will always “only” be whatever percent you put into the market.
There are many ways to run this analysis, and this is not financial advice. Do your own research.
If the market was down since you invested, you’d be singing a different tune.
Plus you’d end up having to pay taxes when you sell your VOO since you’re buying a house.
The mistake is the assumption that you needed the
money in 5 years. You would have been fine delaying a year or two. It is a discretionary purchase.
As you have observed, You are much better off financially if you give yourself flexibility. By investing in the market and giving yourself the flexibility to buy a house when you have enough, you usually end up being able to buy a house sooner on average. But you must be willing to accept it has some chance of taking longer.
It’s sound advice but I also think people misconstrue or over apply the term need. Like if you have a vague plan (want really) to buy a home in five years invest that money until things firm up.
I have the opinion that investing is a LONG game. I kind of think of investing and saving as two separate things. In reality it’s not really how it works, but I invest for when I am no longer working and I save for things I might need before then. As of now, I only really invest in retirement accounts (I don’t make enough to max them both out so the tax advantages of retirement accounts matter more to me than the gains at this point) and so money I put in there I plan on not touching for 30 years at this point.
I’m not willing to risk money that I think I may need in even 10 years. I do a MMF that i regularly add to and even save behind my emergency fund in there because I know of a few big purchases that could be coming up in the next few years. My partner and I are planning on getting married in the next few years and I would love to be able to buy a house and pay for a wedding when that happens. To me, I’ve decided I would rather miss out on even 20% annual gains than end up needing that money for those things but having the market drop by 40% the same year.
My retirement money I don’t need for another 40 years almost (hopefully sooner but you never know) so if the market drops in 5 years, I won’t care because in my mind, that money isn’t mine anymore, not until then. I’m sure once I’m 10 years out from retirement, I will start to treat it more like I treat my wedding and house savings.
lets add some clarification;
if you CURRENTLY have a lump sum it is considerably more risky than if you are accumulating. eg you have 50k now, versus you want to save up 50k that you need 5 years from now.
if your end date is flexible it is considerably less risky, eg you need a down payment… at some point 5 years from now, but it’s okay if you get it at 3 or 7 or 10.
>, the more that I think about the fact that even a 20% downturn would be able to get replenished relatively quickly
the fact that every downturn in the last decade has had a v shaped recovery is somewhat of an anomoly and not a given. look at how long you could be underwater around 02, 08.
Obviously very dependent on your situation and brokerage, but investing and subsequently taking out a security based loan, all while avoiding paying taxes while having access to some of that $ is an option worth exploring.
I have a buddy who’s done really well for himself investing at a young age. Recently he’s been in the process of planning a house build. Around the time he started planning, he put all his money into corweave and that stock took off, he was riding high.
Then, Michael Burry hit the news. That combined with less than ideal earnings spooked investors, and the market tanked a good amount. Normally he would have rode this out and waited for the market to recover, but he was a week out from closing on his construction loan. As a result, he was forced to sell a portion of his shares at a lesser price than he intended. A total coincidence that the market had a downward swing at a time he needed the cash in hand.
I find it way too conservative, personally. I don’t ever HAVE to buy a house. I will when my investments have reached my need for a downpayment. Once I start seriously looking, I will sell them and hold the funds in my money market account so I don’t get screwed with a sudden downturn right when I need the money.