What specific kind of financial investing would give the greatest return based on a $2,500,000 investment? Stocks, bonds, mutual fund, etc?
July 31, 2012 5:03 PM   Subscribe

What specific kind of financial investing would give the greatest return based on a $2,500,000 investment? Stocks, bonds, mutual fund, etc?

If one has $2,500,000 presently invested in real estate but would rather not have the headache of maintaining property....are there any reputable investment firms or major banks that could provide an 8% ($200,000 annual return) or higher based on the 2.5 million?
posted by lorebella to Work & Money (22 answers total)
If there were, why would anyone invest anywhere else?
posted by Tomorrowful at 5:07 PM on July 31, 2012 [5 favorites]

Statistically? As with stories, the answer is all about when you end your time frame. The answer for 100 years will be different than the answer for 10 years or 5.
posted by small_ruminant at 5:08 PM on July 31, 2012 [1 favorite]

8% over time? Equities - maybe possibly. 8% year in year out, into perpetuity? No.
posted by JPD at 5:08 PM on July 31, 2012 [1 favorite]

It would be long term. If 8% is too unrealistic, it would have to be a minimum of 5%. Any chance of 5% on an annual basis?
posted by lorebella at 5:15 PM on July 31, 2012

Seriously, there's no guarantees. There are some insurance-based products that are offering 5% these days, I hear.
posted by small_ruminant at 5:17 PM on July 31, 2012

The kind that has professional advice, and possibly professional management.

Fee-based professionals.

On a 'what would tmotat do' basis ... Admiral shares from Vanguard, go with trying to match the market with a big, big chunk ( >80%) and use the rest for speculation.
posted by the man of twists and turns at 5:18 PM on July 31, 2012 [2 favorites]

Long term index funds.
posted by wongcorgi at 5:19 PM on July 31, 2012

There are no guarantees in any investment.

That said, look at the yields on preferred shares for banks. Note that many of these issues are illiquid. Consider also junk bonds.

But, do your homework, etc. No guarantees in any investment.
posted by dfriedman at 5:26 PM on July 31, 2012

5% on a long-term horizon is very very reasonable. You can get that with a mix of equities and cash, but it will also be a function of how much liquidity you need.
posted by JPD at 5:27 PM on July 31, 2012 [1 favorite]

Also, some comment equity has dividend yields > 8%, such as NLY, but it's something you'd have to watch closely, perhaps with a stop-loss order, because there's no guarantee that NLY (or any other company) can continue to pay out fat dividends indefinitely. NLY has the benefit of liquidity (it's a $16 billion company) so it's relatively easy to liquidate a sizeable position in it.

I used to own NLY, but do not any longer, for reasons unrelated to its performance.
posted by dfriedman at 5:31 PM on July 31, 2012

Uh, common equity...
posted by dfriedman at 5:31 PM on July 31, 2012

Higher returns are correlated with higher risk. Stocks and stock funds have averaged over 8% for the past 100 years, but as you know they've had some rocky bits. For example in 2008 the S&P 500 had a return of -37%, which would have lost almost a $1 million on $2,500,000.

The closest to nominal risk free you can get is US bonds, which are returning around 1.5%. And that's nominal returns, which actually might lose money with inflation factored in.

So if you want 5%, you're going to have to accept some risk that you'll get less than that, possibly losing money. There is no investment that will guarantee you will get at least 5%.
posted by justkevin at 5:34 PM on July 31, 2012

If anyone tells you that they can get you 8% a year (or 5% or whatever) guaranteed or even pretty guaranteed, they're almost certainly lying to you.

The stock market has historically averaged more than that. But it's wildly volatile, and cannot be counted on to get you that much in any given year or set of consecutive years. In fact it can lose you money year after year for a long time.

If I was suddenly given $2.5 million, I would sock it away in a low fee mutual fund that tracks a broad stock market index such as the S&P 500.

I would then withdraw no more that 4% of it out in any given year, and probably less. That should allow it to be a fairly safe -- not sure -- bet for perpetual income.
posted by Flunkie at 5:36 PM on July 31, 2012 [5 favorites]

If you have 2.5 million bucks and this is the question you're asking, you need a reputable independent (likely fee-based) investment adviser to help figure out a strategy that makes sense for you. You'll need to figure out what levels of risk you're comfortable with, when you'll need access to the money, tax implications of different investment strategies, what kind of liquidity you need, etc... This is what an adviser helps you plan for. Your question focuses on return, but completely negates the risk side of the equation, which is phenomenally important.

