Safe short term investments

[buster]

My wife and I have around 80k cash (includes EF) in the bank currently earning a pathetic 1% interest. We both max out our Roth IRA accounts and contribute about 25k combined to our 401k each year (not including company match). I'm 31 and my wife is 35 (someone always asks...figured i'd get it out of the way )

I'm looking to park the cash somewhere for the short term that will earn a better return than 1% while not tying the funds up into anything too risky. I will be starting grad school in 2012 and we'll likely purchase a house once finished. There is a high likelihood we'll need to move after school wraps up depending on where my career takes me. We're currently renting in a very HCOL area (Nor Cal/East Bay).

The cash is to help pay for grad school and provide a down payment on a house when the time comes. Thanks for the advice!

[DVM gone riding]

that short a term (less than a year) I would leave it in the 1% fund, that is the best I get too except for the first 750 at one CU. If you are talking 5+ years then I would put it in an index fund (risky but might possible higher return) or ladder it into CDs

[Peace77]

You could transfer your funds to an account with a higher yield.

Discover Bank is currently offering 1.2% APY on an account with a minimum open of $10,000 or more and no minimum balance.

American Express is offering a high yield savings account - 1.15% APY with no minimum to open and no minimum balance.
personalsavings.americanexpress.com/savings-product.html

Several banks are offering 1.25% - 1.3% for one year CD's.
See: www.bankrate.com/cd.aspx

[phil5185]

Sounds like about $45,000/yr is being invested in your age 59 1/2 accounts, good job.

I normally travel the road that seems to be against all financial planner plans. I invest my shortterm money into longterm products (that historically return about 11%/yr). And then I borrow for my shortterm needs.

Eg, when I buy a rental house, I save up for the down payment (important as a risk mitigation tool), but then I don't use the money for a DP, I borrow it. So I am borrowing capital at <6% and investing it at an average 10% to 12%.

Perhaps you could get a low rate long term student loan to fund your grad program and retain the use of your own cash.

I would place at least $50k of the cash into a SP500 Index Fund at a no-load provider such as Vanguard or Fidelity.

[gooddecisions]

Phil, I really love your posts, but I think you overestimate what most employers contribute to a 401(K). I'm at one of the largest companies in the world with great benefits and after 10 years have yet to receive more than a $3500 annual employer contribution to my 401(k). It would be interesting to find out what the average employer contribution in the U.S. works out to be. My guess is the average is less than 3K/year, maybe even as low as $1500/year for the full match.

[buster]

I've been reading your posts for a while Phil and I always appreciate your advice as it bucks the norm without being overly risky. I'll definitely have to speak to my wife about the advice I've received from you and others here before moving the funds around.

In the short term, 1.15% with Amex is definitely a little better than where i'm at and I already use Costco Amex for most all of my purchases (got almost $700 back this year!). I'll look into the others as well.

As for 401k, we both get very good company matches so we're actually at 38k invested annually (fully vested) with an additional 10k for Roth. Pretty close with those numbers Phil.

[Savoir Faire-Demogague in NJ]

Phil, I really love your posts, but I think you overestimate what most employers contribute to a 401(K). I'm at one of the largest companies in the world with great benefits and after 10 years have yet to receive more than a $3500 annual employer contribution to my 401(k). It would be interesting to find out what the average employer contribution in the U.S. works out to be. My guess is the average is less than 3K/year, maybe even as low as $1500/year for the full match.

Employer contributions mostly depend on how much the employee is contributing and at what rate. I've maxed out my 401K the last 10 years and I get roughly a $4800 match.

Phil does write some interesting posts and is one of the more knowledgable contributors here. Unfortunately a lot of his advice is not suitable for the average person.

With several millions in assets that he has as well as a portfolio of rentals, he can easily qualify for 100% financing of properties, that someone who would be struggling to make a down payment that would be required by a lender.

His advice to put one's entire EF in the stock market is highly risky for the average individual who does not have $5 or $6 million in assets to draw on.

[phil5185]

he can easily qualify for 100% financing of properties, that someone who would be struggling to make a down payment that would be required by a lender.

Well ya, NOW I can easily qualify. But how about in 1980 when I had 4 houses with 6 mortgages, one was a balloon and another was a reverse-amortization loan. (Had to sell my old 1970 pickup to meet the balloon.) Sometimes a bit of struggling pays off handsomely.

[2kids10horses]

I'm with Phil. There is no reason an "emergency fund" has to be in cash or cash equivalents. Not at $80,000. I keep my working capital... working.

If I had an emergency where I needed money, I'd sell some stocks or draw on the home equity line for short term cash. Long term, I'd either refinance one of the rentals or sell one if I needed big bucks.

