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I have ~$100K in cash right now that I need to put somewhere. I plan on using the money for a down payment on a home sometime in the next 2 to 7 years (if I were a betting man, I'd say in 3.5 years). So I need the money to be somewhat liquid and not too volatile. That said, I could probably buy a home without the money (using funders from other places), so if there's a riskier option that may be somewhat volatile, I may be interested.

I think the things to consider here are tax implications of any gains (e.g. short or long-term gains), and risk/reward. A few options I've considered are

  • Money market fund
  • CD
  • Index funds (S&P 500)

This is the first time I've had this kind of cash to manage, so I'm looking for any advice I can get. Thanks!

EDIT: It's not necessary that I use this for a down payment. I would say the requirement is that in 7 years, I can get the money as cash and do whatever I want with it.

EDIT: Sorry, I've been behind on this one... I'm planning on using this money for a down payment in the next 3-5yrs. I also have a $40K emergency fund, so I could potentially borrow from that to make the downpayment. I also may not need all $100K for the down payment.

I do have a job. And in the next 3-5yrs, I expect my salary to increase by ~50%. (Not sure if this matters.)

My risk tolerance is probably somewhere in the middle. I could see taking 1/3 of the money and putting it into something pretty risky that may take 10yrs to pay off.

  • I found this useful: money.stackexchange.com/questions/4728/…. I am a little different in that I don't necessarily need the money in the next two years. – three-cups Sep 7 '13 at 21:29
  • There are smarter people than I that will answer, but do you need this for a down payment or not? What are the other sources, perhaps somebody could offer advice on how to make your down payment. I don't know where to invest in that time frame, but I am more worried about your plan for the house purchase. – MrChrister Sep 8 '13 at 5:35
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    The optimal asset allocation depends on your time horizon and risk tolerance (ability and willingness to take financial risk). From the question, it is hard to tell the time horizon and your willingness to take financial risk (your ability to take risk is high because you are only 34 and presumably have a job). Do you need the whole $100K for the house down payment? Why do you need to be able to exchange all the money for cash in 7 years? – Powers Sep 8 '13 at 13:34
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    You can use one more edit. Is it 3.5 or 7? I'm old enough to remember a full decade that showed a slightly negative return, so even a 10 year horizon is no guarantee of a positive outcome. And the prior decade returned a spectacular 405% return. If you invest in something that drops 40% next year, what will you do? Sell? Double down with more funds? – JoeTaxpayer Sep 8 '13 at 15:09
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    Zero coupon bonds are built for your scenario. More detailed recommendations require knowing more about tolerance to risk. How would you feel being +- 30% at some point? – dcaswell Sep 11 '13 at 17:57
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Given your timeframe, risk tolerance, and the fact that you don't need this money, I would suggest a balanced approach. Something like:

  • ~35% in an index fund
  • ~65% in CDs/money market fund - something liquid and FDIC insured

If you want to have fun investing, you could look into things like lendingclub, or bonds, or stocks, etc. But an allocation like I've outlined above is a pretty good balance of risk and reward over that timeframe.

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One of the things I would suggest looking into is peer-to-peer lending. I do lendingclub.com, but with a lot less money, and have only done it a short period of time. Still my return is about 13%.

In your case you would probably have to commit to about 3.5 years to invest your money. Buy 3 year notes, and as they are paid off pull the money out and put into a CD or money market..

They sell notes that are 3 or 5 year and you may not want to tie your money up that long.

  • Are you investing in Grade A or B? – Question3CPO Sep 19 '13 at 16:18
  • Currently doing B and C, very few A's. – Pete B. Sep 19 '13 at 18:17
  • I didn't have such a good experience with lending club, and I was mainly doing A's and B's... littleadvisor.wordpress.com/tag/lending-club – littleadv Oct 6 '13 at 7:53
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    The question is tagged United States so I might add that you need to check your state's local laws about P2P lending. Many states, including mine (Texas) outlaw it. – JohnFx Nov 27 '13 at 15:38
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Well, a proper answer needs a few more details:

1) What's your marginal tax bracket? (A CD is just plain silly for someone in a high tax bracket and in a high tax state)

2) What's your state of residence?

3) Do you have a 401k to draw on for a house loan in case of badly timed volatility?

4) What does will the rest of our investment portfolio look like in case of a sudden rise in interest rates?

Depending on the answers to those questions, the mix of investments could be anywhere from:

  1. Short term muni bonds (or muni ETFs)
  2. Short term TIPS (there's a Vanguard ETF for that)
  3. 10 no-transaction fee index ETFs following the Ivy Portfolio 10 diversified risk-reduction strategy
  4. 3 year zeroes (strip treasuries)
  5. Preferred stock with a 3-5 year call horizon that is taxed as dividends

Tell me more about bracket/state/other investment mix and I can suggest something.

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I like precious metals and real estate. For the OP's stated timeframe and the effects QE is having on precious metals, physical silver is not a recommended short term play. If you believe that silver prices will fall as QE is reduced, you may want to consider an ETF that shorts silver.

As for real estate, there are a number of ways to generate profit within your time frame. These include:

  • Purchase a rental property. If you can find something in the $120,000 range you can take a 20% mortgage, then refinance in 3 - 7 years and pull out the equity.

  • If you truly do not need the cash to purchase your dream home, look for a rental property that pays all the bills plus a little bit for you and arrange a mortgage of 80%. Let your money earn money. When you are ready you can either keep the property as-is and let it generate income for you, or sell and put more than $100,000 into your dream home.

  • Visit your local mortgage broker and ask if he does third-party or private lending. Ask about the process and if you feel comfortable with him, let him know you'd like to be a lender. He will then find deals and present them to you. You decide if you want to participate or not. Private lenders are sometimes used for bridge financing and the loan amortizations can be short (6 months - 5 years) and the rates can be significantly higher than regular bank mortgages. The caveat is that as a second-position mortgage, if the borrower goes bankrupt, you're not likely to get your principal back.

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    Storing silver in your home exposes you to risk of theft. And it's not unheard of for governments to confiscate personal property. Just pointing out this approach is not FREE of risk. – ChrisInEdmonton Sep 11 '13 at 17:58
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    Also keep in mind that as QE is drawn down, the Fed may raise interest rates too, which will decrease bond prices. This could affect anyone investing in bonds, e.g. the fund managers you mentioned. Also, 5-10% of your portfolio in physical precious metals? The end of QE isn't the end of the world (and if it were, silver wouldn't be a good investment anyway), but you expose yourself to significant liquidity risk by doing this, as well as risk that you won't be able to buy/sell the metal at the spot price, but rather at a price that includes significant premium/discount. – John Bensin Sep 11 '13 at 18:16
  • @Chris you raise a good point. This is not free of risk. Insure your bullion, get an alarm system, don't tell anyone what you've got buried under the basement steps. Or store it is a safe deposit box. – Jerry Penner Sep 11 '13 at 21:03
  • @John, I would argue that the liquidity risk is lower than a 401K as I can buy and sell to any dealer at any time. Premiums and discounts can be minimized by dealing with reputable houses like Kitco and J&M. – Jerry Penner Sep 11 '13 at 21:07
  • @JerryPenner If you're worried about the banking system failing, a safe deposit box probably isn't the best idea. Also, you can withdraw your Roth IRA contributions any time without penalty, so liquidity isn't really an issue (of course, like any retirement investment, if you can avoid withdrawing from it before retirement, all the better). – John Bensin Sep 14 '13 at 18:36

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