Investment options for the young and the restless?

January 26, 2007 11:03 AM

A friend needs to find a good place to park some money that will ultimately be used for house down-payment purposes. Help me come up with a few good investment options.

My friend has around $100k sitting in a low-yield savings account. It pains me to see the cash left there when better options are legion.

Key points: the money will be invested for around 1-3 years. I think one or two good mutual funds would be a reasonable choice, but am not really an investor myself so I don't have specific funds or fund families to which I can point my friend.

Other options are welcome, of course, provided they are relatively conservative and are low-maintenance (i.e. they do not require active monthly monitoring; keep in mind that my friend is relatively young and is not an experienced investor).

Thanks!

posted by killdevil to work & money (23 comments total)

Not a mutual fund, but if you're friend's looking for zero maintenance, HSBC Direct has an online-only, FDIC insured savings account that pays 5.05% interest.
posted by SteveInMaine at 11:10 AM on January 26, 2007

Index funds. Me, I like Vanguard for their super-low fees and specifically the Vanguard 500 Index.

Also note that if this is said friend's first home purchase, s/he can withdraw up to $10k from a Roth IRA without penalty, so if that's the case s/he should invest the maximum into an IRA. If the house falls through, there's still the IRA savings for retirement.
posted by jacobian at 11:13 AM on January 26, 2007

For anything less than a 5-year time horizon I would avoid stocks (mutual funds are just groups of stocks). The problem with any stock-based solution is there is too great a risk of losing the principal which your friend would need. I agree with SteveInMaine above and I would go with a no-fee savings account or money-market account. You can find the accounts that pay the best interest ones at Bankrate. CDs are also a very good option.
posted by bove at 11:34 AM on January 26, 2007

Not index funds, unless you don't mind the risk of having your savings lose 20% of their value.

SteveInMaine got it right. If you want to spend the money within 1 to 3 years, the only safe place to put it is cash. Luckily, cash is paying a pretty good rate of return these days.

Investing in equities or bonds over such a short time frame --- even via an index fund --- puts your capital at risk due to market fluctuations.
posted by alms at 11:36 AM on January 26, 2007

One thing I've used in the past for short term investments like 1-3 years are stock indexed GICs. They're no risk to the principal investments, but the yields can be much higher than ordinary GICs or savings accounts. I'm not sure if they're a Canadian specific thing, but they've worked pretty well.
posted by jacquilynne at 11:37 AM on January 26, 2007

Like others have said, index funds and other mutual funds are a good choice, but for god's sake get more diversity than one or two funds. It might make sense, though, to sit down with a fee-based financial advisor (one who is compensated on an hourly basis and not on commissions from your friend's investments) to get a good mix of multiple investments.

Since your friend is concerned about having the money in a couple of years to buy a house (i.e. he is a short-term investor), it might not be appropriate to be totally in index funds or other mutual stock funds - some cash holdings and bond funds might be a very good idea as well.
posted by jcwagner at 11:38 AM on January 26, 2007

We just moved some money into the above-mentioned HSBC online savings account (destined for the same fate as your friend's cash). It came from a matured CD that I chose not to rollover as the HSBC account has nearly as good an interest rate and is considerably more liquid.
posted by jalexei at 11:40 AM on January 26, 2007

Get an HSBC or ING Direct account. Why mess with stock market if its only for the short-term?
posted by bored at 11:44 AM on January 26, 2007

I'll Nth the recommendation NOT to go the route of mutual funds. Any sort of investment in the stock or bond markets (and that's essentially what mutual funds are) requires a longer time horizon (5+ years, preferably 10+ years).

If the money's going to be used within the next couple of years, the best bet is a high-interest savings account, like the ones mentioned above. The money won't grow that much, but it'll be secure.
posted by gwenzel at 11:54 AM on January 26, 2007

Whether an investor in this situation should be in stock funds, bond funds or guaranteed-return savings accounts is a measure of the investor's own risk tolerance. Sure, investments can lose their entire value or some of their value. They can also result in significant gains. For a time horizon of 1-3 years, I think it's bad advice to say that an investor over this time frame should be in only guaranteed investments - it's a question based on that person's own risk tolerance.
posted by jcwagner at 11:54 AM on January 26, 2007

Depending on the amount of money, the best plain savings accounts is at Amboy Direct, which are at 5.25% with somewhere around $100 minimum opening deposit. eLoan has the same rate, but requires $5000 to open the account.

I think there's a bank in Illinois offering an extra .01 or .02%, but I can't think of the name at the moment, and I'm pretty sure it's got a minimum deposit requirement.

HSBC is nice in that you get an ATM card to use with it, but otherwise, the other two are better.

Those are good for liquidity. I've seen a few places offering better CD rates than that, although most banks are still between 4 and 5 percent on a 12 month CD.
posted by wierdo at 11:59 AM on January 26, 2007

Does your friend have a 401K (or for a non-profit, a 403B)? The law allows a person to roll their 401K into the down payment of a house and the great plus side is that employers match the amount up the the federal deductible limit (something like $3200). Your friend can put in as much as he wants, and it can go into a stock/cash/bond portfolio and be ready for him when he wants to finally build his property portfolio.
posted by parmanparman at 12:04 PM on January 26, 2007

USAA also has a Performance First savings account that pays 5.2% APY and a Jumbo 3-year CD that pays 5.45%.
posted by mattbucher at 12:04 PM on January 26, 2007

I've been real happy with ING for similar situations; probably not worth putting it into the market if it's for such a short period.
posted by craven_morhead at 12:05 PM on January 26, 2007

killdevil: I think one or two good mutual funds would be a reasonable choice--

As several people have pointed out, over a 1-3 year period, mutual funds are a bad idea. The stock market can move up and down significantly during a short time period. I'd suggest CDs or a high-yield money market fund; you want something that's guaranteed not to lose money.

jcwagner: Whether an investor in this situation should be in stock funds, bond funds or guaranteed-return savings accounts is a measure of the investor's own risk tolerance.

