Hi all. I’m agonizing over something and I wanted to put this out for ideas.
We are planning to buy a new house in the spring. We have some money in non retirement funds. Given that the market seems nuts at the moment, I am agonizing over whether I should move the down payment money to cash or leave it be. A correction wouldn’t make us unable to buy/afford the house but the timing could force me to sell low. I knOw one should not try to Time the market but the current valuation seems crazy.
Thoughts?
I am absolutely opposed to market timing, but money that you will need in the short term, and by that I mean in the next two years, should be in cash or cash equivalents. I see no problem in pulling out enough cash for the down payment.
I’m assuming you intend to buy a house about three months from now.
A review of S&P 500 performance shows that a severe drop could cost you 40% in that time period (see late 2008).
The biggest three-month gain in the S&P 500 that I could find was about 24% (see early 2009, recovering from rock bottom).
That’s a decent upside, but an awfully harsh downside, and a big spread between the two (i.e. a lot of risk). If you don’t have to sell, you can ride out a market crash. But you’ve stated that you (probably?) have to sell three months from now. Any decent financial advisor would be telling you that money you will need soon ought not be exposed to risks like that.
This is not market timing; if it were, you would be waiting for the market to peak, and then trying to sell it right then. Your need for down payment money in the near future means you should be pulling your money out of that index fund right now (in fact you should have done so some time ago, as Bill Door says), shielding it from market risk. As things stand, you can also thank your lucky stars that the market just so happens, by spectacular coincidence, to currently be at an all-time high.
When I was in a similar position, I bought a bunch of Puts as insurance. If the market went up, then it was insurance money well spent, and I was OK with the loss. If the market went down, then I was still more or less locked in at current valuations. If the market stayed the same… well, them’s the breaks.
In my case, the market went down quite a bit, but I was OK since I had my ass covered.
Thanks all for the feedback. I think it’s a compelling case that I should move to cash.
In my defense, the plan had been to leave the money alone but somewhat unexpectedly a new job demands a move to a more expensive neighborhood. My risk tolerance was for a 5+ year horizon. Now the Missus has said she’s not dealing with this commute and we’re moving. Happy wife, happy life.
Often, a good way to think about these things is to assume you are already in the state that you’re considering, and decide if you’d do something else.
For example, if you already had the down payment in cash right now, would you go invest it in the stock market? Of course not, right? You have a short-term use for that money in the near future. You don’t invest short-term money in the stock market.
The correct asset allocation is independent of your current asset allocation (modulo transaction fees and taxes), so thinking about it from the other side is useful for limiting status quo bias.
If you want to hedge against the case that you don’t actually need the cash for a down payment and avoid taking taxable gains, then some puts like John Mace mentioned might make sense.
I agree with everyone. Also, moving some to cash is more profit taking than market timing, since you are not expecting or betting that we’ve reached the high yet.
Well, yesterday I liquidated what is (to me) a substantial amount of stock index funds (S&P 500 and international) and as of right now, I can say I sold at pretty much the peak of the market
Seriously, though- this was one of those where I think I knew the answer but just needed some outside perspective. As soon as I put in the sell orders I felt better.
Not that you asked, but we’ve been in this house a very long time and I really don’t want to move. But my wife’s new job, which is a really great one, has her driving through some of the worst of the daily Boston traffic. I told her when she was thinking about it that we’d move if we had to, and now she’s cashing in the chips. Fair enough, but I’ve been spoiled by a mortgage payment that at this point is near negligible… Hello starting over
(we’re on the absolute outskirts of metro Boston, and about to move someplace that will be 3-4 times as much as what we paid for our current place and 2-3 times its current value)
