As someone who has only invested in long-term retirement funds, what short-term, non-retirement funds should I consider investing in?
I just sold a house that was paid for, and my current mortgage is at a 4 percent interest rate. I’d like to invest the funds from selling the house, since I can likely earn better than 4 percent, but I’m not sure how to go about it. I understand long-term retirement investing, but I have never invested money in shorter-term, non-retirement funds. At some point, I would probably pay off the house with the proceeds, after I earned enough. What sort of non-retirement funds should I consider?
Based on the goal of using the funds to pay off the mortgage at an unknown and flexible future date, you will want to invest the funds in a traditional taxable account. You can set one up at a discount brokerage company, with a financial adviser, or directly with a mutual fund company. These accounts don't have tax advantages, but you can take the money out anytime without worrying about paying penalties to the IRS. Additionally, most of your profits will be taxed at the much lower capital gains rates if you hold the investments for more than a year.
Regarding the funds, academic research demonstrates low-cost index funds are most likely to provide the best returns when comparing similar fund strategies. The exact funds will depend on the length of time and your risk tolerance. Funds that track broad-based indexes such as the S&P 500, the Russell 3000, or the Barclays Aggregate Bond index are good examples to start your research.
Unfortunately, I cannot make individual fund recommendations, as it would be illegal without fully understanding your goals, financial situation, and risk tolerance. Although I would tend to lean toward ETFs as they are more tax-efficient than mutual funds.
Your exact choice in mutual funds or ETFs should also be based upon what goals you are trying to achieve. You mentioned you might want to pay off the house with the proceeds, but there may be other goals you would want to consider as well. Possibly starting a business, taking a major vacation, retiring early, or funding a child's education. Make sure to analyze your ability to achieve these other goals and how paying off the house would impact them.