Where Should I Invest My Money Now?

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.

Where to invest my 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

Update 05/14/2013 

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.

Prosper Account Performance

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

  1. Is it for short-term or Long-term?
  2. Can you actively manage this investment? Or want an expert to take care of your money?
  3. What is your risk profile? Are you prepared to see investment losing it’s value? You may not have enough money when you need.
  4. Do you know the investment fundamental, how to play it to your advantage?
  5. 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.

investment recommendation

 

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.

is a husband and working as a software professional for a Fortune 100 corporation in Florida. Thanks for visiting the blog.

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Comments

  1. says

    When I read your title, I said, Oh no! I can’t stand “where do I invest TODAY” articles. However, yours covers every base I worry about….namely, that there isn’t any right choice for everyone AND that long term investments are different than short term. Great read. Congrats on the bonus. If you’d like to share with readers, I’m your guy. :-)

  2. says

    I think with your time horizon you’ve made a good choice. I’m not completely sold on the ETF’s though because what do you do if 2 years from now the market goes into bear mode?

    • says

      More than this 20%, 50% of the fund so far is in stocks or MFs. It will be a great loss and can prevent me from buying home 2 years from now. But that won’t last and things eventually would come up. I may not buy home in 2 years, but would be able to in next 5 years, in worst case.

  3. says

    I like Prosper too, but I don’t think it’s appropriate for this. You really want to preserve capital and who knows what can happen with P2P lending? If the economy took a big hit, people may default a lot more.

    • says

      Joe have been in prosper for about 6 months. no default yet, and 10% return so far. Its too lucrative at the moment. And my 3 -5% return expectation is more or less dependent on prosper. I am OK with a couple of defaults. But this money would go to only ‘A’ borrowers with high credit and long history.

  4. says

    can you explain whats so greatr about etf’s? i didn’t even know what an etf was but googled it. i had never heard of prosper either. i’m learning so much!! honestly, i’d love to learn more about what you decide since i hope to be where you guys are in a few years and would also like to know the best way to earn interest on a similar sum of money. it’s currently sitting in like a .8% interest savings account. i know i can do better.

    • says

      Prosper – A platform which brings together borrowers and lenders. You can lend money to borrowers in exchange of interest. Prosper requires a lot of paper work from borrowers to be able to accept loan offers. The minimum interest can be earned upwards of 6%. There is good risk, but you can reduce risk by investing small amounts. If you have $1K to invest, loan it to 10 borrowers $100 each to spread your risk. You can find more here http://financeproductreviews.com/prosper-peer-to-peer-lending-program-review/

      I started with prosper a few months back, haven’t had a default and return is around 10% so far. ETFs are exchange traded mutual fund, you can hop on hop off any time and fees are negligible compared to regular MFs.

      Yeah that 0.8% is too low a number, my discover checking account gives 1%, think about it.

  5. says

    I hate to be nosey but I need to know the actual amount. Please don’t whisper in my ear and tell me it’s the wind blowing. :).

    Maybe if we get to meet you will whisper it in my ear or send my nosey ass out in the wind. :)

  6. says

    Hm, to me it seems like you’re trying to do two conflicting things: both preserve capital AND make money. I wouldn’t do ETFs or Prosper if my objective were to preserve the capital — but would instead stick with only boring things. But I guess if the worst that would happen is that your house-buying plans would be delayed, you may be ok with more risk.

    • says

      Yes, the worst that could happen is that. We are very happy with our landlord and the job can take take us to a different city as well in future. I’ll be applying for internal postings in a few months and I don’t want to have a place constraint as of now.

      You are right, if I leave Prosper and ETFs out, I will end up at 1 – 1.5% return, very boring!

  7. says

    Have you ever tried Lending Club? I’m a huge fan of theirs. It’s a great site if you want to earn a larger rate of return. Just like Prosper though, there are some risky loans out there.

    • says

      Aren’t they same? I’ll surely open an account and see things..but as per the reviews I read so far Prosper and Lending club are same in their model

  8. Economically Humble says

    this is a fantastic predicament. I never heard of prospeer lending but will certainly look into it. My personal thought is interest checking/savings unless you can find a CD with a better rate. Congratulations!

  9. says

    I got into Prosper Lending about 5 years ago (they actually had to shut down the site awhile for some reason…something along the lines of reporting to the IRS). That was a few years ago though.

    I actually borrowed through their site too and I loved it.

    If memory serves me correctly, don’t they only do 3-year loans? So if you need your money in 2 you won’t have it all back by then.

    My lending experience on Prosper was great. I was a bit of a risk-taker back then and certainly lended to high-risk borrowers. All-in-all my returns were still in the black though!

    Obviously this isn’t a recommendation, I just give my opinion on what I’d do: I wouldn’t touch the ETF’s. Money Infant said it well: what do you do if the market is up or what happens if it tanks? You’re just getting into timing the market and in a two-year time frame a lot of things can happen. I’m risk-adverse though…so that’s just me.

