OT: Best Way to Invest $20K for 2 Years

Submitted by TheCool on

FIRST POST!

My wife and I recently sold our house and moved to Houston, TX. Of the profit from the sale of our house is $20,000 that we are saving for the down payment for our next home which we plan to use 2 years from now when we find our "Forever Home". What is the best form of investment to use to get the greatest return with minimal risk in such a short time period? I know very little about investing so all information is considered helpful.

Thanks in advance for taking the time to help a brother out! GO BLUE!

MichiganG

August 23rd, 2015 at 12:55 PM ^

For someone in finance, you really struggle with matching his investment goals with appropriate strategies.  He's indicated HE WANTS THE MONEY IN TWO YEARS.  That means there is very low tolerance for potential losses.  That means settling for low-risk, low-return investment strategies.  Yes, it means potentially leaving money on the table, but it also means that he has access to the amount of money he needs/wants in two years, which is his stated goal.  And even if he was flexible on the two years, market appreciation is not likely to be so substantial in the next two years that it would meaningfully change his financial picture.

ppToilet

August 23rd, 2015 at 4:53 PM ^

A two-year window on a $20k investment with minimal risk tolerance doesn't get you much. Even if you changed your risk tolerance, you'd be lucky to get a 10% return over 2 years. That gets you a bit more than $24k after the two years, which is fairly neglible as a downpayment for the 'forever home'.

If you talk to the bank, they may have some structured and relatively safe notes that could get you a couple percent. My advice is not to gamble away the windfall you've made.

remdog

August 23rd, 2015 at 11:18 AM ^

If you wish to have both safety and a good return over the short term. The safest approach is probably a 2 year CD but the return is negligible. If you don't mind some risk, a broad stock market ETF will likely do better. Even if there's a bear market or deeper correction, it usually will recover over 2 years. A very diversified bond fund might be a decent bet but has risk too with rising rates (some are better insulated). A mixture of the above would lower your risk. But if you can't bear any risk to capital, stick with a CD.

Pinoe is my hero

August 23rd, 2015 at 11:18 AM ^

Either invest it in the stock market or buy a Rolex. Invest it if you know the market well, as you could easily lose tons of money in a matter of days. If you don't know the market well I would advise you to buy a Rolex. Watches are some of the only things that appreciate in value over the years. Buy something like a submariner in 18k gold, wear it if you want, and watch its value go up every year

MGoOhNo

August 23rd, 2015 at 11:27 AM ^

This may be the worst financial advice I've ever read.

OP a two year investment timeline for money you know you'll need at date certain = laddered T bills or a savings account. CD prevents you from using money earlier if you find your dream home and/or an unexpected emergency arises. Speculation on Rolex watches, gold or trying to time market not smart. The low cost etf option is OK, but why risk loss if principal if you only have 2 years. Ask yourself how you'd feel if you bought into an etf the day before a 350 point correction followed by another 400 point correction. Given known need and short timeline be very conservative.

ghostofhoke

August 23rd, 2015 at 11:59 AM ^

^^Mgoohno has better advice. I was in a similar situation 2 yrs ago. The money was t from the profit of a sale but it was the chunk of savings we were going to eventually use for a downpayment. My wife was going back to school for a 2 yr residency and I knew our desire was to buy a home on the other side of it. Most of our money stayed in a savings account. It isn't sexy but it was reassuring. I put some money that wasn't vital into an investment account and it's done pretty well but the amount vs the risk is inconsequential. The couple thousand dollars I gained has little impact on my overall financial situation 2 yrs later in light of the other money I've been able to accumulate by saving over that time. Especially after you remove taxes on the sale of the investment. It's a drop in the bucket. When I look at what the market took out of my nest egg a few years ago when it tanked, there is no way I could justify putting that at risk again. If the market went down 20-30% in the next two years could you still buy a home of you only had 14-16k of that money?




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evenyoubrutus

August 23rd, 2015 at 11:28 AM ^

Buy granite counter tops and then send your kids to a private school. They will grow up to be wealthy and buy you a house, and then you can put the counter tops in the home they bought you.

rob f

August 23rd, 2015 at 12:13 PM ^

Instead, send it to the head terrorist (Brian):

 

and have him use it towards a new server and upgrades to MGoBlog.

 Once you've done that, he'll give you several million MGoPoints, all of us will upvote you lots and lots, and in two years, when you need that $20,000 back, we'll all be here, grateful that you are the one who saved us from frequent "backend fetches", and you'll be rewarded with our really REALLY good advice (this time on how to quickly raise the $20,000 + that you otherwise would have saved up).

 

roscostix

August 23rd, 2015 at 11:39 AM ^

The stock market is a bit of a volatile place right now, and I might be wary of buying into it these days - especially if planning to use the money for a down payment soon.  I'm in a slightly similar situation right now, and my plan put a good chunk of my cash in high interest savings/checking accounts.  It's easy to find places online that give 1% APY right now, and if you dig a little deeper, you can find accounts that give 3% a year interest all the way up to 6% on a limited amount of money.

