Best short term investment strategies

November 2, 2010 · 31 comments

homeless ninja

If you’ve learned anything about me over the last 18 months, it’s that I love to make a plan. In fact, I’ve considered legally changing my name to Planny McPlannerson, but then realized I would probably get beat up for having such a dorky name. As much as I love setting up game-plans, I have to admit the short to mid term investing gig scares the bajeezes out of me.

My financial game-plan thus far has been pretty simple…

  • Make a decent salary
  • Get married to a total babe that also makes a decent salary
  • Direct 15% of gross income towards retirement
  • Maintain reasonable expenses
  • Don’t piss off previously mentioned wife
  • Put most of our discretionary income in our savings account

As I’ve frequently mentioned, GN and I are putting 15% towards retirement. Could we up that amount if we wanted? Sure, probably around 40%, but I want to be careful not to over invest in my retirement funds. After all, what good would having $6,000,000 in IRA’s do for me, when I’m 45?

I need to start learning strategies for 10 and 20 year time horizons. I know a decent amount about Roth IRAs and 401ks, but I know diddly squat about bonds, short term treasury funds, and interpretive dancing (side note: am I the only person that thinks interpretive dancing is just code for “I suck at dancing, so I pretend I’m interpreting music”?).

There are two primary reasons I know nothing about short term investing…

1) I’ve had no need to learn about it since I’ve spent the majority of my PF journey digging out of debt and building up liquidity.

2) I’m lame.

I know money that will be used within 5-ish years should be kept somewhere safe (like a money market, high yield savings, or CD) and I know retirement contributions should be made through a Roth, 401K, or traditional IRA, but I honestly don’t know what the ‘standard’ protocol is when it comes to saving for 10-20 year time horizons.

Let’s pretend I had $20,000 in cash sitting in my savings account for a car purchase the wife and I plan to make in 2020. I find it hard to believe the 1% interest my “high yield” savings account pays is the best place for that money. There’s got to be a better option right?

This is where you, a much smarter person, can come in and help a Ninja out. Pretend you had $20,000 cash that you knew you wouldn’t need to use for another 10 or 15 years. What would you do with the money? Would you buy bonds? Would you go 50% stocks/50% cash? Would you stay all cash? What means would you take to try and maximize your return, while minimizing your exposure to risk? What investment strategies have solid 10-20 year track records?

I literally know nothing about this area of personal finance and would greatly appreciate any insight so I can go research each option and be less stupid.

{ 31 comments }

1 gyps808

I just asked my dad’s financial advisor this today, so I’ll share with you what he said: If the volitility of stocks is scary, do a bond fund. If you’re like us and want it a little riskier (all stocks for us is too scary) do 50% bonds, 50% stocks (a nice, steady, solid company, dividend paying one). Of course, this money is separate from your emergency fund, which should be in cash.

Don’t know if this helps, but here you go!

2 Jake Stichler

Gold and silver, gold and silver, gold and silver. I’d copy and paste that a million times but then you’d kick me out. But I can’t stress that enough. And I don’t mean ETFs or any of that crap. Don’t settle for paper. Physical delivery.

3 Kathy

Do you realize if you guy gold or silver that it’s much HARDER to sell it… and for much LESS than you paid for it? It’s better off buying it in an EFT or fund.

4 Jake Stichler

No, actually, it isn’t. I had quite the easy time selling it, for much more than I paid for it.

5 Dave

I’ve thought a lot about this issue and it all boils down to how much risk you can handle. For this time frame, I choose between bond funds and equity funds investing in high value stocks with historically great dividends. You can adjust percentages between these two options depending on time frame and risk.

6 Elizabeth

I have been thinking about this same issue for some time now. We have some money saved up and I feel like we should be doing something with it instead of it just sitting there earning like $2 a month in interest or whatever. Unfortunately, that doesn’t help you much but I am really interested to see what others respond with. :)

7 Kevin @ Thousandaire.com

I definitely agree with dividend stocks and bond ETFs. I actually talked to a guy who sells bonds for work and asked if he knows how I can buy individual bonds for my portfolio, and he had no idea. He said he tried to figure it out once and it was so complicated and expensive that the only way to do it is an ETF.

8 tom

I wouldn’t even bother with bonds right now. We are about the same age, and can handle the risk to get the return. Historically, stocks have done much better in the long run and, since we are still in a down economy, they are selling at a discount!

If I had $20K of “investing money”, I’d probably build a diverse portfolio of dividend stocks like Kevin mentioned.

9 Kristen

I really struggled with this question a few years ago when I realized I want to retire well before my RothIRA & 401(k) can be accessed. My company uses Vanguard for our retirement accounts and I can contribute to the same index funds in an Individual Account as the ones in my retirement accounts (Total Stock Market Index, etc). There are different tax consequences for the funds in my individual account, but no restrictions on when I can access the money.

