My question is, if I could get people to have me hold money for them—and for the sake of argument let’s I receive a total of $100 million dollars from 1,000 people—how much money could I earn in interest if I invested it? Assuming I wanted zero risk to my $100 million dollar principle?
How about $10 million? $300 million?
Thanks.
If you want the lowest possible risk, you could put the money into US treasury securities. The current yield on 20-year bonds is a whopping 3.03%. On your principal of $100 million, that would give you $3.03 million per year, assuming you did not reinvest.
If you reinvest your earnings, the compounded interest would get you:
Year Total
1 $1.03 million
2 1.06
3 1.09
4 1.12
5 1.16
6 1.19
7 1.23
8 1.26
9 1.30
10 1.35
And so on.
Of course, if you want to allow people to get their money back in less than 20 years, you’ll neecd a short-term account. Those offer less interest. For example, a 91-day T-Bill (T for Treasury) is currently paying a magnificent annual rate of .03 percent.
Your $100,000,000 investment would then earn $30,000 per year.
w00t. Time to buy that new Lambo with the eagle-down seats and dashboard made of solid eagle’s beak.
And you’d have to pay tax on the interest, and most importantly the people who lent you the money would expect interest from you. Why should they let you hold onto their money instead of buying bonds or putting it into a CD on their own. If your answer is they have you do it because they don’t want their money locked up in a CD for a year or more in case they need it, then you have just discovered what it is that banks do. They lend at longish term and usually take in money at short term – they provide liquidity. And that’s why short rates are typically smaller than long rates.
Very helpful answers. What I was wondering was if that kind of money would give you some sort of clout with a large financial institution. So they might say, if you keep all the money here, we’ll give you a sweet deal on the interest and allow you to have a percent of it liquid at all times. Possible?
Wait, then you’d be earning $30,000 every 91 days, no?
Absolutely. But then you wouldn’t be investing in treasuries, it would be something with more risk.
No, the interest rates are calculated on an annual basis. You can cash in your T-Bill after 91 days, but you’ll only get 91 days of interest. That’s $7,500.
Roll it over for another 91 days and you’ll get another $7,500, etc.
No guarantee that you’ll be able to get .03% when you roll it over. The next 91 days may be .02% or .04% or anything else.
:smack:
I went back to review this thread and I’m getting confused here with the $1.03 million and $3.03 million, The current rate seems to be right, so should all the numbers in the chart be $3.XX rather than $1.XX?
It’s possible. But:
Even a very large financial institution is riskier than the US government, and your original stipulation was “zero risk to capital”. There is no such thing as zero risk to capital, but by investing with a “very large financial institution” you are accepting a greater risk to your capital than you need to.
If you want a percentage liquid at all times - say 1% - then you can put 99% into US bonds, and 1% into short-term deposits. If you want more return than you can get on US bonds, by accepting greater risk to your capital you can buy higher-yielding bonds of other governments or of large financial institutions, and still get your liquidity by keeping 1% on deposit, without having to bargain for it as a special term.
I made a mistake and calculated the interest for $1 million of principal instead of $100 million. The actual chart should be:
Year Total
1 $103.03 million
2 106.15
3 109.36
4 112.68
5 116.09
6 119.61
7 123.23
8 126.97
9 130.81
10 134.78
I would imagine that long haul you would do thing like buy a chunk of 90 day bonds, a chunk of 1 year bonds, and a few 5, 10, 20 year bonds. Eventually you have piled up longer term higher interest bonds to the point that you have long term bonds maturing all the time.
There’s a similar strategy called a CD ladder. This strategy used to be popular among retired folks who didn’t want the volatility of equities. But CD rates have been so low this decade that it often isn’t worth it.
The trick is to pay the original investors a good rate of interest which will then attract more investors. If you can’t get enough interest to pay your investors, just use the deposits of subsequent [del]mugs[/del] investors to keep up the payments and keep spreading the investor base.
When you have amassed enough millions for all your future needs, cash it all in and emigrate to a country that is not likely to give in to pressure from your government - Syria sounds good, or maybe even Argentina.
I think it’s also worth mentioning that even US Treasuries are not zero risk (literally nothing can correctly be described as “zero risk”, in my view - even keeping it under your mattress you have fire risk etc, not to mention inflation risk). Although the US has never defaulted on its debt to date, it’s probably closer to doing so at the moment than at any other time in its history. I’m not saying it’s likely, but it could happen.
That aside, you also need to consider inflation risk. This is the risk that the value of your principal does not increase by at least the current rate of inflation, which if the case will mean you are losing money in real terms.
This plan sounds familiar…is your name Bernie?
He certainly Madoff with my money!