How would you invest $1000/month to get a return of over 2.5% ?Investment forums?
April 30, 2012 10:20 AM   Subscribe

Looking for forums where I can get investment advice. Can you recommend a few active ones? Also, how would you invest $1000/ month if you knew you were likely to pull out most of the money in approximately 4 years to pay a down payment for say a house? Banks probably give around 2%-3% max. So I imagine the goal here is to get more than 2.5% return. Please don't recommend the type of financial instrument such as mutual funds or index funds. I am looking for something more specific. Like a fund name etc
posted by r2d2 to Work & Money (13 answers total) 11 users marked this as a favorite
Mutual funds and index funds don't guarantee returns. No financial instrument or investment does, and if someone tries to tell you otherwise, I'd run in the other direction.

That having been said, if you're looking to generate returns in excess of 2.5% per year, I'd look at junk bonds or mortgage REITs. Don't forget to take into account taxes you will owe on this dividend/interest income that you want to generate.
posted by dfriedman at 10:22 AM on April 30, 2012

I've spent more time reading their beginner guides than in the forums, but the Motley Fool is a decent investing community that tries (aside from their annoying ads) to avoid the usual overheated hyperbole surrounding investing. See here.
posted by Wretch729 at 10:30 AM on April 30, 2012

Response by poster: I know there are no guarantees. I am open to taking some risk but not too much.
posted by r2d2 at 10:31 AM on April 30, 2012

If you want to do the research yourself (rather than being told what to do), consider joining the American Associate of Individual Investors and checking out some of their guides and FAQs. This recent blog post is relevant (specifically "an index fund that invests in the Wilshire 5000 index").
posted by mattbucher at 10:36 AM on April 30, 2012 [1 favorite]

4 years is a too short time horizon for anything other than safe instruments like a CD. Over 4 years, 2.5% APR nets you about $2500 in interest income. 6.5% APR (just as a random example) gets you an extra $4000 on that. Personally, I don't think that little gain over 4 years is worth the risk of the short term volatility of the stock market. Play it safe.
posted by COD at 10:39 AM on April 30, 2012

how would you invest $1000/ month if you knew you were likely to pull out most of the money in approximately 4 years to pay a down payment for say a house?

Conventional wisdom is that is too short of a time window to get a return much higher than what you'll get from a savings account without a lot of risk. Stock market investment is generally considered to one of the best long term investments, and a reasonable expected return from that is around 8% per year after adjusting for inflation, but in 4 years there's a decent change that you'll be down 15% from where you started instead of up 30%. If your bank was confident that they could turn $X into $X + 30% in the next four years without much risk, then they would probably be giving you a better rate when you effectively lend them money by putting it in your savings account.

I am looking for something more specific. Like a fund name etc

Unfortunately the advice you are looking for doesn't really exist. There are plenty of people out there who will tell you they can give you stock tips to be able to beat the market, but no one can actually back that up with consistent results. For example, one of the most basic things you would need to know for short term trading is where the overall market is going. If you put money in a good stock just before the market tanks, it doesn't matter how good your pick was because you're going to lose money anyway. If you look at the actual statistics of major stock market experts and their predictions for market direction, you'll see that on average they are correct around 50% of the time, which means their predictions are exactly as useful as random guessing. And these are people who have a lot more knowledge about the market than you and a lot more time to try to figure these sorts of things out.

The whole point of the market is that the current value represents what everyone as a collective group thinks it is worth. The only way you can beat the conventional return is if you somehow know something that everyone else doesn't know. That's why insider trading is illegal, if you actually do know secret information that the public doesn't know, you can use that to gain an unfair advantage in your trades. And if you yourself don't know, then you have no way of evaluating someone else's tip to see if they actually know some secret information that can beat the market. The point of investing is that you are confident that in the long run what you're investing in will be worth more than it's worth now, whereas the point of trading is that you're confident that you can buy something for less than it's worth and/or turn around and sell it for more than it's worth. So is there anything out there that will be worth more than 2.5% next year than it is today? Sure, but good luck finding it instead of something that will be worth 20% less next year. Whereas with your savings account, you're guaranteed to get that amount, because even if the economy crashes by the end of the year and your bank goes under, you're still protected by the FDIC insurance.
posted by burnmp3s at 10:46 AM on April 30, 2012 [3 favorites]

Perhaps discounted T-Bills would be the way to go. Or certificates of deposit.

