Buying an apartment: Should the money be invested?

It takes a lot of time to be a genius, you have to sit around so much doing nothing, really doing nothing. – Gertrude Stein

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
In our family one of the most common insults one child hurls at another is to be called a “genius.” While for many that would be a compliment and an indication of intellectual prowess, for us it is an insult. It actually means the opposite, it means that you did something stupid. One of the kids actually likes to be referred to as a genius, and he loves to just sit around and do nothing. The rest of the kids always roll their eyes when he uses the “genius” title, but clearly they have not heard of the aforementioned Gertrude Stein quote.
Believe it or not, even in investing, sometimes it’s better to sit and do nothing than try and make money. I do not know of many people who like to see their money sit and earn nothing, especially when the stock market is trending higher. The question could certainly be asked – if over time markets tend to perform well, why shouldn’t one take all money sitting in cash and get it invested? In fact one of the most frequent questions that I receive is about what to do with money set aside for the specific purpose of being a down payment on the purchase of an apartment. Over the last two weeks I have probably had this question asked five times, and my response usually leaves the apartment hunters frustrated.
Can’t afford to lose
Those who ask me the question usually have short-term time horizons, usually up to two years. This means that within 24 months they will buy a home. Due to the short-term time horizon, my advice is to NOT invest the money in anything with an element of risk. Why? The answer is simple. Because this money is earmarked for a down payment, and if the market were to drop by 20-30% that would have a huge impact on the ability to even make the purchase.
1-2, or even three years, is just not enough time to invest in assets with risk. If things don’t work out well, there is just not enough time to recoup the losses. Keep in mind that when pundits are out there preaching historical market returns of 9-11%, that’s based on many decades of data, not a few months worth. Unfortunately, I have met couples that didn’t take my advice and went ahead an invested their down payment money. Some are still waiting to buy the first home.
What to do?
Today there really isn’t much to do. With interest rates near zero in the US and Israel, deposits yield next to nothing. If you hold US dollars, Certificates of Deposit (CDs) are the best choice. They are insured by the US government and pay some small amount of interest. While CD rates can change, 1-2 year deposits are yielding a lot less than 1% annually. Other than being government insured, it probably doesn’t make sense to tie up the money for 1-2 years for virtually no interest.
Similarly, for Israeli shekel-based investors both short-term deposits and/or government and corporate bonds are also an option. Unfortunately they also are paying virtually no interest. The downside with leaving money in money market or in short-term bonds or deposits is that with interest rates near zero, the returns can be lower than inflation. This means that in two years when you buy your home the purchasing value of your money will be less than it is today. If inflation is running at 2% and you are making anywhere from 0- to less than 2%, you are actually losing money in real terms. The way to protect the future purchasing power of your money is through inflation-linked securities. Both Israel and the US have assets that are linked to inflation.
I am well aware that it can be frustrating watching your money sit and not grow in value. Save the risk for longer-term investments. Money earmarked for an apartment means that you can’t afford to take any risk. If you truly want to be a “financial” genius, sit tight and do nothing, be patient and remember the goal for this money is to buy a home in a defined short-term time period.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
The writer is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.;