For me I was willing to take on the added risk of the stock market index funds over a 5-10 year time frame, I didn’t think bond funds were aggressive enough for my risk tolerance. I did take a massive hit with everyone else in 2009, but I didn’t make any changes, kept contributing and now I’m much better off. I do keep a healthy money market fund (Vanguard & ING) for money I want to be sure is safe on a shorter timescale < 5 years.

I think I stuck with index funds because I learned about them with my retirement accounts and felt comfortable with them, I'm interested to learn if there's a place in my portfolio for a few bonds.

10 rePete

There is no one answer. And, what I do may be totally different than what you want to do. The first step in investing is to figure out your desires (low risk or high risk) along with the accompanying possible high and low rewards, respectively.

11 BruceBucks

Dude tough question! I wonder how beneficial CD’s are. They would be higher interest rates than your high yield savings account, but the market might be able to get you a better return than a 3-4% 10 year CD. (I am just throwing out numbers here). I am interested in what you conclude from this post.

12 StackingCash

Cash! It’s quite intoxicating, knowing that you have easy access to FDIC insured moolah you have earned with your hard work. You know I’m biased but there is good reason for it. I have no fear in losing principle except to inflation. If you knew how much money I had lost in the market you would puke. Anyhow, I think I would stay away from bonds because interest rates are so low that most likely they will go up and the value of bonds would go down in response. Your retirement funds are fairly accessible in the form of loans from your 401k and you can take out what you put in a Roth without much penalty.

I do envy how you balance your life via percentages, I need to work on that. Currently we are saving 50%. Not enough fun money for my mid-life crisis.

13 CB

1% in a FDIC insured savings account is a safe way to go broke. YoY inflation as reported by the government is at least 2%, and they have a financial interest in under-reporting it. CDs are also a bad for the same reason.

For a minimum 10 year time horizon, I would buy equities (stocks).

But 10 years is a long time, and you *might* want to pull that $20k out to buy a new car, get a bigger house, etc. Since you and GN are in the 25% federal bracket (or at least close), and since you pay 4-6% CA income tax, I would buy tax-free municipal bonds. The easiest way is to buy a bond fund. Take a look at something like DSIBX or MITFX.

14 MyMoneyMess

As some one else mentioned, I’d put the money in gold or silver. I also agree that it should not be paper but physical delivery.

15 StackingCash

The mark up on gold and silver is a rip off. Good luck selling a physical piece of that for what you paid for it. If you feel the dollar is doomed, stick with guns and bullets because that is what you will need to survive.
Bond funds are a rip too, better off buying individual tax free municipal bonds. Although, I’d be leery about buying any municipal bonds in California, you might get one of those famous IOU’s from the Governator. I might as well throw in another jab, buy some lotto tickets and make a quick trip to my hometown, Las Vegas, for some investing. You might get a free buffet or room comp.

Didn’t mean to come on strong like that but I’m just in that kind of mood right now.

16 Jake Stichler

The markup is only a ripoff if you’re buying very small quantities, and from the wrong place. A decent purchase of a few thousand dollars will get you a good price. And I’ve had no problem at all selling for *more* than what I paid for it.

17 Ryan

I echo the suggestions regarding a bond fund. You want something with a stable positive return, that you can use in 10 years or less for a specific goal. The 10-year returns for a $20000 investment in the stock market would leave you with somewhere between $11,000 and $135,000 (based on the worst and best 10-year returns over the past 90 years of stocks), but a bond index fund will yield a regular 5-7%, for at least $30,000 by the time you need a car.

18 Kevin2

I have also turned this corner. My 401k only has crap options and will do no good when I am 45. I put 20k of my own in a dividend stock. See all caveats about investing in stocks, but I like to know exactly what I know versus ETFs or mutual funds (and no annual fees!) So buy something like VZ, MO, SEP or similar and earn 5-7%/year in dividends. Companies are big enough to have low downside risk, and still players for a potential upside risk in capital gains! As long as the companies are riding high with cash and moderate growth, they won’t cut dividends. Typically the small investor can jump ship when scary things come on the horizon (e.g. banking stocks) See Early Retirement Extreme for more information about this crazy track to save a lot more than 15% and retire SOONER!

19 livetochew

Assuming the $20k is in excess of your emergency fund, I’d invest 20% in an emerging market ETF, like China, or Brazil… 15% in Ag ETF (the world’s gotta eat!), 15% in precious metal like silver, 15% in commodity like … i dunno.. lithium, 10% in real estate ETF, 5% in bond… and finally, find a couple small cap stock that you really like and dump the remaining 20% in them… I feel small cap has the most potential for growth… and with a 10 – 20 year time line… you might just stumble upon a berkshire, microsoft, Coke… Why? I dunno.. I’m not smart so I’ll just hedge everything.