Don't get greedy. Just put the money in a Money Market account, cruise the interwebs until you find one that pays the best rates.

Do NOT invest in anything, not knowing that the money is for a specific purchase in what is a very short period of time.
posted by Ruthless Bunny at 10:52 AM on April 30, 2012

In addition to taxes, take into account any management fees.

For general investing take a look at index funds - or index ETFs. Vanguard has a wide variety of low expense funds and/or ETFs. These have exceptionally low fees and typically track the movement of a large number of stocks (S&P 500, Whole stock market, international, etc.) or an industry. While they have low fees, they are not with out risk - and given the state of the world economically speaking - potentially considerable risk.

4 years is pretty short, if you really need the money for a down payment, then go for something very safe (bonds, cds, money market accounts). If you feel safe to take some risk or can look longer term, then start thinking about the index funds...
posted by NoDef at 11:22 AM on April 30, 2012

Response by poster: Okay, I think then consensus is that 4 years is too short a time frame to do anything other than put the money in very safe instruments. I agree.

This discussion however is pushing me to ask another question?
Since 4 years is too short. How would your advice change if I had say 10 years?
Now I realize if I had 30 years and a balanced portfolio then I am likely to get over 2%.

I am trying to understand what is the minimum time frame required for investing in anything other than super safe instruments?

I understand that this is really a follow-up question. I think asking it in this thread will keep things in context.
posted by r2d2 at 1:06 PM on April 30, 2012

For the shorter term, you could consider using your money in peer-to-peer loans (Prosper, LendingTree, etc.). They're certainly riskier than CDs, but less random than stock picking.
posted by tau_ceti at 1:37 PM on April 30, 2012

If you have anywhere from 4 to 10 years, I would put it in USSPX. Here's why:

- You are getting a part of the top 500 companies in the S&P. If they all go down, probably the economy is in the toilet so you are also worried about your job, etc. And if you have a little play in the timeframe (4 to 10 years) you could ride out a bad patch -- and ideally pump a lot more money in while everything is at fire-sale prices and then just wait a year or two for it to pick up.

- The fees are low.

- Although past return doesn't predict the future, it gives you an idea. If you put that money in a year ago today, the return was 12.25. If you put it in last year, the return was 5.52. Three years ago when the recession hit and everyone was selling, the return was 20.02. Five years ago, 0.71. Ten years ago, 4.51.
posted by Houstonian at 5:52 PM on April 30, 2012

You might consider savings bonds. You can purchase $10,000 per year (per person). Currently Series I Savings Bonds are earning just over 3%.

A few notes:

-value of the bond will never fall below purchase price
-must be held for at least a year
-holding a bond for less than five years will require forfeiting three months worth of interest
-subject to federal income tax, but not state or local taxes
-interest rate is based on a fixed rate and a variable rate that adjusts semiannually with inflation
posted by roomwithaview at 7:40 PM on April 30, 2012

Just a couple comments on USSPX. It is an index fund which tracks the S&P 500 stock index (good in my opinion). This means if the "market" goes down so does USSPX - it also means no one is trying to beat the market, which results in low fees and when the market recovers so will USSPX...

To add to the return data above the year ending 12/31/2008 this fund was down (just like the S&P 500 index) by -37% - the results from 2009 quoted above were from the rebound and recovery in 2009 of the index. This is not bad just like the fund went down, it also came back up with the market - not all funds did as well, and if you do some reading on index funds you will find that very few beat index funds over the long term.

Also the fees are .25%. Fees for a similar vanguard S&P 500 index fund 0.17% and a vanguard S&P 500 ETF 0.05%. Perhaps not a big enough difference for some people to choose one over the other, but a good lesson that not all index funds are created equal when it comes to fees...over a long time horizon .2% can actually add up...
posted by NoDef at 10:26 AM on May 1, 2012

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