I’m on the board of a small nonprofit - my neighborhood HOA, actually. We’ve got a decent amount in savings, and we’d like to put an amount in the upper five figures in a safe place that also gets a good return.
‘Safe’ meaning we’re running no risk of losing the principal. So an index fund of stocks would be right out, but an index fund of AAA-rated corporate bonds would be in our wheelhouse.
‘Good’ meaning by the standards of safe investments as just described. So we’re guessing that ‘good’ means an annual return on the order of 2% or thereabouts, 10% or even 5%.
But we don’t really know what’s out there. Any suggestions?
I would modify your use of words there. Do not use “no risk” because everything has risk.
Some things just have very very little risk (treasuries), others have very little risk (AAA corporate bonds, CDs), little risk (BBB bonds), some risks, etc
I would assume the person who we pay to do our taxes every year is a CPA. Don’t know for sure, but I can ask.
Still, I figure that the collective knowledge of the Dope probably exceeds that of a small-town CPA, hence this thread.
I agree that whatever investment we get should be laddered. We’ll still have a good reserve in an immediately accessible bank account, but if we, say, invested $60K, having six one-year $10,000 CDs, T-bills, or whatever, with one maturing every two months, would probably do the job.
The highest savings rates right now are about 2.0% and CDs about the same, though if you’re willing to keep it longer as high as 2.25%. It should be in a high yield savings right now while you figure it out.
All savings have the 6 transactions per month restriction, so this is liquid enough but not for daily transactions.
Note that you might get 0.10% for a $10,000 CD but 2.00% for a $25,000 CD, so it can be a little hard to set up a ladder and still make a decent return. (On the other hand, the interest earned is so insignificant, I wouldn’t sweat over it too much.)
We’d had it in one, at a big-ass bank that came into our area with a bang, and left equally quickly, and then we couldn’t get to the money. Long story, but it took us most of a year to get our money out, and now that we’ve accomplished that, we need to put it somewhere better.
For which? A CD? That’s why they’re not popular anymore, although they’re easier to access than they were 10 years ago. Savings? Something was wrong, it should take same day if local, and no more than 3-5 days if online.
I tried to set up a CD ladder about four or five months ago. I was working with a professional investment advisor. I found that there was very little difference between short term rates and long term rates, so a traditional ladder didn’t really make sense. Things may have changed since then.
Be careful about buying into a bond fund. It’s very different than buying single bonds and holding to maturity. Fortunately we are in a low interest rate volatility market, but when interest volatility returns the value of your bond fund can swing wildly.
Your bond fund isn’t valued at par. It’s valued at the discount or premium the underlying bonds are priced at relative to the market interest rates. If market rates move significantly then your underlying bond prices are going to move as well.
i.e. if your bonds have interest rates of 3-4%, and the market interest rates move to 5%, then the value of your bonds are going to fall.
That’s typically the way to get highest ‘govt risk type’ returns, best yields, nationally, on FDIC or NCUA (equivalent to FDIC for credit unions) insured CD’s. To answer another post, a ladder isn’t just if rates differ by maturity at a given time, it’s so there’s always some of the money coming up for maturity soon, and to diversify over time which rates you get. ‘Then we couldn’t get to the money’, don’t know what that actually refers to. If you insist on dealing with a bank face to face then you’re left with whatever rate and customer service of the local bank. I mean to look up best rates and reviews on sites like https://www.depositaccounts.com/savings/
and deal online.
However, managing a portfolio of CD’s is a (small) task. If you want maximum hands off, a single high grade bond mutual fund of moderate maturity will not fluctuate ‘wildly’ in value except in the most unusual circumstances of rate changes. But depending what price fluctuation you think is ‘too much’. You can scale it down from intermediate term funds (say 5 yr duration, IOW price would change around 5% for a 1%-point change in rates) to ones with duration around 2-3 yrs to a money market fund with duration almost zero. In a very few cases in the past MM funds suffered credit losses enough to get the whole market in a tizzy, but some such funds (Vanguard’s VUSXX is an example) invest purely in T-bills so are relatively (nothing is 100%,) ‘riskless’. Likewise short or intermediate funds might invest in ‘high quality’, or might be all treasury (slightly lower return but closer to no credit risk at all).
Managing a ladder of individual T-bills and -notes yourself is yet another option requiring some hands on work and probably a bit less work than dealing with various banks depending whose CD rate is highest at a given time. But treasury bill/notes typically yield less than (again) best (national) FDIC/NCUA gteed CD rates of same maturity though credit risk of the two is essentially the same.