Currently the investor has the money in a low-yield savings account. That's fairly strong evidence that his or her risk tolerance is not high, and that investing in mutual funds is not appropriate. The original poster also asks for conservative options, and mentions that the investor is inexperienced.
posted by russilwvong at 12:08 PM on January 26, 2007

russilwvong: I'd suggest CDs or a high-yield money market fund; you want something that's guaranteed not to lose money.

If someone's really that risk-averse, that person shouldn't be buying real estate. When I look at this situation, I think "how likely is it that the person will lose such a portion of the investment that it will be impossible to do what that person intended for the money?" That's not very likely - even with some losses, the investor can still buy less-expensive real estate or just take out a larger loan.

Currently the investor has the money in a low-yield savings account. That's fairly strong evidence that his or her risk tolerance is not high, and that investing in mutual funds is not appropriate. The original poster also asks for conservative options, and mentions that the investor is inexperienced.

It is by no means "fairly strong evidence" or evidence of the person's risk tolerance. The person is referred to as inexperienced and relatively young. Because the person doesn't even have the money in a (comparatively) high-return savings account, that person is clearly not acting rationally, with good information.

"Investing" $100k in something guaranteed not to lose money is not "conservative." It is "ultra-conservative and 100% risk-averse." There is no risk (except that the bank will default and the investor will lose anything in excess of $100k) in your proposal, and the corresponding returns (while much higher than what you could historically get in FDIC-insured accounts) are very likely to trail (perhaps significantly) the performance of index funds or broad stock and real estate funds over three years. For lesser values of "very likely", the same thing is true for shorter time periods.

Lots of people have money in low-yield savings accounts just because they don't know better. The poster asked for "relatively conservative" options. The options you're proposing are far from relatively conservative. You're confusing that with "options for which there is infinitesimal risk."
posted by jcwagner at 12:33 PM on January 26, 2007

The law allows a person to roll their 401K into the down payment of a house and the great plus side is that employers match the amount up the the federal deductible limit (something like $3200). Your friend can put in as much as he wants, and it can go into a stock/cash/bond portfolio and be ready for him when he wants to finally build his property portfolio.

I don't think that's correct. To use your 401k to make a downpayment on a house, you have to make a hardship withdrawal. You pay taxes on the amount withdrawn and a 10% penalty. You may be able to borrow against your 401k for your downpayment/closing costs, but be sure your mortgage lender will permit it. Sometimes you have to keep your downpayment/closing costs in an "aged account", which just means you could borrow about 3 months prior to the mortgage application and be covered.
posted by electroboy at 1:25 PM on January 26, 2007

If you put the money in a Roth IRA, you can withdraw up to $10,000 tax and penalty free. With a traditional IRA, you will have to pay taxes on the withdrawn amount.
posted by electroboy at 1:37 PM on January 26, 2007

I don't want to get into a long argument with jcwagner--AskMe isn't the place--but I will say this: your friend shouldn't invest money into something that he or she doesn't understand. This thread recommends some introductory books on investing.
posted by russilwvong at 2:09 PM on January 26, 2007

I agree with most of the others in saying do NOT put it in mutual funds. A high-yield savings account would be fine; assuming your friend won't need the money on very little notice, CDs are probably a little better.
posted by raf at 3:02 PM on January 26, 2007

For the risk-averse: I would recommend splitting up that amount to be below the FDIC insurance max and investing in CDs.
My credit union's offering a 5.64% rate on a 24 month CD.
posted by Arthur Dent at 3:49 PM on January 26, 2007

Arthur Dent is very right in pointing out that your friend is near the FDIC max, and this is a bad thing if he's risk averse. You can't just NOT manage money and depend on it to be there tomorrow.

While the stock market is win some/lose some, There's so many things you can do with $100k that will earn you more interest. I would get your friend to have a good sit-down with a banker and figure out a strategy to invest all that in preparation for buying a house. (And hell, the house I live in, he could probably buy for what he has plus what I owe on my car... and that just sucks.)

If he's risk averse, maybe get him to split the amount he invests in higher risk in favor of what he can earn in three years on the $100k he has? So let's say that he puts $90k in a 3-year CD and gets 6% APY interest out of it. He'll end up with $108k anyway, which is the same exact amouht he'd get with 100k and his 2.8% APY savings (if he's even getting that amount) account. Then invest that $10k in something that's yeilding 10%, say, some mutual funds or something in the 'not really a risk, but can be played with' category. If he manages to get 10% APY out of the mutual funds (possible, I make 17% per quarter continuously on my 401(k) ... except for 3q2k6, but we won't talk about that...), he'll end up with at least $13,000 -- that's $13k of "free" money with no real risk to him.

But first, ask your friend how much he likes saving money. If he's managed to amass $100k without any real work, it's probably a lot ... Point out to him that the more he manages to make his money WORK for him right now, the more interest he'll save when he goes to buy a house.
posted by SpecialK at 6:38 PM on January 26, 2007

Maybe it'd be easier to lay things out in a best/worst case scenario. I find that sometimes that's a good way for inexperienced investors to see what they're getting themselves into. e.g. for cd's @ x%, best/worst case is the same: they'll get back $x. for say an s&p500 index mutual fund, best case is they'll end up with $x, worst case is they'll end up with $y. Of course, with the mutual fund scenario, the #'s will be best guess, but at least you can "measure" their tolerance with their reaction to the worst-case scenarios.
posted by edjusted at 5:03 PM on January 28, 2007