May 2020

Love the show! Y’all make personal finance fun.

 I am one year out of college living at home with my parents (rent and grocery free – very blessed situation) and have the ability to put a good portion of my take home income into investments. I put 30% of my income into a company-sponsored Roth 401(k) and split up remaining discretionary income between a General Investing account with Betterment (93% stocks currently), Fidelity (FZIPX & FZILX – both $0 fee), and some shares trading on Robinhood.

 That being said, with some short term goals (5-10 years down payment on a house, new vehicle, etc.), which of these accounts do you suggest I fund? I am pretty risk taking and can handle some losses.

 Thanks and keep up the great work!

 

  Gardner

 

Gardner, thanks for the compliments. Nothing like getting to your question almost a year later but holy cow, what a year it’s been. Hopefully you stuck with your original investment plan and are now enjoying the fruits of dollar cost averaging into a downturn (Covid) and reaping the rewards of the upturn. 

We recently took a question about this very subject on the Podcast as a couple had recently paid off a car and were asking about whether or not they should pay down other debts or begin saving for a car again. This led us down a path of discussing time frames for goals and where to put the capital. 

Despite last year’s rewards for your investing efforts, I’m still in the camp that financial goals within the 4-5 year time frame should be kept out of the market and in a safe, liquid, boring savings account. I am well aware these earn zero return, which is very frustrating but the reality is they pose no risk either.

Let’s assume you kept your investment plan going, remaining fully employed and living home rent and grocery free over this entire last year during Covid. Maybe you had no issues sticking with your plan and as mentioned are enjoying the fruits of that strategy. The reality is often times, many are not so lucky. On the flip side what could have happened is when the market declined and it looked as if world was ending, you may have said to yourself “I want to buy a house soon, having this money at risk is dumb, I should at least sell now and protect what I have” and baam, now you sell while down 20 – 30% and lock in those losses. “But what if I just don’t sell?” Yes, I understand this argument as well and assuming you don’t need that money through loss of a job or other emergency that is an option. While I do believe that over time the market will be just fine and return to new highs, always, the fact that this has been happening so quickly is actually a rather new phenomenon. Most often these economic downturns and market corrections last quite a bit longer and sometimes we can go several years or even more than a decade without market gains. 

It has been a very long time since this has transpired so folks have become conditioned to believe that when a market corrects it will always bounce back in a matter of weeks if not days, but the reality is that this may not always be the case so as boring as it is, I will always choose safety over increased returns. 

Since you have no other expenses, or at least you didn’t when you wrote, I’m going to say to consider a partial half investing, half savings approach for your goals so that you have options in the event we run into market difficulties or an economic downturn. This way not all your eggs are in the market’s basket and you can at least have some of the savings protected. 

Go get ‘em!