There is no zero-risk way to get a guaranteed 8% return, especially when your timespan and liquidity needs are undefined. If there were, everyone would pour all their money into said investment in a flash. The higher the return, the greater the risk and/or the lower the liquidity. That's why US Treasuries pay such little returns and why two-person garage startups make their investors filthy rich if they hit the big-time.
posted by zachlipton at 5:40 PM on July 31, 2012 [5 favorites]

And by the way, if you go the "index tracking fund and forget about it" route, don't bother with some fancy-schmancey investment firm like Merrill Lynch or whatever. They exist only to slowly drain your money from you, and in the long run the advice they give isn't remotely likely to be particularly good. Just sign up for an online account at Vanguard.com, pick a low fee fund that tracks the S&P or whatever, transfer money into it, and forget about it. Maybe, for example, VFIAX.
posted by Flunkie at 5:42 PM on July 31, 2012 [4 favorites]

You must evaluate risk along with return. FWIW, pension funds and endowments often target about 7% growth with low risk as a ballpark expected return on 20+ year investments. Many people now feel that number is too high in the US, even with a 20 year horizon.
posted by Nelson at 6:20 PM on July 31, 2012

Possibly Lending Club. I've invested mostly passively with them for three years, with a net annualized return of 14.5% (before taxes, fees, inflation etc.). Risks I would consider: lending fees could always increase (if they wanted to profit more and didn't need as much lending capital), the quality of their diligence on borrowers could decrease (either due to their effort or the borrowers becoming harder to asses), more online lenders could sprout up, and traditional lenders could become more competitive. Do your own homework of course.
posted by mnemonic at 8:24 PM on July 31, 2012

If I was suddenly given $2.5 million, I would sock it away in a low fee mutual fund that tracks a broad stock market index such as the S&P 500.

I mostly agree with this advice, but there's no reason to limit your investments to one country like that. It's equally easy to invest in multiple index funds, or one that tracks a larger and more diverse geographic region.
posted by ripley_ at 11:12 PM on July 31, 2012

First off, IANAInvestmentAdvisor, and I'm not yours if that were the case, and it's not.

That being said I'm assuming you're in the US, although you don't mention that in your post and it isn't in your profile. If you're in Australia, all my advice below is null and void.

These days in the US, you're gonna have to babysit the crap out of anything current to get anywhere near the %8 you're looking for. zachlipton wisely says above that currently, there isn't much of a way for us Americans to guarantee a simple %8 return right now.

Others have also recommended low fee mutual funds, and I can't really disagree. Start slow, and unfortunately you'll only get %3 or %4 now, but you might be able to get an %8 or %9 down the line, maybe it will even out, although it probably won't.

The days of getting a decent static return on your lump sum of invested money in the US is apparently behind us. Be ready to get something closer to %4 or lower. While index funds are nice, and I had a chance to get in on the recent SCSS increase, nobody is looking like AAPL in the near future. Look at what happened to Facebook. Whatever you do, don't buy gold or silver.

Unless of course you're in the Senate. In which case Senator, I have a panoply of fantastic investment ideas for you.
posted by Sphinx at 12:14 AM on August 1, 2012

Oh, and as always diversify. Especially with a lump sum like that. Don't put all your eggs in one basket.
posted by Sphinx at 12:15 AM on August 1, 2012

Can you hire a property management company to manage your existing portfolio of real estate? Even with their fees, it might beat other options.
posted by lohmannn at 5:37 AM on August 1, 2012

It sounds like you are wanting to invest for income and to use this fund as a sort of money machine to turn out a fairly predictable income stream year after year. This is different from investing for growth (which long term could achieve 8%) or investing for wealth preservation.

A good financial advisor will probably steer most investments toward dividend yielding stocks and bonds and target a 4 to 5% return annually. Really good advisors will spend time to really understand your goals and how much you need to earn to live and tell you if you your goal is a stretch.
posted by dgran at 5:45 AM on August 1, 2012

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