Last week, I spoke about my appraisal at work and the effect of blogging on it. Although nowhere near the previous two bonuses, I still managed to get a significant lump sum amount. I have been pondering, where to invest the money? Here’s the solution, we are going to stock this entire money in our home buying fund, not in retirement fund. Here’s how we did invest the money.
If you have missed, you can check out how much do I need save for retirement, the calculation showed that we are on-target for our nest egg with monthly contribution to 401(k) and IRA and a company match.
Moreover, the annual profit-sharing contribution goes directly to the 401 (k), this year the absolute dollar amount exceeded 12 months contribution. So the bonus money is not going towards our retirement. It should go to our next financial responsibility, i.e our first home fund.
Our immediate goal is to find avenues for investing, say $10,000 (sorry, not revealing actual amount).
We have moved the money from no interest checking account to 1% Discover interest savings account immediately as soon as it arrived last week. By the time we figure out where to invest this money and put it into work, we could earn one or two pizzas from checking account interest earned.
Remember its one cent at a time, don’t you? Every bit helps.
Now to state our goal clearly, we have to invest $10,000 for short-term, at most 2-3 years. The objective is to earn as much as possible keeping the capital preserved.
Where should I invest my money now?
Many of you have similar goals as well. You may want to know where should you invest your money in 2012. The amount or the duration may differ. Here’s how we are going about investing right now.
1. We will invest in things we know – From Peter Lynch (Fidelity) to Warren Buffet emphasised on this aspect, If I do not know a business model or how the investment is going to earn money, I can not make informed decision. We would rather prefer a known investment route.
Unknown information increases the likelihood I will make investing mistakes. The unknown can also set me up for scams.
2. We need to preserve capital - We need this money to pay for our home. Any erosion to the fund may further delay our first home purchase.
As a short-term investor, your first aim should also be to preserve the capital.
3. We need to earn maximum risk-free income – No harm in being greedy in my investments. If I don’t love my money, no body would. I want the best of both world, it has to be risk free and has to earn maximum return.
The more we can accumulate in our home fund, less we have to take mortgage on. And less mortgage means we can free up funds for other goals in our life.
4. We need to make it as passive as it can be – With a demanding job and a budding blog, I really don’t have much time to go after the performance of this investment constantly. I can’t spend more than an hour a month to track this investment.
Based on these criterion, here is what we have short listed so far.
i) 2 year CD : Not much rate difference than 12 months CD rates. Still that extra 0.15 or 0.25% helps a couple of 100’s in two years. Capital would be preserved, guaranteed. See the 2 year CD rates.
I don’t have to pay any attention to this investment, completely passive. 20% of our bonus is going towards 2 year CD.
ii) Prosper peer to peer Lending: I opened a Prosper account and started earning hefty rate from it. although this loan is risky, the recent increase in minimum credit score requirement, makes it a little bit more safe. I can at least invest 40% of investable amount in Prosper, and earn around 8-9% return, choosing only high-credit-worthy borrowers.
I have to at least read materials and reports to keep u with this investment, a monthly review should be sufficient
I’d like to brag about my decision to invest in P2P loan instrument. P2P loans are investment you make by lending money to individual borrowers. The same way you loan out to relatives and friends. The difference is, you give small amounts to various borrowers, which is managed by loan brokers (Prosper, lending Club, etc). Brokers take commission on every sale and also a percentage of lender’s earning.
My Investment with Prosper grew by 6.72% in last one year. Compare that with savings account rate of less than 1% or a three year CD rate of 1.6%. P2P lending is little more riskier than those options but it’s not as much as in stocks. Below is the snapshot of my Prosper investment gain. If you are interested, apply for a Prosper loan here.
A high return investment without a risk of losing your money is a must have in every investment portfolio. You can start with a little money, I started with only $500 and let it be there for 3 months before raising to $1000. It took almost 6 months to invest $5000. We just got our first home, that’s why I can’t investment more money right away.
iii) ETF’s : For 2 years investment horizon, we would definitely avoid direct stock exposure. Even more so because almost 50% of our home buying fund is already invested in stocks or funds. I never invested in ETF’s before, mostly because I never had much idea of what difference can fund fees make.
I will wait for the stock market to go down from current level, as I always do. I will wait for a red signal to buy in with 20% of the bonus amount. A 5% drop from current level would be my trigger. I may need to spend 30 mins per month for tracking this investment.
iV) High yield checking account – Our home buying fund has around 20% of money in saving account. we are planning to put 20% of this bonus in that same capital one account, earning near 1% return.
This is absolutely passive and I don’t have to spend any time to manage this investment.
As per our draft calculation, we are going to spend a little more than 30 mins a month to manage this investment. And, unless the stock market behaves the way it did in 2008, we can keep our capital preserved and earn around 3-5% income per year for next two years.
Where we are not putting our money in?
As this is a short-term investment, we are not looking for
i) Stocks and stock derivatives – Because, in short duration they are extremely unpredictable. Also, stocks require active fund management and that needs a lot of time.
ii) Bonds and company papers – Bond market is not good at the moment, and in bull market in stocks, bond market don’t fare well. And the bond investment is not as passive as we wanted.
iii) Money market/muni bonds – They offer extremely low-interest and in 2 years our investment would rather see depreciation if we choose this option.
iv) Treasury – We were interested in series I bonds, we could have earned around 3% inflation adjusted interest, but the 5 years lock-in period is not fitting exactly (yeah, you can break any time with three months interest as penalty).
Remember there are many ways to do things right and many ways to do things wrong. Do not blindly follow me, or any other expert, your knowledge and your financial skills, situation and goals may be completely different than ours.
Apply your best judgement and know what’s best suitable for you. I don’t invest in futures and options. Because, I dont understand them fully.
But, I know many folks who make a lot of money using futures and options trading. I have also seen people losing money due to wrong execution of trading strategy.
So, to summarize, if you want to invest some money now, answer these questions about your investment goal
- Is it for short-term or Long-term?
- Can you actively manage this investment? Or want an expert to take care of your money?
- What is your risk profile? Are you prepared to see investment losing it’s value? You may not have enough money when you need.
- Do you know the investment fundamental, how to play it to your advantage?
- How much time can you devote to manage the investment?
Based on your answer, chose the vehicle fitting best in your situation. And always keep diversification in mind. Diversification can alone make you a good investor from an average investor.
Here’s to your help, some historical performance of different kind of investments. But, at the end of the investment return is something only future can decide, not the past. So even though stocks outperformed bonds in last 100 years, for next 100 year or so, bond can very well out perform stocks.
|Investment||Rate of return in last 100 years|
|Stocks||7% (inflation adjusted)|
|Bonds||2% (inflation adjusted)|
|Cash||$1 became 5C (inflation adjusted)|
|Gold||~0% (inflation adjusted)|
|Real Estate||Can’t be calculated due to cost of maintenance is a non-measurable factor.|
CNN money has a great tool which gives automatic investment recommendation based on your input, such as, number of years, risk appetite and offensive vs. defensive investment strategy. When I did plot my conservative investment need, it came up with this suggestion.
I do not agree, specially with 10% investment in foreign stock. I am reluctant to put this money in stock market in the first place. This tool is useful for your long-term investment need, definitely.
Readers, what do you think about my strategy? What other advice you have for me or any one in my situation? If you have searched through Google to land on this page, feel free to ask question in the comment and expect an answer within 48 hours. I am not an expert but can point you to righteous direction.