Speaking (unfortunately) largely hypothetically, what’s the best way to invest about $20K, safely and for a relatively short term?
I know Government Bonds can double the investment, but that takes something like 17 to 30 years. What if I didn’t want to wait? What’s the safest way- if there is one- to add, say, 10 to 20% in less than three years?
Or to put it another way, say I invested the whole chunk in some manner or other- what’s the most I could expect to gain over a year? Two years? Is there anything that does better than simple interest in a savings account, over that short a period of time?
If there was a “safe” way to make 10 to 20% in three years then no one would work. Just about every method of investment that yields a return involves risk. It’s called risk vs. reward.
The lowest danger factor is probably in government bonds, which you’ve already said you don’t want to wait for. That’s where the risk comes in.
Mutual funds are a fairly safe way of playing the stock market. You’re probably not going to strike gold with a mutual fund in today’s economy (assuming you’re American) but it’s much safer than playing solo.
It blows my mind when people say “If I had a million dollars I would just stick it in the bank and live off the 100k a year intrest.” I always have to ask “What bank are you going to that gives 10% intrest?”
Put every last dime, lock stock and barrel, into one of them thar whizz-bangy in-ter-net companies. How could ya lose? Them techno-geeks, they’s onto a gay-ran-teed goldmine, I tells ya!
CDs usually do better than savings accounts and are also no risk. You’re not going to be getting a 10% return on them though. I did get a 7.5% rate on an 18 month cd, but that was a few years ago before interest rates tanked.
You can get variable terms (usually anything from 3 months up to 2 or 3 years) and the interest rate is locked in. You can’t access the money during that time unless you pay a penalty. It’s a gamble in the sense that if interest rates improve over the term of your cd you may be locked into a low rate. However, it’s risk-free in that you can not lose your money and they are FDIC insured.
Sometimes banks will run “specials” for opening cds. For example, E-Trade recently sent me a postcard offering me an extra $50 deposited into the account for opening a cd with $5000 or more (effectively adds a point of interest). If you shopped around for that kind of thing you might be able to get a pretty safe 4 or 5% return after 3 years. (For comparison, E-trade’s super savings account interest rate on an account with $20K in it is about 1.8%)
I’m not an accountant or CPA or anything, but I have to disagree with Cisco. This is all assuming you’re American.
Instead of using mutual funds I would buy some index funds–how about $2500 each of the three major indexes, QQQ for Nasdaq, SPY for the S&P 500, and DIA for the Dow Jones.
I’d then split up some more (maybe another $7500) among companies in several sectors–INTC, LUV, GE, COST, SNE, either LMT or NOC, either PFE or MRK, maybe an energy stock like CVX or XOM, and either DOW or DD. So that’s about $750 each in individual stocks in individual sectors. Of course, the specifics would come down to more factors than just big names, of course. I might even look into some overseas markets for more index funds or a company or two.
Now, I’m pretty young (20) so I am going to weight heavily towards stocks for my long-term investing now. However, I personally would throw another $2000 into my IRA–I won’t be able to touch it for another 45 years, but you should see the interest over four decades. That leaves about $3000, which I think I would throw either into CDs, HH or I bonds, or a savings account. It’d depend if whether or not all this money can safely be invested or whether I wanted a couple thousand liquid in case of emergency.
Assuming you don’t want any of that in an IRA, I would still throw a fair bit of that last $5000 into CDs or government bonds. I still would consider a savings account.
Oh, another thing. Might I suggest looking at The Motley Fool? Many newspapers carry their columns at least once a week in the business section. The good starting advice is free, but the messageboards and advanced advice will cost you.
Also, definitely stay away from IPOs and day-trading. If you start doing that, you might as well go to Vegas–at least they give you free drinks while you throw your money away.
Try some paper-trading too. I don’t know of any good sites, but it would give you an idea of how your ideas work if you have time to play around a bit first.
While this appears to be a good idea, better check out those companies which make up these indexes.
For example, last time I checked the NASDAQ QQQ index is very heavily weighted by one very large software company based out of Redmond, Washingtion, to the point the QQQ is really meaningless.
