Good news: I've got US$100,000! Bad news: for one year.

February 21, 2008 2:24 PM

Asking for a friend. As the result of a credit card arbitrage scheme, he's going to have a hundred thousand bucks to invest for a period of one year (that is to say, until the 0% APR ends).

What should he do with the money? The primary limitation (besides time) is that it has to be basically no-risk, since of course he has to have at least $100K on hand at the end of that year to pay back the credit cards.

He genuinely enjoys finance and playing around with numbers and will not be scared off by something that requires a lot of effort and/or babysitting if the return's high enough. Other than the aforementioned arbitrage, he's debt-free, no car payment, no credit card debt, only rent and living expenses which are covered by his job - the $100K can be left untouched once invested.

I realize that trying to make as much money as possible in only a year with low-to-no-risk investments is pretty limiting, but maybe having a chunk of change like this carries some advantage with it...? CDs seem like the obvious option - are they? Are there any others?

(I've dug through AskMeFi and found a couple threads on the $100K part and one or two on the limited-time part, but none that really covered this specific situation.)

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

Definitely check out the Finance forum over at Fatwallet.com... they call this scheme "App-o-rama", and there are a lot of people doing it. They will have up to date lists of all the highest-yield bank accounts, CDs, etc.

I think the most important consideration, though, is to make VERY SURE that you don't miss any payments, as that can trigger raised interest rates and could potentially get you into hot water pretty quickly. This includes taking precautions like sharing your online payment info with an SO, parents, or someone trusted, so that in case you were in a car accident or otherwise incapacitated for a few days you wouldn't inadvertantly trigger a financial catastrophe.

Good luck!
posted by allen8219 at 2:30 PM on February 21, 2008 [2 favorites has favorites]

CD was my initial thought, but I'm far from a finance expert. Otherwise mutual funds maybe. Not risk free by any means, but if he chooses carefully, he can stand to gain more than with a CD, with some risk of having to pay a couple thousand out of pocket if he ends up losing money. But the chances of the price plunging to the point where he's totally ruined are pretty low.
posted by gauchodaspampas at 2:40 PM on February 21, 2008

These days the concept of missed payments can even mean missed payments on other cards.
posted by caddis at 2:42 PM on February 21, 2008

I would strongly discourage mutual funds as the risk is huge that he suffers downturns during the arbitrage period and winds up losing money. A 10-20% drop is not hard to imagine at all and would mean as much as a $20,000 loss. Most of the folks doing this at fatwallet search out high-yield money market accounts which these days are in the 4-4.5% range. Last time I looked Countrywide was paying the best rates because of their obvious need for liquid capital.

The FatWallet forums are really the mothership for all such schemes.
posted by Lame_username at 2:48 PM on February 21, 2008

If he's going to need to make payments on it, it will need to be somewhere relatively liquid. CDs are more liquid than other assets/investments, but depending on the size of his payments and the term of the CD it may not be the best bet. I would stick to a high-yield savings account, but I'm not a huge risk-taker. Also I'm pretty sure CDs renew themselves if you don't withdraw during some grace period after the term of the CD expires. YMMV.

He should also make absolutely sure he's not going to need credit during that time. He doesn't have a car payment now, but what if he has to buy a car and can't get a loan (or at least a reasonable APR) because of this? Just something to think about.

One other thought if he goes with a savings account-type investment, make sure his total funds at the institution are less than $100K. If he's already got $15K in savings at ING, don't go putting the entire $100K there for example. Put $85 there and the other $15 somewhere else because of the FDIC insurance caps. The total FDIC coverage limit includes CDs according to wikipedia.
posted by ml98tu at 2:49 PM on February 21, 2008

it has to be basically no-risk

No such thing. Take your single-digit interest on a safe investment and reinvest it at the end of the year.
posted by Ironmouth at 3:00 PM on February 21, 2008

I did this in 2007, with $10,000 from BofA & later Discover at 0%.

I just put in in HSBC's 5% online account since I don't think it's wise to speculate with borrowed money. I netted about $200 from the exercise. Frankly, I found it really wasn't worth the admin time, but I guess $100,000 might have been.

Leave room for interest gains when looking at the $100K FDIC caps, they'll return up to $100,000, but not a penny more !
posted by panamax at 3:04 PM on February 21, 2008

Heh. The problem with FDIC-guaranteed investments is that if the bank goes belly up, you'll get your money, but the matter of "when" is a big problem.