    I’d go with the 1% checking account and “play” with 25% of the money on Prosper and invest it conservatively there.

  10. says

    I think the safer/more conservative you are – the less money you’ll make on your investments. I’d personally spread it around. Some investments with guaranteed returns are good, but there’s also some pretty solid stocks and mutual funds that give a better returns. I’d worry that the safe/conservative investments might not even keep up with inflation!

  11. Jacob Britt says

    I might do half Prosper or solid known “risky” investment and half in gold (or even silver). Given the currency issues we may be facing, putting some money in gold/silver may give you a pretty solid return.

        • fraz says

          i would only disagree, simply for the fact that what do you get from gold. Nothing. Its a materialistic item that does not provide anything for the matter thats happening around. The functionality is presentable. That being said i would recommend small investments in gold and more towards land. There are 3 things you need in life. Food shelter and water. simple. For every possible reason its the best outcome. Not making anymore of it tomorow last time i checked. Long term investment that will pay off. History repeats itself.

  12. says

    I’ve never tried the peer to peer lending. Having that 20% in an ETF would work, like a good dividend or large cap ETF, most have really low fees and many brokers offer commission free ETFs.

    Thought I’d add that this is a great example of how to break down a financial goal into possible investments.

  13. dr rajeev singh says

    When market sets everything upside down it is then the real reality is turned up so don’t worry that you are loosing money but watch for the turned up real causes behind it. Never believe in what market shows you but always give your brain an exercise to what lies beneath this market truth. When in a market few are gaining money and all others loosing always think this game of earning by snatching from others is not economic and real growth but just a fraud created.

    • says

      Dr Rajeev, the real problem to me is ordinary people like us want to trade stocks without knowing when to buy and sell. Agree there are market players with big pockets who manipulate small movements in a stock.To hedge that people like us should buy and hold the stock, you are almost certain to lose money if you start day trading or extremely short term trading.

      • fraz says

        there is 2 very import facts for sure. Long term investments. everyone wants to be rich in a year. And dont always believe what the paper or news wants to tell you. Why not 10 to 20 years from now. You will always appreciate it more, and best of all you will have family and friends and children to share it with. At the end of the day money is money, thats it, family is #1. Most importantly, happy wife is a happy life. Money is as important as it is to me as it is to you, that is why i am on this site as much reason as it is to you, but dont let it ruin your life or relationships. If you ran a race and fell over half way, and you friend/family/spouse picks you back, and you finish the race and win. Everyone wins. Thats what its about. Look at any well off country. They work as a team. Thats the way it use to be, and thats where this economy is heading. Big brother system. You see it every day and you dont even notice it.

  14. JonasC says

    Emission trading can be a minefield as an area to invest in, I have been looking at this area of investment for just over 8 months now, I have been noticing massive increase of Banks and large financial institutions investing heavily in the purchase of carbon credits, and the floor prices set by the UK and US markets for these carbon credits give amazing opportunities to make money if anyone else out there has interest in this area be aware that there are many types some not as good as other and many that are not verified or of a high quality.

    • says

      Any type of trading has its share of risk, to me. Let me know if you think emission trading has no risk. I may look in to this aspect pretty soon. But for short-term I am not sure if I want to venture in this route.

  15. Brian says

    I use several safe investment vehicles to earn 1% per month on my money. By years end that adds up to 12% annual return on my money! You can do this also tax free with a Roth self directed IRA. Feel free to contact me & I’ll be happy to share. bgill46 at yahoo dot com

  16. Christine Perez says

    If you want to learn more on how to invest in the stock market, you can check PSE’s Market education website pseacademy.com.ph

  17. says

    I feel comfortable enough with investments although I have a longer term outlook. I think you made the right choice. I really like the fact that you recognize at this time you are not full educated on stocks and therefore will not take the risk investing in them.

  18. Mitch farmers says

    If your a retail investor you are not going to make it in the stock market. And investments such as CD’s you only earn pennies on the dollar.

    I invest in trust deeds. They equal high secure returns for the small guy.

    Look at these two companies if you do not believe me: Ampez Rehab Investments or The Norris Group.

    • John says

      Hi Mitch,

      Are you a client of Ampez Investment and how long? I was looking at their website and not sure if it was legit? Thank you. – John

  19. Chester Miller says

    I’ve been involved in real estate for about 46 years and feel it is perhaps the best vehicle going. Just about everything you can think of has to involve real estate. Since 1999, I ‘ve been investing in real estate paper (Mortgage notes) and have had a measure of success. My plan calls for earning 10% for the use of investor’s funds for a term of 120 days maximum. To avoid the notion of fraud, investor’s funds do not have to issue forth until the real estate transaction is under contract and ready to close. To further protect the investor, funds are escrowed and remitted by an independent law firm.

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