So due to a special credit I had no idea existed (thanks, TurboTax!), I’m due to receive about $2000 more from the I.R.S. than I anticipated. Since I’m financially solvent right now and don’t need to spend the money on debt, I’d like your opinions on the best way to have this money work for me.
Bonds? COD’s? The stock market? Should I just let it sit in my savings account? Something else?
How liquid do you want it to be? How much return would you want on it?
You can go anywhere from a money market fund to an index fund in balancing return and risk. Might be a good excuse to start an investment account somewhere and put some money into it every month. In 30 years you’ll be thanking yourself.
If you don’t mind tolerating some short-term risk for a likely long-term gain that exceeds your savings account and bonds, and don’t want to do a ton of research on individual stocks, I’d suggest a mutual fund. If you pick an index fund that tracks the S&P 500, in a typical year you’d see a return of 8-12%, although things have been a bit wild in recent years. If you’re investing it for the long haul, you’re more likely to see an annualized rate of return in that 8-12% range, but any single year could be quite a bit higher or lower (or even post a loss).
Mutual funds like that often have a minimum investment period; if you withdraw before then, there may be a fee, so you wouldn’t want to invest unless you’re confident you won’t need the money soon.
Plus, all the history of the S&P is obviously from the 20th century, which is a time period in which the US saw tremendous economic growth. That might not be replicated in the 21st.
[That said, I myself have some money tracking the S&P, so I’m not knocking it. I figure it’s a way of just going along with the US economy without having to think about it too much. But I would not assume anything like an 8-12% return.]
The truth of the matter is that $2,000 is not a lot of money, investment-wise. The difference between a 7% return and a 5% return on $2K is all of $40. Not something worth agonizing over. A lot depends on whether this is intended as the sum of your investment portfolio, or whether you intend to add to this amount going forward. If the latter, then more thought is warranted.
One other note about mutual funds: be sure to check out the fees. (I believe Vanguard is generally the lowest.) These can eat a lot of your return, especially if you’re only investing $2K.
An extra $2 million can be invested in a variety of ways, especially considering you willingness to invest long term. Have you looked at private equity investments? Secondary private equity funds have been doing very well recently also. Congratulations on your windfall and good luck.
Do you have a 3-6 month emergency fund in liquid cash?
If not, use this to start one.
If you do, then you can start reading MotleyFool.com and/or Michelle Singletary’s Personal finance column at the WashingtonPost.com. And do not invest in anything unless you understand the risks associated (there is risk with every investment, no matter what the pretty brochure tells you_
Talk to a financial adviser. See Waddell and Reed “Office Locator.” When we finally figured we were adult enough to seriously think about retirement, we sat down with an adviser and figured out what we really needed to save for the future. I wouldn’t go to a bank. They never really seemed to have my best interest in mind. The Waddell and Reed people (or at least my two different advisers we’ve had) have been really helpful.