In addition to mgoblog, you might also want to check out http://reddit.com/r/personalfinance and https://www.reddit.com/r/investing.  Obviously their recommendations won't be as high quality as mgoblog's, but they do answer questions like this all the time.

HenneGivenSunday

August 23rd, 2015 at 11:35 AM ^

There is always a lot of risk out there if you want any sort of return. One thing I did recently with a smaller sum of money was buy some stock in The Anderson's. Their stock price is at or near a 2 year low and for $20,000 you could buy quite a few shares in the $35/ share range. Double check me and do your homework though. ANDE is the symbol.




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recklessaBrandon

August 23rd, 2015 at 11:41 AM ^

This is tricky because you have to consider two things: what direction the Houston home market is going and the risk/return of your 20k investment over those two years. For example, if you made a 10 percent return on your 20k investment but home prices in the Houston area went up 15 percent during the same two year period, you essentially are losing 5 percent of your money (if you know for sure you are purchasing a house in two years). 

I think the best thing to do would just buy a house now (I understand that logistically this is probably not possible). You could try to find an ETF/REIT that mirrors the Houston housing market/property value in general (that way you don't get screwed by a situation where your investment's performance is weak but the Houston real estate market grows rapidly). If you are willing to take a little risk, you could, as others are suggesting, just buy an index fund and hope that it outperforms the Houston RE market-that is probably what I would do personally but I also would be more flexible than putting a drop dead date of buying a house in 2 years. 

Mgobowl

August 23rd, 2015 at 12:21 PM ^

Something to keep an eye on is the energy sector in Houston. Tons of layoffs with the price of oil dropping and it's uncertain how long the price will stay this low. That could have a big impact on the housing market in Houston over the next two+ years.



There's also some concerns within the city of Houston regarding the city's debt and pension responsibilities. Some people are panicking like it's going to be Detroit all over again, I doubt it reaches that point, but again something to keep an eye WRT the housing market.

ndscott50

August 23rd, 2015 at 11:47 AM ^

You would need some type of investment that tracks with oil prices. Currently we are at $40. A two year bounce back to $60 to $80 seems possible. Prices falling into the $20 range seems unlikely. Of course if we did have two years of $20 oil the housing market in Houston would likely fall significantly. Assuming your job in Houston would not disappear with the low oil prices you would be somewhat hedged.



All of that being said commodity markets are very risky and your best plan is the CD option listed below due to your short timeline. A few thousand dollars of extra down payment earned if the market does well is not worth much risk. An extra four grand does not really effect the type of house you can buy and has a minor effect on your monthly payment over 30 years.

gopoohgo

August 23rd, 2015 at 11:53 AM ^

USO (etf) is supposed to track the NYMex price of light, sweet crude.

Largest of the oil ETFs (almost 2 billion in assets) with a low expense ratio (0.45%).

Only concern right now would be a combination of decreased refiner demand after Labor Day, with the uncertainty on how global oil inventories will fare if Iran can start exporting oil again.  Supposedly, Iran was exporting 5 million barrels/day, which combined with slowing Chinese/Emerging market growth, will further depress global prices.

ElBictors

August 23rd, 2015 at 12:07 PM ^

USO tracks the futures market and trades the price of WTI - West Texas Intermediate Crude.  As such it generates a K-1 tax form and does not track the 'spot price' of oil.  There are additional considerations around contango and backwadation in the space that may not be suitable for all investors, particularly conservative ones.

 

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

  http://www.unitedstatescommodityfunds.com/fund-details.php?fund=uso

 

MGoOhNo

August 23rd, 2015 at 12:21 PM ^

Over the 10 year oil rally every major oil producing country invested massive amounts of money into oil infrastructure to realize upon those higher sales prices. Saudi Arabia is the one country that can affect oil prices by production cuts. But they've got more reserves than anyone else and they will keep pumping because while they're getting hurt all the other producers are getting hurt worse and they're trying to squeeze competitive producers out of market. In short, oil prices likely to go down.

PinballPete

August 23rd, 2015 at 11:49 AM ^

Ultimately you should figure out what is suitable for you with the help of an adviser or at least by taking an investment suitability questionnaire to determine what is right for you. If you already invest with a brokerage firm then you likely have access to some free tools to help. If not then those tools can be found on the web for free. 

A two year time horizon with minimal risk would put you in the market for short term bonds/CDs/money market investments and with those you are not going to get a good yield right now. 

The  2 year treasury note finished the week at 0.71%, which is $142 of interest for each year. That's not great but you would be almost guaranteed to get your initial investment back. You could also consider a short term bond fund but with pending interest rate increase those will no doubt lose some value. It's possible that you can find a fund that's paying a high enough distribution yield and that would overcome the loss in value from a 1-2% rate increase over the next few years. 

It's tempting to look at stocks for more solid returns but remember, from September 2008 to November 2008 stocks lost 31% while bonds lost about 4%. If you are ok with the risk of losing capital in return for more explosive growth then a mix of stocks make sense. 

It depends on what risk is acceptable for you.