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Looking for help... I'm a dedicated stock index investor (thank you fools!) but currently have a situation I'm not sure how to handle. I work for a large tech company (lots of stock options) and our stock has had a very nice run-up in the last year, so I'm looking at quite a bit of potential gains from that.

I'm also recently married and we're thinking about buying a new house within a 9-18 month window. So, I'm considering selling some of the stock options now as part of an overall diversification strategy and to pre-fund some of the down payment for the house. I have a few questions, and I'm hoping that folks here might be able to help.

-- guidelines: 9-18mo window, need to be able to get to it at any point (if/when we pull the trigger on the house)

-- primary question: if I sell the stock, where do I put the money in the interim? I need something that's fairly low-risk, but 5% on a money-market account doesn't seem like the right idea. I have a good understanding of bonds and credit markets, but I know very little about how they are bought/sold/traded (meaning I can explain how a municipal bond differs from a corporate bond, but I don't know how to buy either)... leading to:

-- what little I've read seems to imply that if I find a decent bond fund, I may be able to significantly beat the fixed-income alternatives with only slightly more risk. This is where I most need the help... if YOU had $200k or so and a 9-18mo horizon to invest it (again, risk tolerance is "low" but not "zero") where would you put it? I can't do straight bonds as I need more flexibility, right? Stocks (even ETFs) seem too high-risk.

-- if the answer is indeed a bond fund, how do I find one that won't get me rooked with loads and fees and all these other things that I don't understand?

-- tax implications of selling stock options? When I sell the stock I take a tax hit, but I'm thinking that the risk reduction is worth that. Opinions?
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I'm also recently married and we're thinking about buying a new house within a 9-18 month window. So, I'm considering selling some of the stock options now as part of an overall diversification strategy and to pre-fund some of the down payment for the house. I have a few questions, and I'm hoping that folks here might be able to help.

-- guidelines: 9-18mo window, need to be able to get to it at any point (if/when we pull the trigger on the house)

-- primary question: if I sell the stock, where do I put the money in the interim? I need something that's fairly low-risk, but 5% on a money-market account doesn't seem like the right idea. I have a good understanding of bonds and credit markets, but I know very little about how they are bought/sold/traded (meaning I can explain how a municipal bond differs from a corporate bond, but I don't know how to buy either)... leading to:

-- what little I've read seems to imply that if I find a decent bond fund, I may be able to significantly beat the fixed-income alternatives with only slightly more risk. This is where I most need the help... if YOU had $200k or so and a 9-18mo horizon to invest it (again, risk tolerance is "low" but not "zero") where would you put it? I can't do straight bonds as I need more flexibility, right? Stocks (even ETFs) seem too high-risk.

-- if the answer is indeed a bond fund, how do I find one that won't get me rooked with loads and fees and all these other things that I don't understand?

-- tax implications of selling stock options? When I sell the stock I take a tax hit, but I'm thinking that the risk reduction is worth that. Opinions?


Let's start with selling your options. You're in the money now. Sure there are taxes, but if you need money for a downpayment, which requires a short time frame, you need to treat the capital for the downpayment as something you have to keep safe, and stocks are not safe.

Sorry to tell you, but for 9-18 months, you are stuck with short term fixed-income options, of which a Money Market is probably the easiest. There are now also on-line Savings Accounts which are competitive with yields similar liquidity to MMs. If you are sure you won't be buying for at least 6 months, look at 6-month T-Bills through Treasury Direct, then move to something more liquid as you get closer to buying.

As to Bond Funds, I don't know who you've been reading on bond funds, but right now Vanguard's Prime Money Market has a higher yield than its Short Term Corporate Fund (which has been returning lower dividends than its listed yield for a long time, though I haven't checked for a couple of months). Anyway, the only way the Corporate Fund would do better is if short term interest rates drop between now and when you need the money. If they go up you lose. You look at bond funds with longer maturities and your risks get higher.
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Thanks Lokicious... What's the advantage of doing 6mo T-bills vs. a MM acct? Taxes? What about doing ETFs? Are there worthwhile value-index mutual funds that may also be an option?
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You seem almost desperate to buy something. Buy shares in a money market fund, e.g. the Vanguard Prime Money Market Fund, and quit twisting it.

db
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What's the advantage of doing 6mo T-bills vs. a MM acct? Taxes? What about doing ETFs? Are there worthwhile value-index mutual funds that may also be an option?

ETFs simply give you the option of getting out during the day instead of at the end of the day, as with regular mutual funds. You still are putting yourself at risk of losing principal if things go wrong. Same goes with value funds. If you want to get higher than safe returns of money you will need in the short term, you risk losing principal. There is no escaping that. In hindsight, of course, you will wish you had done something different. No escaping that either.

If you choose T-bills, you won't pay state taxes. In a high tax state, that will make a difference. Currently 6-month t-bills are at 5.1%, a smidgen higher than Vanguard's Prime Money Market (which is fully taxable). You can also lock in 5.1% for 6 months, in case interest rates go down, though you will lose out a bit if interest rate go up. Over 6 months, I doubt the difference will be as important as changes in mortgage rates and housing prices.
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...if YOU had $200k or so and a 9-18mo horizon to invest it (again, risk tolerance is "low" but not "zero") where would you put it?...

Before you get too fancy with your investing, you really need to look at what the sort of dollars you will likely to get getting if you take the extra risk. The problem is that if you can increase the return by 1% without taking lots more risk(which is unlikely) then you will only get an extra $2,000, and after taxes clear maybe less than $1,500. Not trivial, but when you consider that you would be risking losing a couple of percent or more of the $200K I would don't think that the risk would be worth the limited reward.

If it were me, I would probably just put half of it into a CD or T-bill and the rest in a money market fund. Splitting up the money between fixed and variable rate investments will help lessen the effects of interest rate changes.

Greg
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