Liquidity, however, is hugely different. A CD carries the same effective credit risk as a Treasury to a retail buyer who holds less than the $250k FDIC limit for the issuer. But not to a dealer who makes a secondary market, nor to a large institutional investor. So if you need to sell a CD before maturity, it will cost a lot more in bid-ask spread than a Treasury, for which the bid-ask spread is virtually nothing.
One important thing to note that’s always relevant to these discussions. The current low interest rate environment is a good thing, not a bad thing, for investors. Being concerned that you are “only” getting 1.5%-2% on your money is a mistake. Rates are low because inflation is low. The purchasing power of your money will be preserved far better in a low-inflation low-interest-rate environment than in a high-inflation high-interest-rate environment, especially if interest income is taxed.
In low interest rate environments people tend to want to take on more risky fixed income investments to “chase yield”. Remember that you don’t need to do that, because inflation is so low.
Whatever the HOA ends up doing, I would strongly recommend that you go through some professional advisor for the official advice. If the investments go bad, the people on the board don’t want the liability of having made the recommendations of what specific investments to make. But if instead you can say “We went with the recommendations of Joe Blow at EF Hutton”, then you’re probably in a better place if you can show you did your due diligence about picking a qualified advisor. If it’s just the regular people on the board without financial background making the decision, I would think that would open the board members to possible liability if the investments go bad.
For example, what if whatever the HOA invests in turns out to be a fraudulent ponzi fund and all the money is lost. There will likely be lawsuits. If the investment recommendation came from a qualified 3rd party, then the risk to the HOA will be reduced.
Of course professional advisors can give bad advice and don’t always know the future. But at least they are professionals and have the financial background to make qualified recommendations.
The thread earlier indicated the amount in question was $60k so obviously ‘retail’ from the amount and even such a question being asked. Although, depending on a given person’s preferences and value of time, $60k might well be too small to be worth doing anything but the simplest possible alternative (which would probably be to drop the money in shortish term, high quality bond mutual fund).
Anyway where the amounts make the difference between treasury and CD more relevant in absolute $'s over time for retail investors, you don’t suffer a ‘bid offer’ per se cashing in a CD directly with a bank/credit union. They will generally subtract an Early Withdrawal Penalty, usually 6-12 months interest. One reason that’s an important distinction is if rates go up. In that case the treasury sells at a potentially significant discount to the purchase price.
The CD always 'sell’s for par plus accrued interest minus the known EWP. In fact this amounts to an interest rate option. If you buy a 5 yr treasury now at ~1.62% yield and rates go up 2% points (not that a high probability obviously but just to illustrate), you just lose that 2% per year in opportunity cost for the rest of the 5 yrs, or in market to market value if you sell. If OTOH you bought a 5 yr CD at 2.75% (ballpark of best rate now, not a small difference v treasury to begin with) and rates go up 2% points, cash in the CD, pay a one time penalty of 1.37~2.75% upfront, and get a new 4.75% CD for the remaining years. If you put that feature into an options model it has non-negligible value, something like 0.25% per year. So add that to the 1.1%+ yield advantage of the CD to begin with and you’re talking a huge compensation for that liquidity difference.
If it’s money you’re likely to need all of right away then CD doesn’t work well. But if you might need some time to time without strict timeliness requirement, that’s where ‘ladder’ comes in (5 CD’s one maturing per year etc).
Best yielding CD’s give a boat load of compensation for their lower liquidity, especially in recent times, is the point. Other way to put it, many retail investors suffer a big liquidity yield penalty holding treasuries (stand alone or in funds) for liquidity they don’t actually need. The pricing is being determined in large part by institutions which need instant liquidity to use treasuries as hedging instruments (ie to go long/short treasuries financed in the repo market to offset the institutions’ interest rate risks on corporate bond inventory, open interest rate swap positions, etc or their need for a wholly owned instrument they can repo out to raise liquid funds instantly). The market sets a liquidity premium that often doesn’t make sense for the retail investor’s true liquidity need. At least on a lot of their fixed income money.
Of course, keep in mind that risk grows pretty much proportionately with the potential reward. If you can find one where the risk didn’t grow commensurately with the reward, you’re on to something good!
So pretty much anything with minuscule risk is also going to have minuscule payout. I’d think stuff like CDs or maybe even stuff like municipal bonds might be a better bet than T-bills, as the risk is nearly as low, but the payout is slightly bigger.