Where to get the best return on a safe investment?

[Bear_Nenno]

Park Aerospace Corp. (PKE).

You’re welcome.

[control-z]

@Riemann

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.

But still, high interest with low inflation is better than low interest with low inflation.

[Riemann]

@control-z

But still, high interest with low inflation is better than low interest with low inflation.

There are two possible interpretations to that, and both are wrong.

If you are talking about risk-free rates, what you describe simply never happens. The risk-free rate (the rate on T-Bills) is closely linked to inflation, so you will almost never get a situation where you can beat inflation even a little bit by investing at the risk-free rate. You will certainly never get risk-free rates significantly higher than inflation. Either both are high, or both are low; and (especially if interest is taxed) both being low is better.

If you are talking about trying to beat the risk-free rate, you can only do that by taking risk. And in a low interest rate environment, people are generally more inclined to underestimate that risk, they “chase yield”. High interest is not better than low interest if you don’t get your principal back. (Of course there are slight exceptions to this such as the market distortions that Corry El is talking about where you can effectively get US Government quality paper in the form of FDIC-insured CDs for retail amounts.)

[China_Guy]

Riemann - word!

The most risk free or at least the benchmark for risk free is US treasuries. Any other investment has a higher risk profile that treasuries, which are backed by the full faith and credit of the US government. If the US government fails, then you have a lot more to worry about than a 5 figure investment by your HOA.

If there is a publicized return greater than treasuries, then you ARE taking on greater risk. By definition.

[septimus]

“Real interest rate” is defined as the actual (“nominal”) interest rate with inflation subtracted out. If you’re getting 1% return, but inflation is 2% then the “real interest rate” you are earning on your investment is Negative 1%.

@Riemann

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… Rates are low because inflation is low.

This is rather misleading. Here is a graph showing (red line) CPI Inflation rate, (green line) 1-year Treasury yield and (blue line) a measure of “real interest rate”. (I chose AAA bond yield for the blue line’s minuend, but the comparison will be similar with other yields.)

Real interest rate (as defined in the graph) was 8% in 1985, and remained near 5% throughout the Booming 1990’s. It got as high as 4% in 2015, but is now below 1%! And be aware that, due to “yield seeking”, an environment of low interest rates pushes up the prices of assets like stocks.

Historically, high real interest rates are often a sign of a strong economy: entrepreneurs’ eagerness to invest pushes up the rental price of capital. But right now, interest rates are low throughout the world. Are we in a Brave New World of “Modern Monetary Theory”? Or will the old norms apply? This discussion doesn’t help OP’s immediate problem, but I could not let the mistake quoted above go unanswered.

[actualliberalnotoneofthose]

I don’t know if this is available to orgs but I have a checking account that pays something like 3% on the first $1000, 2% on the next $15,000, and almost nothing on balances over that, as long as I have a monthly direct deposit. It is attached to a savings account that pays a flat 1%. So I keep balances over the $15,000 (which I usually don’t have) and an emergency fund there.

On the other end of the spectrum I have a business CD that only pays I think 0.2% (it was opened to secure a loan and not for investment).

[RTFirefly]

Sorry I was absent from the discussion yesterday, it was a busy ass-day.

Quoting Omar Little:

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.

Yeah, that’s very much a place we don’t want to get stuck in, so this is very germane advice. I really think we want a ladder of short-term instruments so that if rates change, we can afford to wait for maturity and get the face value.

(The way I’ve heard ‘ladder’ used isn’t about variable rates, btw, it’s just about having a regular cycle of instruments reaching maturity, so you’re never far away from getting some of your principal back at face value.)

Corry El:

The thread earlier indicated the amount in question was $60k

Just confirming that this is the ballpark we’re talking about. Maybe as low as $50K, maybe as high as $75K.

Riemann:

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.

Really we don’t need to do anything at all - we could leave it all in checking, and nothing would go wrong. But we’d feel kinda silly not having all this money earn what can be safely earned, even if it’s only a thousand bucks a year.

As septimus points out, we are in an unusually low environment with respect to real interest rates, and that makes a practical difference. Low inflation means the principal isn’t eroding, and that’s good. But low interest rates on top of inflation means that the interest isn’t going to pay for resurfacing the basketball court (for example) unless we’re willing to wait several years.

Which brings me to filmore:

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.

Another problem of the real rates being so low is that people aren’t likely to charge any less for their advice. You hire a professional to help you invest $60K, and your first year’s interest is mostly gone. Given the amounts we’re talking about, we’re just not going to do that. We’re trying to figure out what’s the best interest we can get that’s backed by a government/bank/corporation that isn’t going anywhere in the next several years, absent a giant meteor hitting the Earth, in a way that allows us to access the principal over a reasonable time frame.

