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I've calculated that I will be able to save approximately enough for a 20-25% down payment on a home (at my back-end-ratio affordability level) in the next 2-3 years. I'm maxing out contributions to my Roth IRA already, and plan to withdraw $10k from it for the first-time home purchase. I've also already saved up ~6 months of living expenses, and have 0 debt to pay down.

I believe I need something in the middle ground for risk/reward. I'd like to earn at least some return on the savings greater than a savings/cd/mm account, and can even tolerate a loss of 10-15% if it means waiting an extra 6-12 months to recover from an event like that.

What's a good investment vehicle for my needs?

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  • I just want to comment that the fact that I even have to think about this is the kind of effect such low interest rates have - they induce me to invest rather than just save. – Mike Dec 15 '10 at 19:11
  • More than five years later after this posting, I never decided to buy and still don't see myself doing it for another few years. The market in my area changed and so many other things in my life. Glad to rent still. – Mike Mar 10 '15 at 0:07
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When you are saving for money you need in 5 years or less the only real option is a savings account. I know the return is nothing at this point, but if you cannot take the risk of losing all of your money that's the only thing I would recommend.

Now you could try a good growth stock mutual fund if, when you look up in 2 - 3 years and you have lost money you wait it out until it grows enough to get what you lost back then buy your house.

I would not do the second option because I wouldn't want to be stuck renting while waiting for the account to recover, and actually thinking about it that way you have more risk. 3 years from now if you have lost money and don't yet have enough saved you will have to continue paying rent, and no mutual fund will out preform that.

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  • What's wrong with a short-term GIC? – Matthew Read Dec 13 '10 at 21:32
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    That is an option, but right now the quotes I find have an interest rate of 0.8% my money market at my credit union is 0.75% and I have no restrictions on that money. The other thing is if interest rates rise, and they will, they can't go much lower, my money market interest rate will rise with it, while the GIC is fixed. – Move More Comments Link To Top Dec 13 '10 at 23:44
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Assuming this'll be a taxable account and you're an above-average wage earner, the following seem to be biggest factors in your decision:

  1. tax-advantaged income w/o retirement account protection - so I'd pick a stock/stocks or fund that's designed to minimize earnings taxable at income and/or short-term gains rates (e.g. dividends)

  2. declining risk profile - make sure you periodically tweak your investment mix over the 2-3 year period to reduce your risk exposure. You want to be near savings account risk levels by the end of your timeline. But make sure you keep #1 in mind - so probably don't adjust (by selling) anything until you've hit the 1-year holding mark to get the long-term capital gains rates.

In addition to tax-sensitive stock & bond funds at the major brokerages like Fidelity, I'd specifically look at tax-free municipal bond funds (targeted for your state of residence) since those generally pay better than savings on after tax basis for little increase in risk (assuming you stick w/ higher-rated municipalities).

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    I would not recommend buying bond funds, as interest rates rise bonds go down in value. We have the lowest interest rates in almost 50 years, they cannot go much lower, and are sure to rise. – Move More Comments Link To Top Dec 13 '10 at 21:14
  • What if the savings from a tax-free muni exceeds the loss due to a rise in interest rates? That's a risk just like taxable higher return assets present, no? – Mike Dec 15 '10 at 19:10

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