A friend has recently come into some money and is trying to figure out where to put it both for security and the best return available. All I’ve done is put money into my work 401K and stock purchases, so I have no insights for her.
Any help is appreciated and if this is better suited for IMHO please move it there.
A taxable account, presumably?
There is very little yield premium for CDs over Treasuries at the moment, nor for corporate bonds. Just stick with Treasuries, instant liquidity. Treasuries are also exempt from state tax - that makes a significant difference if you are in NY or CA.
With such uncertainty about inflation prospects, the most conservative approach is to keep to fairly short maturities (I would say under 2 years) and just reinvest when they mature. The interest rate when you reinvest will track with whether inflation is higher or lower at that point in the future.
There is no ultimate risk in Treasuries, but with this debt ceiling nonsense there’s a non-zero chance that something weird might happen at the point when the ceiling is actually hit around July. So I have tried to avoid maturities from June to Septermber 2022.
Treasury yield curve here, around 5% to 1 year.
Fidelity is excellent for fixed income if you’re opening up a new account. You can trade Treasuries online in seconds, very tight bid-ask spread, instant liquidity if you need to sell before maturity.
This is a very complicated question and the answer is, of course, “it depends.” If it’s a large amount of money, it might be worth finding a good financial advisor.
The important questions are how much risk tolerance does she have and how soon does she want to access the money? If she’s not going the advisor route and she wants to keep it in absolutelysafe instruments, a credit union might be a good place to start. Local papers usually publish CD and treasury rates in their business sections; right now, I’ve noticed local credit unions are offering higher rates on 1 year CDs than on longer terms, probably because they think rates will fall. None of the guaranteed rates are going to beat inflation; if she’s planning to leave it invested for a while and she’s not going to get an ulcer over the uncertainty, a diversified portfolio that includes stocks is likely to earn her more in the long run.
It’s not because they think that, it’s because that’s the market consensus. They price off the Treasury yield curve. Expectations right now (which have changed considerably this month, we’ve had some hot numbers) are that rates peak around 5.5% toward the end of the year, then start falling again.
It also depends on the amount of money your friend inherited, her age and her tolerance. For instance i inherited $50,000 from my grandmother at the age of 35. I put it in non-retirement equity index funds.
But that’s because i have enough time and so would like return more than security. On the other hand my best friend invested in indexed universal life insurance policy with an early cash value rider. It’s got a 25 year window and begins paying him distributions when he’s 60. He had to pay maybe $350,000 to pay for the policy.
My best friend and I are mainly separated by income. To me my inheritance is a lot, to him it’s a little.
If your friend’s going to look for a financial adviser, she may want to get one who takes an annual fee instead of getting paid by commission. That way your friend can learn about investments on her own so she doesn’t have to rely on a financial adviser
All these opinions Are from a
^^Uh-oh! Looks like they got him!
I know I’m entering IMHO territory here, but since the OP invited such posts I think it’s fair to do so. I, personally, recommend ETFs (exchange-traded funds) to anyone seeking to invest money, provided that they won’t need short-term access to the money. Interest rates on anything that’s fixed income (such as CDs, bonds etc.) are below interest rate, so you’re certain to lose money in terms of real value. ETFs give you exposure to equity (i.e., share) markets, which, in the long run, have so far always outperformed fixed income on average. And the ETF structure means you’re getting exposure not to one specific company but to the market as a whole, which is great for diversification. They’re also low in fees, and you can choose between distributing funds (that pay dividends on a regular basis) or accumulating ones (where dividends arre automatically re-invested).
These are Europe only. Funds must distribute income in the U.S.
How would savings bonds compare with Treasury bonds? I know that liquidity is an issue with a savings bond like losing the last three months of interest when you cash it in less than 5 years after purchase.
Interesting, didn’t know that. I personally like the accumulating ones - I don’t spend my entire income on consumption, so I save each month, and having a distributing ETF would just mean there’s more money for which I’d have to do the investing.
One basic understanding to keep in mind is that US government debt is the safest with usually the lowest interest rates because it is backed by the full faith and credit of the US of A. Tbills, treasury bonds, etc.