Since the OP has significant salaries (in order to fund the 401k) he could 1) suspend contributions to the 401k for extra take home pay, 2) borrow against it if necessary, and 3) withdraw it if the severity of the emergency warrants it.

Now, as to the OP's question about short term, safe, high yielding investments... Sorry, there aren't any.

You CAN get:

Short Term + Safe but low yield (what you have now)

Safe + High Yield but long term

High Yield + Short Term but very risky.


Pick your poison.

[schildi]

Have you tried looking around your local banks?
I currently get 3% interest on $30,000 in a checking account at a local Credit Union. Not huge, but better than 1% ... :-) Probably equal to or better than the stock market over the last 10 years, LOL. (Should a laugh or cry about that? )

[Lex Luthor]

Like schildi said, check out "High Yield Checking" Accounts. They have requirements about the number of transactions you need to have in a month (10-15) and usually require auto-deposits, though mine doesn't. Mine currently earns 3.2% and there is one other Credit Union in my area that has one for 3.4%. They have limits on the maximum amount they will pay on, mine is $30k, most seem to be around $20k.

I found mine, by using the website below and filtering on my state and then going to the websites for each bank listed. You can also try searching "High Yield Checking".

www.depositaccounts.com/checking/reward-checking-accounts.html

[schildi]

^ why did you buy a 0.90% CD? I don't think rates in accounts like ING ever dipped under 1%.

[2kids10horses]

With $80,000, and wanting to get some income from the investment, I would invest in a basket of High Dividend paying stocks. Maybe buy 8 stocks, $10,000 of each. Or 10 stock, $8,000 in each.

Go over to the Investing forum, and look for the Thread for Income stocks or Dividend Stocks. A new list of 300 companies paying steady dividends has just been posted.

I would pick 8 companies paying around 4 to 5%, from different categories (1 utility, 1 bank, 1 services, etc.) to diversify the risk.

I wouldn't pick a company paying over 5%. There's some reason their dividend payout is so high, and either they will drop the dividend, or the company is in financial trouble.

Generally speaking, high dividend payers are less volatile than other stocks, because the dividend props up their stock price in bad times, and they don't accumulate much cash since they pay it out, so their price doesn't rise as much in bull markets. Their price will vary quarterly (or whenever they pay the dividend.) Just before the dividend pay date, the price will rise as some will buy the stock to get the dividend. Then after it's paid, they sell the stock, so it goes down. You can see this happen every quarter.

Over time, you should see a modest growth in the value of your investment. Over time, the company should raise the dividend.

[2kids10horses]

tough,

I suppose it depends on exactly what your definition of an emergency fund is. And on the individual's circumstances.

The OP (and his family) appear to have two salaries, and are active savers. They apparantly do not own a home, so they could downsize to a cheaper apartments if necessary fairly easily. They really don't need a large CASH or cash equivalent emergency fund.

People who have limited income sources, and have high monthly commitments, and live paycheck to paycheck NEED cash equivalent emergency funds because they could get wiped out with a job loss.

Now, as for Dividend stocks:

Look at SO on yahoo finance. That's Southern Company. They sell electricity in the Southeastern US. We like our air conditioning! Look at the chart since 1981. Pretty steady. Look at the 5 year chart. It looks like about 5 years ago, it was selling for about 33 per share. It's at about 37 now, so not a lot of growth, but it does pay a 4.7% dividend. During the past 5 years, it has been as high as almost 40, and as low as 27.

In the unlikely event that you bought at the high and sold at the low, yes, you would lose money, but you would not be "dead"! Of course, if you had purchased 5 years ago, held on, you would have a gain, and have collected the dividend for the past 5 years.

Going back to the long term chart, if you had bought SO back in 1981, those $2 shares would be worth 37 today, and all along you would have collected nice dividends.

[azphx1972]

I don't believe short term savings belong in stocks either. Back in the 2001 I purchased some high dividend stocks in a commercial property management company because the yield was higher than savings accounts at the time. From what I could tell according to the research that I did, it was a solid company with a long term track record. Then 9/11 happened, and the company stock took a nose dive and ended up closing its doors. $20k down the crapper. I will never ever do that again.

[2kids10horses]

azphx,

So, you put it all in one company? Did you not read my post where I stated you should spread the risk out over several companies? You can either buy a basket of 8 to 10 companies or buy a mutual fund whose goal is dividends.

You could make your point using Enron as an example. That company was commiting fraud, unfortunately.

That's why you diversify.

[azphx1972]

Well, with only 20k to work with there wasn't a whole lot to spread around, and I wanted to minimize trading costs. And it wasn't like I didn't diversify; that amount of money probably represented less than 5% of my net worth. Still, I learned that individual stocks are risky. Mutual and index funds are much safer. YMMV.

