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Today’s question comes from a reader who wants to step on the gas when it comes toplanning.
Question: I want to buy a house in five years, but I won't have quite enough for a 20% down payment by that time. What if I invested into make up the difference?
-- Tim B., Tulsa, OK
The Investing Answer: Tim, you’re probably not alone in thinking that a risingportfolio can make a nice segue into homeownership. After all, the continues to deliver robust returns that you simply won’t get from a low-interest or .
It’s an idea with merit, but ultimately, it is perhaps an unwise way to achieve your goal. Let me explain.
Over the course of many years and decades,tend to appreciate in value faster than just about any other . By some studies, have risen roughly 7% or 8% annually since the mid-1920s, which is handily ahead of the rate of and also faster than home-price .
Chances are, if you$200,000 in a portfolio and also buy a $200,000 home this , the portfolio be worth a more in 30 years than the home. So on the surface, it seems practical to kick your assets into gear with first and then parlay the proceeds into a home later.
But your plan has two major flaws.
First, there is a traditional rule of thumb that suggests you keep several years’ worth of savings out of the and in a bank account, you need for an unforeseen short-term event. As we saw in 2000 and again in 2008, can lose a of value very quickly, and people discovered that the rainy-day they needed was no longer there when or a health scare emerged.
And even if you decide that you want to keep those rainy-dayin , they should be very conservatively invested, which means you won’t get the robust you’re likely expecting. From the sound of it, you’d be seeking out with robust potential to meet your down payment goals, and it’s precisely those aggressive that can fall the most in value.
The second flaw concerns theitself.
As of the time of this writing, the S&P 500 has risen a stunning 145% in just four years, which works out to be a roughly 25% annual. There are few instances where rose by an average of 25% annually over four years, and I certainly hope you’re not counting on those kinds of to continue right up until the time you are ready to out and buy that home.
We don’t know where thego in coming months or years, but there's usually only one time when it's wise to make heroic assumptions about potential -- after have fallen sharply. Anybody pursuing the strategy you suggest back in 1995, 2002 or 2009 would have been quite savvy, but in most periods, it’s wiser to expect much more modest in the periods ahead.
If you are still keen to pursue this approach, let’s assume that thegenerate its typical 7% or 8% return over the next five years. If you $50,000 into the now, and it grows 7.5% annually over the next five years, then you’ll have $72,000 in five years.
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that be enough for the 20% down payment you seek? That depends on the state of home prices then.
Rather than visualize your dream home now, focus on building your savings and putting some but not all of yourin the market. By the time five years have elapsed, you’ll have a much better sense of what you can afford.
The Investing Answer: When it comes to and home prices, five years is a very long time. If you seek to eventually convert your holdings into a down payment on a home, don’t become too aggressive, swinging for the fences with that may actually push you further away from your goal if they fall in value.