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 a retirement fund. Here’s how we did invest the money.
If you have missed it, you can check out how much I need to save for retirement, the calculation showed that we are on target for our nest egg with a 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 the actual amount).
We wasted no time when our money arrived last week; it went straight from our no-interest checking account to a 4.3% Discover interest savings account. This move was prompted by our desire to make the most of the best bank savings interest rates available. As we contemplate our investment options and put our funds to work, the interest we’re earning on our savings will gradually add up. In fact, the interest accrued may soon equate to the cost of one or even two delicious pizzas!
Remember it’s 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 – Peter Lynch (Fidelity) to Warren Buffet emphasized this aspect, If I do not know a business model or how the investment is going to earn money, I can not make an informed decision. We would rather prefer a known investment route.
Unknown information increases the likelihood that 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, nobody would. I want the best of both worlds, it has to be risk-free and has to earn maximum return.
The more we accumulate in our home fund, the less we have to mortgage. 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 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 this criterion, here is what we have shortlisted 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, and 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 a hefty rate from it. although this loan is risky, the recent increase in the minimum credit score requirement makes it a little bit safer. I can at least invest 40% of the 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 a P2P loan instrument. P2P loans are an investment you make by lending money to individual borrowers. The same way you loan out to relatives and friends. The difference is, that you give small amounts to various borrowers, which are managed by loan brokers (Prosper, Lending Club, etc). Brokers take a commission on every sale and also a percentage of the lender’s earnings.
My Investment with Prosper grew by 6.72% in the last year. Compare that with a savings account rate of less than 1% or a three-year CD rate of 1.6%. P2P lending is a little 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 the 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 it to $1000. It took almost 6 months to invest $5000. We just got our first home, that’s why I can’t invest more money right away.
iii) ETFs: For a 2-year investment horizon, we would 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 ETFs before, mostly because I never had many ideas of what difference can fund fees make.
I will wait for the stock market to go down from the 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 the current level would be my trigger. I may need to spend 30 minutes per month tracking this investment.
iV) High-yield checking account – Our home-buying fund has around 20% of the money in a savings account. we are planning to put 20% of this bonus in that same capital one account, earning nearly 1% return.
This is passive and I don’t have to spend any time to manage this investment.
As per our draft calculation, we will 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 the next two years.
Where are we 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 – the Bond market is not good at the moment, and in a bull market in stocks, the bond market doesn’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-year lock-in period is not fitting exactly (yeah, you can break any time with three months interest as the 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 judgment and know what’s best suitable for you. I don’t invest in futures and options. Because I don’t 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 the 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 the short-term or long-term?
- Can you actively manage this investment? Or do you want an expert to take care of your money?
- What is your risk profile? Are you prepared to see investment losing its value? You may not have enough money when you need it.
- Do you know the investment fundamentals, and how to play it to your advantage?
- How much time can you devote to managing the investment?
Based on your answer, choose the vehicle that fits best in your situation. And always keep diversification in mind. Diversification can alone make you a better investor than an average investor.
Here’s to your help, some historical performance of different kinds of investments. But, at the end of the investment return is something only the future can decide, not the past. So even though stocks outperformed bonds in the last 100 years, for the next 100 years or so, a bond can very well outperform stocks.
|Rate of return in the last 100 years
|$1 became 5C (inflation-adjusted)
|Can’t be calculated due to the cost of maintenance is a non-measurable factor.
CNN Money has a great tool that gives automatic investment recommendations based on your input, such as the number of years, risk appetite, and offensive vs. defensive investment strategy. When I did plot my conservative investment need, I came up with this suggestion.
I do not agree, especially with a 10% investment in foreign stock. I am reluctant to put this money in the stock market in the first place. This tool is useful for your long-term investment needs.
Readers, what do you think about my strategy? What other advice do you have for me or anyone in my situation? If you have searched through Google to land on this page, feel free to ask questions in the comments and expect an answer within 48 hours. I am not an expert but can point you in a righteous direction.