Hello and welcome to another episode of Ask Marco where I answer your investing related questions.

Today's question comes from Armen and he says, hi Marco, I'm a long-time listener. Thanks for all that you've done with your podcast. I have a question about how to efficiently invest my money that I am saving for a down payment. I allocate a chunk of each paycheck to saving for a rental property down payment and I was wondering what you think is the most efficient way to invest that money such as CD's, T-bills, or just in a regular brokerage account in stocks. I've been doing a lot of research and I can't decide what is best. Thanks so much! - Arman





So, Arman, that's a good question. I guess you have to look at the time horizon. Are you saving with the intention of deploying these funds in a relatively short period of time, let's say 90 days or less? Or are you saving at a pace where you won't need the funds for let's say a year or more?

That could make a a difference in how you actually save the funds. So if you need the funds to be fairly liquid, then you'll want to put them in what are essentially referred to as cash equivalents. And these are typically investments that have short term maturities of less than 90 days and they're considered very liquid because they can be readily converted to cash. And so common examples are things like stocks and marketable securities, things that are publicly traded and easy to get in and out of us. Treasuries and bonds mutual funds are typically less volatile than stocks. And so they probably, and possibly can give you a better return than just putting it into, let's say US treasury or a bond. But then of course there are money market funds and this is a type of mutual fund that invest in very low risk, low yielding investments like municipal bonds.

So it's similar to a mutual fund and a money market fund and they're very liquid. So these are the types of things that are very liquid but produce very little in terms of a rate of return. In fact, some of these are so low, you know, it could be half percent one, 2% in terms of rates of return that you're actually losing money when you factor in the real rate of inflation. So if inflation is like 3% 4% 5% whatever number you want to believe, but you're getting a 1% return on your, your savings, your cash, you're actually losing money. Now is this a big deal? Possibly not. If you need the funds right away or in a relatively short period of time, this is not going to make or break anybody. So it's not that big of a deal. Uh, so if you need them liquid and in a short period of time, 90 days or less, cash equivalent is probably the best place to keep it.

A savings account. You don't get anything from a savings account, but it's just there. So it's easily easy to access. Now, if you're talking about a time horizon that is more than a year and less than five years, that's what you might define as a short term investment. So there's no formal definition or official definition of what that means, but essentially short term means one to five years and if that's what you're looking to do, then there are various options out there depending on your comfort level. I mean, I'm not a big fan of the stock market. There's a lot of volatility, but of course, you could park it in an ETF or an index fund, which is relatively stable, but it does fluctuate from year to year depending on what the market's doing. And let's face it, we've seen years where we've seen big drops in terms of the overall market.

So that's why it's not a favorite place for my, you know, my cash. If I'm going to just park cash for a short period of time, I'm okay with keeping it in an FDC insured account and the bank knowing that it's just there for the purposes of safety, liquidity and easy access and deployment. But if you're looking for higher rates of returns, you're going to have to look at some, you know, alternative investments there.