QotD: Investments
Posted April 25th, 2005 @ 07:10pm by Erik J. Barzeski
Question: Daniel, in a comment on a previous entry, suggested that given the low mortgage rate, it's better to invest your money than to pay off a mortgage early. Today's question is simply this: what investments safely yield an 8% or higher return, can be easily withdrawn for large purchases (car, etc.), and require little capital to start?
My Answer: I dunno. I'm askin' y'all. 🙂
You are encouraged to answer the Question of the Day for yourself in the comments or on your blog.
Donate Life
Posted 25 Apr 2005 at 8:32pm #
A great question! I thought the ING Orange Savings accounts at 3% was a good deal right now for having liquidity, 8% would be awesome.
Posted 25 Apr 2005 at 8:37pm #
No investment is going to be guaranteed to give you really big yield. On the other hand, it is possible to achieve results as good as or much better than 8% if you choose carefully. Often, though, the results will vary from year to year, so it's best to keep a long term horizon on investments and to diversify so that your risk is reduced. Diversification also reduces your potential return, but it's generally wise to do. Putting all your eggs in one basket only works well if you pick the _right_ basket, and few can do that reliably. It's up to you to balance risk vs. return to suit your comfort level.
If you have the education to make good picks, investing in stocks can work very well. But if you don't know what you're doing, you're more likely to get burned badly. Day trading works for some, but can easily be more damaging than gambling (and just as addictive). Going by technical analysis (plug in the numbers, get a buy/sell back) can appeal intellectually to mathematical types, but it doesn't always work so well, so be wary of that, too. Making good picks consistently isn't easy, and the decision process is often extremely complex.
For most people, I think the best route is to find a good mutual fund in which they can have confidence. The idea is that the fund manager has the education to make good stock picks, so you trust him/her to choose what to buy and sell and when to buy and sell.
Furthermore, mutual funds have pretty high liquidity, so they might be a good fit for what you want. (Each fund has their own rules about withdrawals, so look them over carefully when shopping for a fund.)
I could write a long, long article on what to look for when picking a fund to invest in. The short version is this (in no particular order):
* determine which type of fund you want based on your investment objectives
* look at a fund's rating (Morningstar, Consumer Reports, and others)
* look for low fund expenses, so they aren't eating into returns too much
* look for managers with proven track records and who invest in their own funds
* look carefully at portfolios (avoid overlap if you invest in more than one fund)
* look at how much variance in return there is year to year (gives an idea of risk)
* look at the size of the distributions, since they incur taxes and thereby reduce returns
There's no "right" fund for everybody, but with careful shopping for funds, everyone should be able to find something that appeals to their sensibilities.
All that said, one piece of disclosure: my father manages a fund (http://www.yacktman.com/) and of course my bias says that he does well by the above criteria. So I have to put in a plug for him. You might find somthing else works better for you, though, so look around and find a fund you like. Or, for better diversification, find a few funds.
Posted 26 Apr 2005 at 1:46am #
get an Interest-Only loan or your house, which cuts your payments in half, and make the same payments as you would with a regular mortgage. ...only, put that other half in a bank account. If you have the self-discipline to not delve into that bank account for anything you dont need to, it's pretty much the best thing you could do.
After 5 years, you could take all that money and put it towards a principal only payment on your house, and you'll have paid off more than if you'd have paid regular mortgage the whole time anyway. ...or take Half the money, put it into the house, and take the other half and buy a car.
it's a pretty great thing, again if you have the Self Discipline to do it. let me know if you want to look into this option further, i can get you some good info and direct you towards a good company to go through. 🙂
Posted 26 Apr 2005 at 4:30am #
I, along with millions of others, only wish this kind of investment were to exist.
Posted 26 Apr 2005 at 11:52am #
If you try to think in the case of all things being equal: they aren't. There are things to do with your money that may make more sense: pay off credit cards and other bills with a higher interest rate till the only thin g you have left is your mortgage.
Also, investing in other tax advantaged plans (401k, 403b, Roth IRA, etc) may make more sense because they have a limited amount of money you can contribute per year.
I would try to come up with a best case scenario (how much could you really come out ahead) and a worst case scenario (what if the real estate market tanks and the other investments go down). That may help put it into perspective.
I would also go to the library and pick up a few books on finiancial planning. Pick what you think looks good. (Or send a mail if you want my reccomendations.)
Posted 26 Apr 2005 at 2:35pm #
High liquidity and an 8+% return, eh? I don't have a quick, ready, and quarunteed answer, but I can speak from my experience.
1. I have an account with ING too... Only 3% though, but it ties directly to your checking account and only takes 3-5 to transfer between the two -- for free.
2. I have an account with Scottrade, INC. This is my brokerage account (I had one with Morgan Stanly Dean Witter, but they are more expensive/give advice) These brokerage accounts often allow you to use them as checking accounts too making them even faster in their liquidity. Sell stock; write a check the next day.
As for the 8%. There is nothing that is guaranteed at that rate, but there are higly risky "all in one basket" ways to get really close with relatively low risk. I say this is highly risky, because by definition putting all of your money into one investment (such as a house) is a risk. However, there are many types of investments that have been successful for decades, and have good outlooks for the future.
I invested in a stock this time last year (FRO) that has done really well for me, and it pays irreglar dividends that often beat 8% per year. About a month ago GM got very close to your 8% mark in dividends alone. On top of that the stock was very depressed making capital gains very likely. Companies like these offer services that won't cease to be needed anytime soon, and they also have valuable assets making them good take over targets if they do underperform for a half decade or so.
On Mutual Funds... I haven't had much luck. There are some good ones out there for sure, but most of the time you will get low growth with the big name funds. I haven't tried any of the smaller funds (like Yachtman) but I imagine that some will far outperform the larger funds. If I were to look into them I'd look for older ones (track record) that are still small for some reason. Find out why they are still small though.
I think that if you looked into the world of investing with the same intensity you bring to the Mac world you'd probably do quite well and find something that does better than 8%, but right now you don't know where to find that investment so you are doing the right thing.
Sorry, this was way too long.
Posted 26 May 2005 at 5:47pm #
Sorry to be responding so late, but I'll look for Ric Edelman's real example - it's in one of his books. Basically it goes like this:
Person A spends $1k a month to buy a $150,000 house and puts $250/month into an investment.
Person B spends $1,250 per month to buy the same $150,000 house a few years earlier, then puts all $1,250 into an investment.
In 30 years, Person A owns a house and has an investment worth 90,000+earnings compounded over 360 months.
In 30 years, Person B owns a house (paid for in 207 months) and has an investment worth 190,000+earnings compounded over only 152 months.
The difference is the earnings. Person A has 360 months' worth of compounded earnings. Person B has only 152 months' worth of earnings. Who wins? You do the math; it depends on the earnings rate of course. (Hint: the winner is Person A.)
At 7%, person A has 306,000 from contributions of 90,000.
At 7%, person B has 305,000 from contributions of 190,000.
See why Person A wins?
Person A wins because it takes time, not money, to make money.