Question

I'd like some of you to critique this idea: My emergency fund is fully funded. I'm using a series of M1 Pies to manage a diversified portfolio. I'm doing a great job contributing to it with automatic-recurring investments, but I'm doing a terrible job saving for a home. I'm not sure if it's psychological, because I hate putting money into an account that's earning virtually zero due to low-interest rates I've decided to carve out a portion of my M1 portfolio as a single security: an ultra-short term bond ETF. The Fund has an average duration of 0. 25 years and a dividend yield of 2. 24%. This way, I'm forced to save a little each week while investing in the market. I know this will create a "cash drag" on my investment returns. Can you all help me think of other reasons why I SHOULDN'T do this to help me break my mental block?  

Answer 1

What's your top priority? Being able to buy a house or possibly maximizing return with the risk that you lose a lot? Once you decide what you really care about, and really think about what happens if you lost 20-40% of your funds, you may have your answer.  

Answer 2

Yeah, so you're getting at my point. My primary goal is building long term wealth, but my secondary goal is reducing debt drag. I can't see myself stopping monthly long term investments, but to achieve goal 2, I need to build some cash base to put a down payment towards a home. So I really have to do both at the same time, since I obviously can't time the market and use equities to save for a house. I guess my ideal solution would be for my M1 "cash sweep" to earn interest, but since that doesn't exist unless u pay for M1 Spend (no thanks), I need the next best option.  

Answer 3

These two goals are not so distinctly different. They both converge one goal #1. This is the strategic goal. Goal #2 is a tactical move, which plays into and converges upon goal #1. However, this tactical move has a much shorter time horizon and different risk profile than the overall strategy, and should therefore be considered a separate bucket. Your ultra-short term bond fund at 2. 24% is a good tactical allocation for goal #2 if your time horizon is </=5 years. >6 I would consider allocating a small portion (20-30%) of this portfolio to equities. Depending on your actual time horizon for buying your home (ie. 2 years, 5 years, 10 years), expected down payment value, and total cashflow available for investments, my suggestion would be to start by splitting your investment allocation down the middle and adjust as needed. Eg. If you have $1000/month for investments. A Down Payment goal of $50, 000 in 5 years (at 2. 24%), then a contribution of $500 monthly to this account will only get you to $31, 695. So adjust up to about $750/month or lower your account value expectations. Considering that we are at a time when recession risk is elevated (though not imminent) as well as exceedingly high equity valuations, you may come to terms with the idea of increased bond/cash exposure in your overall strategic plan. But of course fomo in the market is hard to overcome.