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 in stocks to make up the difference?

-- Tim B., Tulsa, OK

Answer: Tim, you’re probably not alone in thinking that a rising stock portfolio can make a nice segue into homeownership. After all, the market continues to deliver robust returns that you simply won’t get from a low-interest savings account or government bond.

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, stocks tend to appreciate in value faster than just about any other asset class. By some studies, stocks have risen roughly 7% or 8% annually since the mid-1920s, which is handily ahead of the rate of inflation and also faster than home-price appreciation.

Chances are, if you put $200,000 in a stock portfolio and also buy a $200,000 home this year, the stock portfolio will be worth a lot more in 30 years than the home. So on the surface, it seems practical to kick your assets into gear with stocks first and then parlay the proceeds into a home later.

But your plan has two major flaws.

Problem #1: Not Enough Savings In Other Places

First, there is a traditional rule of thumb that suggests you keep several years’ worth of savings out of the market and in a bank account, just in case you need funds for an unforeseen short-term event. As we saw in 2000 and again in 2008, stocks can lose a lot of value very quickly, and people discovered that the rainy-day money they needed was no longer there when unemployment or a health scare emerged.

And even if you decide that you want to keep those rainy-day funds in stocks, they should be very conservatively invested, which means you won’t get the robust appreciation you’re likely expecting. From the sound of it, you’d be seeking out stocks with robust appreciation potential to meet your down payment goals, and it’s precisely those aggressive stocks that can fall the most in value.

Problem #2: The Fluctuations Of The Stock Market

The second flaw concerns the stock market itself.

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 gain. There are few instances where stocks rose by an average of 25% annually over four years, and I certainly hope you’re not counting on those kinds of gains to continue right up until the time you are ready to cash out and buy that home.

We don’t know where the market will go in coming months or years, but there's usually only one time when it's wise to make heroic assumptions about potential stock market gains -- after stocks have fallen sharply. Anybody pursuing the strategy you suggest back in 1995, 2002 or 2009 would have been quite savvy, but in most investing periods, it’s wiser to expect much more modest gains in the periods ahead.

If you are still keen to pursue this approach, let’s assume that the stock market will generate its typical 7% or 8% return over the next five years. If you put $50,000 into the market now, and it grows 7.5% annually over the next five years, then you’ll have $72,000 in five years.

Will 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 your money in the stock market. By the time five years have elapsed, you’ll have a much better sense of what you can afford.

Bottom Line

When it comes to stocks and home prices, five years is a very long time. If you seek to eventually convert your stock holdings into a down payment on a home, don’t become too aggressive, swinging for the fences with stocks that may actually push you further away from your goal if they fall in value.