Low risk investment advice

July 13, 2009 5:23 PM

FinancialAdviceFilter: How to best invest $10,000?

We're a newly married couple who have been given some money we want to invest ($10,000). We're looking at a 5 year time frame and the goal of building a nest egg to buy property at the end of that 5 years using what we've saved. There's already money in a savings account, 401k's, and a small amount of stock. We're looking for low risk with decent return. Municipal bonds? Money market funds? CD ladders? Where should we put the money?

posted by blueskiesinside to work & money (16 comments total)

For the time-frame and risk level you're talking about, a CD ladder is a smart choice. Rates are low right now, but ought to increase in time, so be careful about tying your money up for too long. (If I were doing this, I'd buy short-term CDs.)

Let me know if you can find a place to buy just $10,000 worth of municipal bonds!
posted by jdroth at 5:59 PM on July 13

There are some Mutual Bond ETF out there that would let you invest ~10k, or any amount. I don't know how well they perform, though. MUB was the first one in the list and it looked like it did OK, taking a big dip during the crash but recovering nicely.
posted by delmoi at 6:04 PM on July 13

Do you have any friends that run small businesses that are strapped for cash? Who can't get lines of credit or small loans from a bank to meet everyday expenses? Have you known them for awhile? Are they the kind of people who don't order dessert or appetizers because they're saving money? Do you rarely see them because they are working at their businesses 7 days a week to keep payroll down? Are they committed to really making their business work so far as you know? Are you customers of theirs? Do you buy coffee, books, dog food, some, any kind of service or good from them? Draw up the papers and loan them the money. I'd invest 100% of my money in my own small business or that of someone I trust before I'd put one red cent into some jackass or instrument such as a bank or broker would sell me. A small business owner whose only option for loans right now is a 20% credit card would jump at the opportunity to pay you 10%.
posted by vito90 at 6:31 PM on July 13 [3 favorites]

"Low-risk" is what the man asked for. I wouldn't put it into a small business run by a friend, even one I trusted.

With that time frame, we've used a municipal-bond mutual fund; the return is low, but with the tax savings, it's been far, far better than anything else we could have done over the time period.
posted by palliser at 6:35 PM on July 13 [1 favorite]

oops - lady - sorry.
posted by palliser at 6:36 PM on July 13

I'd invest 100% of my money in my own small business or that of someone I trust before I'd put one red cent into some jackass or instrument such as a bank or broker would sell me.

That's an admirable sentiment but your friend is much more likely to lose all your money and you'll lose a friend as well.
posted by smackfu at 6:44 PM on July 13 [1 favorite]

Smackfu, I respectfully disagree.

The reason why I asked all the questions there is because I'm trying to point out that you can't abdicate your responsibility to be smart with your money. I'm not suggesting you don't carefully vet the different opportunities there are to invest in local business. But we all know sole proprieters that are doing a great job. They are the business people I respect, not some CEO of a Fortune 500 company. I respect the local people in my community because I can see first hand what they're investing money in...I can see what kind of car they're driving. I can see when their shop brings in a new espresso machine (investing in capital, hooray!). If you do some homework and don't get crazy, and observe directly how the business is operating, you'll have a good chance to make money with a loan.

You have to think outside the box a little bit here. If the economic crisis has taught you nothing it should teach you to rethink the way you invest money, who you invest it in, and why.
posted by vito90 at 7:02 PM on July 13

While $10,000 isn't a huge amount of money (from a bank's standpoint, that is), you should see if your bank has a financial planning department, or whoever has helped with your retirement and investments so far: they are the best suited for advising on the risks in various investments, and -- maybe a big advantage -- minimizing tax liability. You may not be able to minimize all of the taxes on it, but depending on how much your investment returns, it might not be worth it in the end if you get taxed heavily. They might also be able to advise on a plan which will also lead into something beyond 5 years: if you can live without that $10,000 for five years, just think how much more you'll earn if you go without it for ten years, or twenty etc.
posted by AzraelBrown at 7:02 PM on July 13

Warren Buffet suggests that if you're investing less than $1,000,000, put it in an index fund tied to the S&P 500 and forget about it.
posted by JuiceBoxHero at 7:03 PM on July 13 [1 favorite]

if you're investing less than $1,000,000, put it in an index fund tied to the S&P 500 and forget about it.

Not if you want it in five years.

To add to AzraelBrown's point that taxes matter: We've lived in two states and in both have been able to find a municipal bond mutual fund that is entirely tax-free, state and federal. That's been the whole game right there. Vanguard has a good selection of low-cost, tax-free funds.
posted by palliser at 7:42 PM on July 13

Do you have any debt? Credit cards, etc? Pay that off first, because that's a huge return on your money right there.

I had a really great experience with Fidelity when rolling over a 401(k). I don't know what they'd offer that would fit your needs, but it was really like I'd just gotten my own investment advisor. He helped me with the rollover, then offered to take a look at my 401(k) allocation at my new job and made some recommendations that have served me well, and answered a few other questions I had. He was clear that he was paid a salary and his bonus was dependent on a survey I filled out, not money taken out of my account. I was really impressed and would definitely start there.

If you and your husband are planning on buying a house, I believe you can take out what you contribute to a Roth IRA for a home purchase, and my Roth has returned more than 10% already this year (most of that was unplanned market timing but still). That might be one option.

I bet a similar question has already been asked at The Simple Dollar or Get Rich Slowly, and I would start there as well.
posted by peanut_mcgillicuty at 8:25 PM on July 13 [1 favorite]

Respectfully, small businesses are decidedly not low-risk investments. As a veteran of small businesses and startups alike, if you invest in a small business, you can't expect to ever see that money again. Sure you can be pleasantly surprised if the business is successful, but the vast majority aren't. You invest in a friend's business because you believe in them and because you have spare $$ lying around - again, not because you can get a ROI.

Anyways, AzraelBrown and palliser are dead on.
posted by whycurious at 8:29 PM on July 13

The value of tax free funds scales directly with the tax burden on the individual. If you pay a total of 40% of your gross income in taxes, a triple tax free mutual fund or specific mutual issues (like tobacco settlement bonds) starts to make sense. The yield on these funds is relatively low but the tax free status makes them a win in a _taxable_ portfolio (not a 401k or IRA). If your tax burden OTOH is low, their relative merit is also lower.

I would suggest, as someone else did, a CD ladder of some sort if only because the odds of it making 5 years is pretty low for a newly married couple. Things happen and while I am an adamant saver and encourage others to do likewise, not everyone always has that luxury.

www.bankrate.com is your friend for finding CD rates. 1.7% looks like the top. None of them approach the rates that, say, VCAIX (a Vanguard california-resident triple tax free fund) is paying, but they are zero risk. Zero.
posted by rr at 8:51 PM on July 13

I'd say ladder some CD's. 5 years is not a long enough time period to get a decent return on equities.

On review: I'd say pay off any credit cards first as well. There's no gain from earning a 4% return on a CD when you're paying 9-10% interest on a credit card each month.
posted by reenum at 9:10 AM on July 14

jdroth - Arlington, VA is selling bonds in $5,000 denominations.
posted by djb at 12:32 PM on July 14

Do you have any friends that run small businesses that are strapped for cash?

Sounds like a great way to screw up a perfectly good friendship, even if they do pay you back.
posted by Afroblanco at 7:10 PM on July 14