You'll be 99.9% safe in a bank product from a good bank, but you can add one or two nines with a treasury instrument. Plus, no state tax!
posted by Kwantsar at 3:16 PM on February 21, 2008

nthing Fatwallet.

The general AOR (app-o-rama) advice is a high-yield money market account. I have my own AOR-related funds in the Fidelity Select Money Market Portfolio (FSLXX), see this Fatwallet thread. It currently pays 3.93% and is nicely liquid. You can eke out a few additional basis points from other banks (see this Fatwallet thread).

Treasury notes or CDs might gain a slightly higher yield, but there is the downside risk that he will miss a payment (somewhere) or otherwise be exposed to the risk of "losing" the 0% rate. If he has to liquidate the CD or T-notes, he would definitely lose out on some (expected) interest or even more. Bonds and stock mutual funds are even higher on the risk spectrum.

IMHO, the risk that someone in an AOR will screw up a payment (and thus have their 0% promo rate yanked) is much higher than a (major) bank default. So I feel comfortable not having my own AOR funds be FDIC insured.
posted by QuantumMeruit at 4:20 PM on February 21, 2008 [1 favorite has favorites]

As others have mentioned you have to be careful of what is called "universal default.'' If you are late on a payment for any bill, not just a credit card bill -- phone, electric, cable, etc. -- they can instantly jack your rate up to 30% or more. Also, they can change their rates at any time for any reason, despite their original 0% teaser.

This all means that your investment must be risk free and very liquid so that you can pay off the balance at any time if necessary. Since you can get a guaranteed profit of $3000 to $4000 with an almost riskless money market account, it would be foolish to take on extra risk to get just a little bit more. Depending on your friend's marginal tax rate, he may find that that a tax-exempt money market account comes out ahead after taxes.
posted by JackFlash at 4:57 PM on February 21, 2008

Try prosper.com for some portion of it. I have a friend who is getting around a 18% return and hasn't found a defaulted user yet.

I would diversify..... too bad interest rates are so low... I just made my $400 o
posted by sandmanwv at 5:17 PM on February 21, 2008

Whereas I have a friend who lost a lot of money on Prosper on defaulted loans. The return rates are high because the risk is high. I think something like Prosper is way too risky for this situation.
posted by Jacqueline at 5:35 PM on February 21, 2008

Furthermore, prosper loans mature in 3 years which is too long for your friend's purposes.
posted by bsdfish at 7:12 PM on February 21, 2008

Well, no gain if he does not risk a bit. I would suggest this - take $50.000 and put it in the stock of a company that seems fine, has a slow moving chart, and is not going to do anything unexpected soon. Keep the money till there is a 2% gain, then exit. Repeat about 5 to 10 times, then take $5.000 profit of the profit and put in a large company which is going to announce in a few weeks. Exit on a 5% gain, otherwise stay in. Do the same with the other $5000, while keeping the rest of the $100.000 in the highest paying interest bank you can find.
posted by markovich at 11:30 PM on February 21, 2008

Well, no gain if he does not risk a bit. I would suggest this - take $50.000 and put it in the stock of a company that seems fine, has a slow moving chart, and is not going to do anything unexpected soon. Keep the money till there is a 2% gain, then exit.

This is a spectacularly dangerous plan. You are selecting stocks that are by definition rising or falling less than the average stock in the market ("slow moving charts") and expecting to see 20% appreciation on them. That would require a market that was up 25-30% over the year, which is fairly rare generally and certainly not a great plan at the moment. If you started the year with this plan, you'd probably be down a few thousand and would still be waiting for your first 2% gain. Investing borrowed money in the market is pretty much always a bad thing. Take your $4,000 in risk-free certain profit by investing in a nice safe money market account like all the fatwallet readers are advising.
posted by Lame_username at 5:23 AM on February 22, 2008

QuantumMeruit: "IMHO, the risk that someone in an AOR will screw up a payment (and thus have their 0% promo rate yanked) is much higher than a (major) bank default. So I feel comfortable not having my own AOR funds be FDIC insured."

Especially if this is his first AOR, and even more especially if he has to ask the question in the first place. I'll probably see his FW thread, but I can say now that it will pretty much consist of people laughing at him and telling him to not do it. They're not a subtle bunch over there, for the most part.
posted by Mr. Gunn at 2:48 PM on February 22, 2008