20 RDT2

If you are really unsure buy TIPS so you have something with a known return since it accounts for inflation. The Finance Buff has a nice writeup on TIPS at http://explorebonds.com/

21 Ninja

These are all great tips! I’ve heard of some of the options, but many others I know almost nothing about! I guess it’s time to hop on Google and start learning! Thank you all so much! I’ll cut you in on a share of whatever profits I make…okay, no I won’t…I was just saying that to sound nice.

22 Lauren

Planny (or Mr. McPlannerson if you prefer),
I’ve been worrying about this very issue lately since we too are stuck with a low-yield high-interest savings account. SmartyPig(.com) has a whopping 1.75% savings account as does our local credit union. Much more lame, save advice than everyone else, but, hey, it beats some of the CD’s out there.

23 Larry

I like the idea of diversifying assets as much as possible, both because you spread out your risk and because different asset classes tend to move in different directions over time:
http://www.cedaradvisors.com/forms/BlackRock2009.pdf

Personally, I invest in domestic and international stocks (large and small cap), REITs, bonds of various characters, and a small percentage in precious metals. I keep everything in my tax-deferred and tax-free Vanguard accounts because I’ve seen some evidence that taxable accounts do not perform as well over time.

If you want to keep your money in cash, you could ladder a set of CDs so that you get the best mix of interest rates. But even though we’re in a non-inflationary period now, inflation has historically hovered at around 3%, which would mean that in 24 years, your cash has lost half its value.

As for bonds, I use the Vanguard Total Bond fund as well as their TIPS fund for most of my bonds, with smaller percentages in GNMAs and the short-term bond fund. (Total Bond is largely intermediate, though it also includes GNMAs.) I have seen it argued that it’s best to keep bonds (other than tax-free municipals) and REITs in tax-deferred accounts.

You could pose your question on the Bogleheads forum, and you’re likely to get some good replies.

24 Ninja

Wow, Super detailed Larry. Thanks for sharing. I got my work cut out for me.

25 Larry

Maybe, maybe not. I asked this question of an investment blogger I trust, and this was his reply:

“It depends entirely on what is meant by “intermediate term.” If we’re talking about anything less than 5 years, my suggestion is usually just debt securities (CDs, for instance) with maturities that line up with when the investor expects to spend the money.

“5-10 years, and it becomes reasonable to consider allocating a small portion to stock holdings. There’s still a very real risk in that over 5 years there’s a good chance that stocks can lose money. But if the investor is OK with that, it’s not necessarily a bad idea.

“For 10-20 years, I’d say a good-sized helping of bonds is in order. While stocks are likely to put up decent returns over that kind of time frame, there are no promises. It’s generally best to make a priority of tax-sheltering bonds before tax-sheltering stock holdings. So, the investor could do some inter-account rebalancing: Holding stocks in a taxable account, and holding bonds in a tax-sheltered account (earmarked for the 10-20 year goal). Then, when that time rolls around, sell the stocks from the taxable account, and, in the tax-sheltered account, sell the bonds and buy stocks. (Net effect being that total stock allocation is the same. So it’s as if bonds were sold from the taxable account.).”

26 Nicole

For anything longer than 5 years, I feel completely comfortable putting it in the stock market. Then move to bonds or cds as whatever goal starts getting closer. If we weren’t sure of having income continuing to come in I would probably feel less comfortable with just stocks… but something like a house downpayment isn’t going to mean I eat cat food if the stock market tanks.

27 SS4BC

Wow Ninja, great question. I always just assumed CDs. But I never thought about medium term investments. I’m always just worried about retirement and debt and E Funds. Thanks for making me think about it!

28 Moneycone

Here’s what I would do:
25% Total Stock Market ETF
25% Cds
25% Cash
25% Precious Metals

Rebalance between stock market and gold since they are inversely related.

BTW, absolutely awesome question and some fascinating answers!

29 SP

I can’t remember if you are maxing out both of your roth IRAs, but if not, definitely do that before investing in taxable accounts. That money you CAN take out when you are 45 (just not the earnings, but your contributions should be significant)

Other than that, nothing to add to the advice you got. What are you mid-term goals?

30 The Lost Goat

I like Scott Burns’ Margarita Portfolio. It’s 1/3 US Stock Market Index Fund, 1/3 International Index Fund, and 1/3 Bonds, rebalanced once a year. You can read more about it (and his other low-maintenance portfolio ideas) at http://assetbuilder.com/couch_potato/couch_potato_cookbook.aspx

31 Kathy

Where can you find Investments Earning 6%?

These days, it may be difficult to find such an investment. One possible source is Lending Club, which is advertising average returns of over 9%. If you’d like to check them out, you can learn more and receive $25 free to try them out.
http://morethanfinances.com/25-free-to-invest-with-lending-club/

Read the section regarding risks/return 1/2 3ay down called: Tips On How To Get Started Investing

Previous post:

Next post: