Friday Q & A – How should I invest my home deposit?

May 24, 2019

3 min read

Updated: Oct 26

Originally written in 2019. Some rules, rates and figures have changed since, so check the current details before relying on them.

Question

How should I invest my home deposit?

Answer

This is a question I often get asked and the question I always ask back is “how long until you plan to buy a place?”

Saving for a home is hard so it definitely helps to get a helping hand from investment returns however by seeking higher returns you are likely exposing yourself to additional risk that you may not be able to afford.

The share market is the most common place people think about parking a deposit, but it comes with real risk over short time frames.

The share market has provided good returns over the long term, but it moves in unpredictable cycles. A commonly quoted minimum time frame for share investments is 7+ years (e.g. you don’t need the cash as a deposit for 7+ years).

But why 7 years?

There’s no exact answer, some may argue less and some may argue more however this is a commonly recommended timeframe (including by Vanguard, one of the biggest investment managers in the world).

It’s undeniably a long-term strategy though as the share market can decline and stay declined for a long period of time and in situations like this, you would want for the share market to recover so your deposit is back to its original value so that you can purchase your home.

Back in 2007 in the Global Financial Crisis, share markets declined a lot and a diversified portfolio primarily invested in shares would have declined about 45% before reaching its low after around 18 months. So if you invested a $100,000 deposit into the share market at its peak, around 18 months later your investment including dividends is worth around $55,000. Including dividends, it would have taken you around 5 and a half years to get your money back. Sure, that $100,000 is now worth some $185,000 but was this person planning on buying a home 12 years later?

Source: Morningstar

So what’s the alternative?

Cash isn’t a great long-term investment, as after tax on interest and the rising cost of living it can go backwards in real terms, but it’s secure. When this was written, savings rates were in the high 2% range. Over a short time frame, that security is the main thing cash offers: the deposit is there when you need it.

But what about the First Home Super Saver Scheme?

I wrote about this here and there are tax savings on offer however it’s an overcomplicated scheme, and the same time-frame point applies to how those contributions are invested, otherwise you could be taking from your future self if the market declines and doesn’t recover by the time you withdraw your contributions.

I cover this in more detail in my video, Best High-Interest Savings Accounts | Australia, on the Edvest YouTube channel.

See what other Australians have said on Reddit: r/fiaustralia thread on the steps to financial independence, which mentions Kyle's spreadsheet.

Explore free Australian finance education from Kyle Frost at Edvest, including the Edvest debt recycling course.

Friday Q & A – How should I invest my home deposit?

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