[thyme4change]

You could flip a house. Oh wait, it isn't 2002.
You could day trade. Oh wait, it isn't 1998.
You could buy junk bonds. Oh wait it isn't the 80's.

Plastics!

[2kids10horses]

Fair enough,

Now, if you had invested that $20K in AAPL, you'd be singing a different tune!

At $10 a trade, trading costs are minimal on a $20,000 account. (You can get even lower rates than that.)

[azphx1972]

If I had a crystal ball, I could win the lotto too. ;D

[2kids10horses]

I know...

It's just that you seem to saying, "I lost my money on a dividend stock. THerefore, investing in dividend stocks is a bad strategy."

In my day, I've invested in a lot of high tech companys. Some did really well, and some did not. But, I didn't put everything in one and crossed my fingers.

Some I invested in (and still own) include: MSFT, INTC, CSCO, DELL. Some I invested in and lost money in include: JDSU, EMC, BRCM, HLIT, MU.

Fortunately, the ones that made money made a LOT, way offset the losers.

Unfortunately, AAPL wasn't one I picked, either!

Now, just because I lost money in, say, JDSU, mean that investing in the Internet backbone was a bad idea? No. My gains in CSCO far surpassed my loss in JDSU. Each got an equal start. (CSCO is way down from it's high, but I'm still very profitable with it.)

I ask, "Was the NASA Apollo Program successful?" You say, "Yes! They went to the Moon!" I say, "But one of the rockets blew up on the lauching pad! Isn't that a failure?"

See my point?

[thyme4change]

2kids - I definately agree that diversification and balance are key to investing - but with such a short time frame and a relatively low tolerance for risk, I don't think stocks are the best place for this posters money.

[souldoubt]

I think there's a lot of good advice given here. That said there was another thread probably two weeks ago talking about what to do (if anything) with money someone had been putting away for a large purchase. I'm in the same boat and not comfortable investing money like that needed relatively soon. Obviously it could work out and that's great because you can come out ahead but if it backfires even just a bit that could affect the timing of a purchase, force you to borrow, etc. To each his own.

[azphx1972]

Mar 24, 2011 17:43:25 GMT -5 2kids10horses said:

It's just that you seem to saying, "I lost my money on a dividend stock. THerefore, investing in dividend stocks is a bad strategy."

No, what I said was that individual stocks are riskier than mutual/index funds, and provided a case where I took the risk and lost. How many mutual/index funds have gone bust that you know of, vs individual companies that have shut down? That was my point.

[2kids10horses]

Well, I stated that you should buy a basket of dividend payers, or a mutual fund of them...

Now, as I read the OP's statement, he was to start grad school in 2012. I'm assuming fall of 2012. That's a year and a half away. Then, he says he wants the money to help buy a home when he's done with grad school. I know of no grad schools that take less than 2 years. So, while he says he wants to use some for grad school, he won't be buying a house for at least 3 1/2 years.

Dividends at 4.5% on 80 grand is $3,600. Interest at 1% is $800.
Per year.

Only the OP can decide if the risk is worth it.

[azphx1972]

Mar 24, 2011 21:11:39 GMT -5 2kids10horses said:

Only the OP can decide if the risk is worth it.

I agree, everyone has their own risk tolerance. Personally I don't like to gamble with short term funds, and since the OP used the word "safe" in the title of this thread, that would rule stocks out of the picture for me. Just my $0.02.

[2kids10horses]

To me, short term means "in a year or less".

To others, it may differ.

The OP was talking about a 3 or 4 year time period.

I'd hate to be stuck at 1% interest for that long. That's not even keeping up with inflation.

[azphx1972]

I feel like we're beating a dead horse, so I'm just going to stop here. Good luck to the OP.

[brdsl]

Dividends at 4.5% on 80 grand is $3,600. Interest at 1% is $800.

previous years, the tax rate would also be lower (15%)....from what I have read, it will be higher this year.

[Gardening Grandma]

Dividends at 4.5% on 80 grand is $3,600. Interest at 1% is $800.

This is comparing apples to oranges. To get the dividends, you accept the risk that you could lose part (or all) of the principle. To get safety and liquidity, you accept the lower interest rate.

I will be starting grad school in 2012 and we'll likely purchase a house once finished.

The cash is to help pay for grad school and provide a down payment on a house when the time comes.

According to the OP, the funds (at least part) will be needed next year. Personally I would not invest funds I needed next year. The OP has two purposes and two time frames for the funds. If it were me, I'd figure out how much of the funds are needed for grad school and accept the lower interest rate in exchange for safety and liquidity. Then I'd invest the funds that are expected to provide a down payment into a longer term investment.