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I own a house that is 75 years old and needs a lot of work done to it. I have been setting aside money from each paycheck for the past couple of years into a savings account earmarked for that purpose so that I don't have to take out loans. When the account is large enough to do a particular item on the list, I pay cash for it. For example, the next items on the list are siding repair, repainting, and tree removal. So I've saved up about $6000 to cover those items which I'll be doing in the next couple of months.

I'm concerned about whether or not this is the best way to go about this though. While I'm building up that account, that money is just sitting there collecting a paltry 1% money market rate. I've been doing it that way because A) a savings account is liquid and I've had to tap it as an emergency fund before, B) I make deposits to it every month, and C) the account gets drained as soon as I can afford the next item on the list (usually only 9-12 months).

I figure that money should be doing more than just sitting idle in a savings account. Even straight index funds grow at about 6-7%. But I don't know anything about investing.

Is it appropriate to invest small amounts for short periods of time? If so, how do I go about doing so? Will fees negate the benefits? I need the flexibility to make deposits regularly and to cash out when I've reached an objective.

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  • Be happy about the 1% money market rate! Where I live, money market fund yields are currently negative. – juhist Aug 2 '17 at 11:43
  • If this is doubling as your emergency fund then no, keep it liquid. Question though - what is your contingency for emergencies that might occur right after making one of these big purchases? – CactusCake Aug 2 '17 at 18:49
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You can expect about a 7% return when investing in the general market if your horizon is ten years or more. The market fluctuates, which means that you should be absolutely fine with losing 10% or more of your invested money during this period. You say yourself that:

I have been setting aside money (...) into a savings account earmarked for that purpose (repairs/maintenance) so that I don't have to take out loans.

It's obvious from your question that the purpose of this money is not savings, this is money that you are already investing, not in stocks or bonds but in your house.

While this money sits around, of course you could put it into the market and hope that it grows. It all depends on your horizon, which in your case sounds like about 1 year. Is that long enough to be fairly sure you will make a profit? From what I've written so far, hopefully you can gather that the answer is no.

If you choose to invest $6,000 but you need that money back in one year, you need to be aware of the risk that you'll instead end up with $5,400 or even less. Your options are then to:

  • Realize your loss: after all, the loss is only made when you sell. You can accept that you just lost $600 by speculating and move on with your life.
  • Wait it out: you can choose to wait another year and hope that the market bounces back.

If you're asking for personal advice, my opinion would be this: you're already investing in your house. The housing market, like most markets, fluctuate. Whether you like it or not, you're already a victim (or benefactor) of this value fluctuation. The difference is that a house is something you'll live in for a long time (probably), that will give you daily joy in a way stocks and bonds won't.

Of course, saving up money and investing them is always a good idea anyway. You should still save a small amount every month and put it into low/medium risk bonds, in my opinion.

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  • +1 for pointing out that the house itself is the investment I'm making. While I couldn't say exactly how much the improvements increase the value of the house, I can easily say how much it would decrease the value if the repairs weren't done. – Wes Sayeed Aug 2 '17 at 21:02
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This is slightly opinion based.

Is it appropriate to invest small amounts for short periods of time?

At your age and the time period, I would say NO. This is because although the index fund do return 6-7% on average, there are several times it blips and goes negative as well. Stock Markets in short periods like 6 months can be unpredictable. At times a downturn will remain stagnant for periods of 2-3 years before suddenly zoom ahead.

If you are not to particular about the time when you need the changes done; i.e. the changes can in worst case wait for few years; then yes investing in Index fund would make sense.

Else you are well off keeping this in savings. Try CD's if they can offer better rates for such durations.

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  • I'm not 75. The house is :-) – Wes Sayeed Jul 31 '17 at 8:54
  • @WesSayeed. Apologies. I mis-read. – Dheer Jul 31 '17 at 9:34
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Even straight index funds grow at about 6-7%.

on average, or over long periods of time. In short time periods (quarters, years), they can fluctuate anywhere from -10% to +20%. Would you be happy if your bank account lost 10% of its value the week before you had to pay the bill for the repairs?

Is it appropriate to invest small amounts for short periods of time?

In general, no. Most investments are designed for long term appreciation. Even sophisticated financial companies can't do any better than 1 or 2% (annualized) on short-term cash reserves.

Where you can make a huge difference is on the cost side. Bargain with suppliers, or wait for sales on retail items. Both will occasionally forego their margin on certain items in order to try to secure future business, which can make a difference of 20% or more in the cost of repairs.

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  • This seems somewhat different than your answer to a similar question; has your opinion shifted since you wrote this? Or is this different because the timeframe is 1 year instead of 3? – Ian Dunn Mar 15 at 18:55
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    The latter. There's significant differences in risk of loss between 1 and 3 year horizons. – D Stanley Mar 15 at 18:59
  • That makes sense, thanks! – Ian Dunn Mar 15 at 19:00
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I would agree with the other answers about it being a bad idea to invest in stocks in the short term. However, do consider also long-term repairs. For example, you should be prepared to a repair happening in 20 years in addition to repairs happening in a couple of months.

So, if it is at all possible for you to save a bit more, put 2% of the construction cost of a typical new house (just a house, not the land the house is standing on) aside every year into a long-term repair fund and invest it into stocks. I would recommend a low-cost index fund or passive ETF instead of manually picking stocks. When you have a long-term repair that requires large amounts of money but will be good for decades to come, you will take some money out of the long-term repair fund.

Where I live, houses cost about 4000 EUR per square meter, but most of that is the land and building permit cost. The actual construction cost is about 2500 EUR per square meter. So, I would put away 50 EUR per square meter every year. So, for example, for a relatively small 50 square meter apartment, that would mean 2500 EUR per year.

There are quite many repairs that are long-term repairs. For example, in apartment buildings, plumbing needs to be redone every 40 years or so. Given such a long time period, it makes sense to invest the money into stocks.

So, my recommendation would be to have two repair funds: short-term repairs and long-term repairs. Only the long-term repair fund should be invested into stocks.

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