Splitting Up the Savings
Jay has $100,000 in savings. In another four years, he should have about $400,000 in savings. He and his wife would like to buy a house at that point. Where should they put that money until they buy a house?
QUESTION: Jay in Afghanistan has $100,000 in savings. In another four years, he should have about $400,000 in savings. He and his wife would like to buy a house at that point. Where should they put that money until they buy a house?
ANSWER: There are two types of risk here. Risk number one is you put the money in a savings account, and the principal is safe but you risk not making any money at all on it because it’s not going to make anything. Risk two is you put the money in something like a mutual fund, and it could go up in value, it could go down in value.
You do have a fairly long window. My general rule is if you’ve got five years or longer, leave it alone. You could start looking at a mutual fund. You don’t really have five years. You’re calling it four years, and yet you’re talking about an awful lot of money to sit there at 1%.
Your risk is between the interest rate sucking and the possibility of losing some money. These are two bad things. What I would do is I would put some in each. I’d put some in a mutual fund, and I’d look for the calmest of mutual funds that are stock mutual funds. It’s called a balanced fund, which means it’s got stocks and a few bonds in it, but it’s going to have the big blue-chip company stocks—the more calm companies—less volatile.
If you want to measure a fund’s volatility against the market, you can look at a statistic—it’s usually on the front page of the offering—called the beta. A beta of 1.0 mirrors the S&P 500—mirrors the market. Anything lower than that is less volatile than the market, and anything bigger than a 1.0 is more volatile than the market. If you’re looking at a mutual fund that has a 2.0, it’s twice as volatile as the market. You don’t want to go that way. You want something that’s less than a 1.0 for this discussion. You’re looking for a 0.7 or 0.8 beta.
Then I’m going to put some of this in money markets. If you put $200,000 in each, then you’ve split the risk between a sucky interest rate and it might go down on the other side. To the extent it scares you to be in a mutual fund with a 0.7 or 0.8 beta, you might move more to the bad interest rate. To the extent it scares you to be in the bad interest rate, you might move more to the mutual fund.
You and your wife talk about that, and 50/50 would be pretty good. I wouldn’t go any more than 75% into the mutual fund if it were me. I would personally probably do it about 50/50. We’re going to go a little heavier than 50/50 on the front end because you want the mutual fund to have the longest window. I’m probably going to put most of the $100,000 in the mutual fund now. Then your last $200,000 is almost all going to be in the money market.