High Interest Investment?

March 28, 2005 7:38 AM

I would like to set aside initially a modest amount of money for young children to be used at least 10 years out or much later, for college expenses or some other use. What do you recommend for the best return? Will entertain a small to modst risk.
posted by terrier319 to Work & Money (11 answers total)

Bonds or mutual funds, leaning towards mutual funds. If you assume 10% interest annually (which historically has been accurate over longish periods of time like 10 years) then you can expect your money to double every 5 years, so every dollar you put in *should* be about $4 in 10 years.
posted by RustyBrooks at 8:42 AM on March 28, 2005

Your time horizon is long enough that stocks are a good bet. I'm not sure what you mean by a "modest amount," but mutual funds are the best way to invest diversely.

You want low expenses and some bonds as well as stocks to reduce volatility. I would suggest that you look at three of Vanguard's balanced offerings, all of which invest in stocks and bonds in roughly a 60/40 mix: Wellington, STAR, or Balanced Index.

If you'd like to read up on these things, I'd suggest Morningstar and MSN Money's Investing section.

Someone may suggest Exchange Traded Funds (ETFs). They're even cheaper than mutual funds *if* you already have a brokerage account, and especially if you plan to purchase in one lump sum. But if you're going to add a bit of money at a time, or if you need to get a brokerage account (and likely pay annual fees) to do so, forget it -- stick with mutual funds.

On preview, I think 10% is a bit optimistic right now, Rusty. I'd plan on maybe 8% annually.
posted by pmurray63 at 8:46 AM on March 28, 2005

Vanguard Target Retirement 2015 Fund (VTXVX) may do what you are looking for. It has higher-risk investments now, but will automatically over time become more conservative as 2015 approaches and you need the money back.
posted by profwhat at 8:47 AM on March 28, 2005

Argh, I should have said that any one of those three Vanguard funds will do. They're similar enough that you wouldn't want all three, or probably even two.
posted by pmurray63 at 8:47 AM on March 28, 2005

If you're in the US, consider a 529 plan. It's a tax advantaged fund for saving for education, sort of like an IRA but for education expenses. You'll need to spend some time researching various options, weirdly enough they're state administered. But you have a variety of investment options available and you get significant tax advantages.
posted by Nelson at 8:51 AM on March 28, 2005

10% is optimistic -- right now. However, at least historically, most 10 year periods of time have seen 10% returns per year or better. When investing for the long term, don't worry yourself too much with how much you returned "this year" or, even worse, this month.

Stocks are a good investment on the 10 year time scale but they require more knowledge, patience, and time. And for the casual investor that contain a risk that is psychological in nature. You don't want to be trading all the time. Market timing doesn't work, you pay a lot in transaction fees, etc. But people feel the need to muck around with stocks more than is necessary. I only own a few stocks and I try not to buy anything that I feel I will want to hold for less than a year. Of course, I work for a financial services firm (but I am not a financial advisor) so my investing is very highly regulated -- as such it's just MUCH easier for me to invest in mutual funds, which have relatively few restrictions on them.

The advice above about finding low-load mutual funds is a good one. If your mutual fund pays 10% a year but you pay 4% in fees you'd obviously be better off with a lower yield mutual fund with lower fees.
posted by RustyBrooks at 10:09 AM on March 28, 2005

Market timing doesn't work, you pay a lot in transaction fees, etc.

If you have at least $5,000 and have had a brokerage account elsewhere for at least two years (and I don't know how they could possibly actually check), check out Freetrade.
posted by kindall at 11:55 AM on March 28, 2005

There's a few Diehards threads that cover much of what I'd say here: one, two, three
posted by milkrate at 12:52 PM on March 28, 2005

rusty, at 10% per year, how can you give a 4x return in only 10 years? by calculations, your return after 10 years at that rate might be about 2.5x what you put in. what am i or you doing wrong?
posted by quadrinary at 1:15 PM on March 28, 2005

Sorry, you're right. I was actually thinking of 15%, not 10%. 10% is more like 1.6X per 5 years, or about 2.5 times over 10 years. 15% is still not unhead of with a portfolio of, say, 4 well chosen mutual funds. But 10% is perhaps more likely.

Get your money into something though. With money market and savings account rates where they are your savings account will lose you money. CD rates are not great although they've risen recently (but still, 4.5% on a 5 year CD?)

Government bonds are a safe way to invest. They are guarunteed to not lose money. They are also fairly low interest also.

Freetrade looks like quite a deal.

I was musing about this today. The investment opportunities above will range from about 3 to about 15 percent. Maybe 20-25% yearly with stocks if you're good and lucky. Know where the REAL money in investing is? Same place as the REAL risk. Starting a business, funding someone else to start a business, buying and selling real estate, etc. I am NOT telling you to do this. You could lose all your money (and then some) but the upside is practically limitless. The odds are obviously stacked against you. I started a business with a partner about 2 years ago. It's side, part time thing, but it's earned me WAY more money than any traditional investing I've done, hands down. The trick here, to some extent is that you invest more than money -- you also invest skill, time, effort and these are in shorter supply than money. Depending on how you do your internal calculations you may or may not come out ahead.

I'm a hobbiest woodworker and about once a year I run the numbers to see what I'd have to do to make it worthwhile, and every time, it comes out that I could probably make enough money (assuming that I can find enough of a market to sell as many items as I can make, at prices I've sold one-offs for) but that I'd probably also hate it as much as any other job. Certainly there are woodworkers who manage to make a living without hating their jobs, but it's few and far between.
posted by RustyBrooks at 9:30 PM on March 28, 2005

Oh and to clear something up, as long as I'm not bunging it up more: 10% interest means 4X your money in 15 years. 15% interest means 4X your money in 10 years. 10 - 15, 15 - 10 as long as you keep it straight you'll do fine ;)
posted by RustyBrooks at 9:32 PM on March 28, 2005