I wouldn’t worry about anyone holding people in this thread responsible. First, I’m just one of eight or nine people on the board, and I’ve only been on the board for a year and a half and they know I don’t have any particular financial expertise. Nobody’s going to be looking at me and saying, “Rufus really knows his stuff, we’ll go with whatever he says.” And the name of the SDMB isn’t gonna pass my lips in our discussion. I’ll contribute any useful thoughts and info that come out of this thread, but I’ll just be one voice in that discussion.

[septimus]

BTW, I was associated circa 1990 with a business operation (smallish cash, probably) whose bank allowed it to buy short-term commercial paper. Has anyone heard of this ? Details?

The risk would be non-zero I suppose so OP mightn’t be interested, but it would seem like a good deal for bank’s customer maximizing yield in a liquid instrument. (Is such paper generally available to bank’s customers? Retail customers? What is the Bank’s commission? Could the particular customer have had some “special” status? Writing this just now has gotten me curious! What’s the paper’s term anyway? — Renewable weekly loans, typically? )

[septimus]

I don’t know whether to be embarassed I missed a simple deduction nearly three decades ago, and didn’t even think of it until now. Or I should be proud to finally think of it at all — Now, with me almost as old as Elizabeth Warren!

@septimus

(smallish cash, probably)

Or maybe not.

… Could the particular customer have had some “special” status? …

But the new conjecture may not be correct, so I still hope Dopers will tell us what they know about bank customers buying ordinary prime commercial paper (e.g. what is minimum purchase?)

Discussion of my new conjecture is out of bounds. (If one of you wants to guess from these hints what that conjecture is, PM me.)

[Corry_El]

@China_Guy

Riemann - word!

The most risk free or at least the benchmark for risk free is US treasuries. Any other investment has a higher risk profile that treasuries, which are backed by the full faith and credit of the US government. If the US government fails, then you have a lot more to worry about than a 5 figure investment by your HOA.

If there is a publicized return greater than treasuries, then you ARE taking on greater risk. By definition.

“(Of course there are slight exceptions to this such as the market distortions that Corry El is talking about where you can effectively get US Government quality paper in the form of FDIC-insured CDs for retail amounts.)”

Which is an important exception for retail investors. You can have an angels-dancing-on-heads-of-pins discussion of the difference between Congress’s commitment to support the FDIC (gteeing CD’s) and federal debt, but that’s what it is. There is no black letter law saying Congress can’t appropriate money to fund the FDIC (or any other spending) until it has paid 100% of federal debt on time. Some people think Section 4 of the 14th Amendment requires that but it doesn’t literally say that. The situation simply hasn’t been tested in court, and quite likely never will be (besides which the USSC can finally rule on what Congress or executive ‘can’ do sometimes years after they’ve already done it). Plus, a given bank is not 100% likely to fail if the govt doesn’t pay 100% of its debt: the bank itself not just the FDIC owes you the CD money. So you could even argue a CD has slightly less credit risk than a treasury…but by a minuscule degree if so. Practically speaking the credit difference between treasuries and FDIC insured CD’s is negligible, not comparable to the still fairly small but non-negligibly greater risk that a highly rated corporation (or state or locality for muni bonds) can’t/doesn’t pay you back in full.

Thus CD’s are instruments which often pay 1%+ pa more than treasuries of equal maturity without necessarily having any extra credit risk. They are less liquid as discussed above, but it depends what liquidity you actually need.

There are also other explicitly govt backed bonds (some mortgage bonds, etc) which also have basically the exact same credit risk as treasuries but yield noticeably more (not as much as best CD’s though) for reasons of what can more accurately be described as ‘liquidity risk’ and embedded options. These bonds are often a significant part of ‘high grade’ bond funds.

For (domestic US) professional market debt other than the US treasuries or explicitly fed govt insured/gteed instruments then what you said is true: at least part of any greater yield there is due to greater credit risk. Foreign govt bonds don’t necessarily have more credit risk than US, but the safest ones are usually in non-USD, bond funds usually do FX trades to hedge the currency risk, and those FX trades themselves may introduce slight risk.

Why do CD’s sometimes yield so much more than treasuries without a good risk story to justify the difference? Simple, the need for a ‘risk story’ to explain yield difference depends on the assumption both instruments are priced in an efficient market. Treasuries are, CD’s aren’t. CD’s are priced in an almost wholly retail market where lack of information and price insensitivity are widespread. Banks that want to (or whose regulators want them to, often) attract more retail deposit money have to raise rates quite significantly to attract attention, and still many retail depositors will go for a CD rate even below treasuries at a local bank they can deal with face to face.