The ROI you are seeking in the time frame you allow really is not possible in today’s markets. You might find some investments but they will not be the kind to plunk down your cash and review the returns every so often. From my experience, you would need to watch your investment daily, as well as read up on all the business news associated with your investment – and be prepared to move it at a moment’s notice.
It appears you need to do quite a bit of homework before you make your hypothetical investment. Homework about the markets and investing first before you start talking specifics.
Of course, I have this little diddy you can invest in right now …
Talk to a banking officer and simply ask what they can do for you. Tell him/her you want a risk free investment and you may be able to get 7%-9%. 10% risk free is not an option. People will tell you that index funds and other things are risk free but this is not the case.
Also, seriously consider the term of your investment. An index fund will provide a very good return in the long run but may go through periodic slumps. Consider your goals carefully before you invest.
Good point and my mistake. I missed that he was going for a three-year investment. As I said, I was thinking long-term and not selling for at least 5 years.
[slight hijack]See, I expect to spend my entire life paying into a broken SS and never getting anything back. So I plan on making my retirement investments early, often, and long-term.[/slight hijack]
Actually, just because I was curious, I went ahead and set up a paper portfolio using about what I suggested. I can tell y’all how it turns out if you’d like.
Other category of investment: a relation had land with a run-down cabin on it. They put something like $20k into updates, and began to rent it out for $1200 per month, an effective return-on-investment of 72% per year. Well, assume some further expenses, still easily over 50% per year. You might scan your circumstances for some such possibility.
Also, paying off credit cards averaging 20% a year gives you 20% return. Beats earning 7% and paying 20%.
[can’t resist hijack] There has been a public relations campaign slamming SS for some years now. Consider the benefit to the brokerage houses if SS withholding money gets channeled into Wall Street. When enough of the votors persuaded, it will be possible to make the move, and it works as a self-fulfilling prophecy.[/hijack]
Oh, what I believe in, is Social Security and personal saving and investing.
Another: $20K could put you through a year or two of career-oriented education. Calculate the paycheck differential between now and then. (It’s been done, made a huge difference to me.)
I would be careful to not read too much into what the Motley Fool has to say about specific investing strategies. Back in the day they advertised their site as where you could learn how to crush the market. They have advance some dubious trading strategies such as the foolish four which they only retracted after a long and acrimonious debate on the subject on their messageboards. Where it was shown that strategy had worked in the past because of the extensive data mining used to produce it.
I gotta’ point out that the OP stated a desire to to cash out in the relatively near future.
Stocks are NOT a good investment for someone who needs the money within the next 20 years. If you can’t hold long-term and aren’t out to gamble on your returns you SHOULD avoid stocks or even stock index funds.
I’d suggest blue-chip corporate bonds, mutual funds with the word income in the title (these are lower-risk and tend to give returns with very high consistency albeit at higher yields), CDs or perhaps government bonds if the OP is particularly faint of heart.
If you choose US Fed government savings bonds, this page lists rates. http://www.savingsbonds.gov/sav/sav.htm
Note that they’ll let you buy your bonds ON YOUR CREDIT CARD last time I checked, so if you want to earn serious frequent flyer miles or whatever and then pay it off before the grace period, that’s another way to maximize ROI. Some people also buy those bonds on their 0% APR for 6 months cards and then sell them at the 5 month point. They pay a penalty but still earn some government-guaranteed interest. Credit for that ideas goes to discussion forums at www.fatwallet.com
Two other options for short-term (2-3 years or so) investment that no one’s mentioned yet:
Money market acounts. Typically pay a bit better interest than a savings account, and are nearly as safe (although they are NOT FDIC insured). Allow quick access access to your funds, too (in contast to CDs).
Short term or intermediate term bond funds. Similar in overall concept to the stock market mutual funds most people are familiar with, but they buy and sell bonds rather than stocks. Gives you the safety of bonds with more flexibility than purchasing individual bonds provides.
What to invest in depends both on how soon you’ll need to cash in your investment, and how badly you NEED the money you’re investing. If you know you are going to have to withdraw your funds within a 2-3 year time window, and you absolutely CAN’T risk losing any of your principle, then stick with money markets, CDs, and bond funds. You won’t get all that much growth - but you also won’t be at much risk of losing some of your initial investment, only to find that you don’t have a long enough time horizion to regain it before the time comes to cash your investment in.