Pretty much any time there is a higher interest rate, then there is higher risk. This is true of municipal bonds, which are backed by the municipality (like NY City) that occaisionally go bankrupt. Or Certificate of Deposits, which come from a bank and not the US government (but the bank can have US government insurance for IIRC up to $100k. And this continues to junk bonds, which have much higher interest rates but also much higher rates of insolvency.
So, if you value safety and the most liquid financial market in the world, then it is a no brainer to go with US treasuries. If you want higher interest rates, then you absolutely are taking on more risk.
FDIC (and NCUA for credit unions) insurance covers up to $250,000 nowadays, although it’s really, really unlikely that your bank will fail, given the modern regulatory environment.
As others have mentioned, a financial advisor is the way to go if the amount is substantial. It is important to find one that has no interest in selling you something. The key words to look for are CFA (Certified Financial Advisor) and fiduciary.
I recently retained a CFA and it is one of the best decisions I’ve ever made. It is not cheap, but it is not as expensive as making bad financial decisions.
mmm
It’s nice that interest rates are such that these options are appealing again. I invested in iBonds last year because they were offering 9 point something percent (now reduced to 6 point something percent, but still). A quick check just now of CDs offered through Schwab shows several 18 month CDs paying more than 5%. If I wasn’t retiring in three months I’d be sinking some cash into them.
ETA: oh, and money market funds are also paying hefty interest rates. I know they’re’ not quite as safe as an insured savings account, but they’re darn near. And they’re a lot more liquid than CDs or bonds.
Same here; I bought the maximum $10,000 in i-bonds when they were offering over nine percent, and then again last month, because I got more than six percent. (These interest rates are, I understand, limited for six months or so and then the bonds get a new interest rate.)
My wife and I both have I-bond investments. A person can also get them for their children, as long as they have SSNs. They can go to zero, but you don’t lose principal on them, and if you’re careful about when you cash out, you won’t lose any interest, either. Even if the interest drops to, say, 1%, it’s still far better than what CDs are paying.
Not really.
The interest rate that matters is the real interest rate. Which is the one you get by subtracting inflation from the headline rate. Which real rate remains negligible.
The only nice thing you can say about CDs and savings bonds is that your principle (probably) won’t disappear. It may well shrink at the rate of inflation, but it won’t crash like an investment in, say, Tesla or Google might.
They are great vehicles for parking money you’re expecting to spend in weeks to maaaybe a couple years. IOW they’re a fine temporary storage mechanism. As a long term investment vehicle their performance is atrocious. Always has been and always will be. It’s built into how they’re priced and the risk profile they offer.
Where the word “risk” has the very, very narrow definition of “likelihood of return of nominal (not real) principal”.
And published real interest rates do not take into account tax on interest income. That’s a huge drag if you’re trying to beat inflation, and the drag increases as the absolute level of inflation and interest rates rises.
How do you mean? You may opt to disburse cash or reinvest dividends if you set it up before hand. It’s not a legal or policy thing, but offered by the broker (DRiP)
All the treasury instruments have different names which is mostly historical/hard splits - bonds are long term, notes medium term, and bills short term. But for the most part their treatment is similar and different from other investments - OP should note that they’re worth a specific amount but sold at a discount, whereas things like money market have a APY. You can translate the numbers, but they’re not to be used interchangeably.
In Europe, there are accumulating funds that reinvest income within the fund. The number of shares of the fund that you hold does not change, and the price of the fund itself rises steadily relative to the price of a distributing fund. (Incidentally, the German DAX stock index is like this. It is a total return index that assumes reinvestment of dividends. Most headline stock indices are not calculated this way, they are price return only.)
In the U.S., this is not allowed. ETFs must distribute at least 90% of income. You can choose to reinvest the distributions by buying more shares of the fund. Most brokers can automate this process for you within your brokerage account.
Regulated Investment Company (RIC): Definition, Examples, Taxes
an RIC must distribute a minimum of 90% of its net investment income in the form of interest, dividends or capital gains to its shareholders