Q. We are planning to buy a house in the next year or so and are building up a down payment. What's a safe investment for that money that will give us a high return?

A. Ask us in a year and we'll tell you the perfect short-term, high-return place where you should have put your money! Hindsight's like that. Unfortunately, without the power to see into the future, you can't get a high return from a safe investment in a short period of time. The two factors are mutually exclusive. Sure, we've all heard of folks who doubled their money in a year, bought a much bigger house with the proceeds, and lived happily ever after. In hindsight, their investment doesn't seem risky at all. These are the same folks who always find a parking place near the entrance to the mall when it rains.

Even if you aren't expecting to double your money (or get a prime parking space), the principle is the same. The invisible hand of the market adjusts returns so that safe investments pay less than risky ones. A lot less. On average, stocks have returned about 11% per year over the last 50 years, while cash accounts and bonds have averaged up to about 6%.

While stocks outperform cash accounts and bonds, they only do so over long stretches of time. Any single year can find the average investor mopping up a flood of red ink every time he opens his brokerage account statement. If you really need to buy a house within a year or two, your best bet may be to put your down payment money in a money market account.

Why not certificates of deposit (CDs) or bonds? To use those financial products, you have to commit your money to them for a set period of time. If you need your money before the term is up, you may end up paying a penalty or even losing some of your principal balance. A money market account, on the other hand, doesn't have a set term. You can take your money out whenever you find that perfect cottage.

Money markets usually pay a bit less than CDs, but small differences matter only when they compound over many years. For a year or two, a half a point of interest isn't something to get excited about.

We know what you're thinking. You're thinking, "Well, maybe we don't have to buy next year. Maybe we could plan to stick it out in this apartment a few more years and really build up the old nest egg." If so, if you know that you won't buy anything for two years, then something like a two-year CD is worth considering.

The odds of beating a money market account by investing in the stock market improve the longer you stay invested. You are still taking on risk, but less risk -- especially the more time you give your investments. There are other risks, though. The housing market might stay red hot and your dream home could appreciate faster than your down payment. And there are costs. There's rent, of course, but you will also be losing all the benefits of home ownership, especially the mortgage interest tax deduction. You won't be building equity in your house, and you'll still have that grunge band living next door.

Explore your short-term savings options in our Short-Term Savings Center, where we've arranged some special deals for Fools. To learn all about brokerages and find one that's right for you, drop by our Discount Broker Center.

Finally, if you wish you had a financial pro to talk to, to address your specific personal financial situation and help ensure that you're saving enough and well enough to meet all your needs, then consider reading more about TMF Money Advisor. It's a valuable service we're offering, featuring customized independent advice from objective financial experts.

If you have any questions, thoughts or opinions on this column, share them with others on our Ask the Fool discussion board.

This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.

Copyright © 2004. All Rights Reserved.
Universal Press Syndicate
webmaster