How to invest 25K for the short term?
December 15, 2013 3:42 PM   Subscribe

So you've got $25,000 that you want to invest for 3-4 years. You're not interested in something crazy, you know nothing about the stock market, and you're financially conservative. What is the best financial tool for this? [I'm asking this for a friend of mine] Thanks
posted by Murray M to Work & Money (14 answers total) 19 users marked this as a favorite
There are certain low-risk, low-fee funds that focus primarily on income. Eg, Vanguard Wellesley Fund. The fund way underperforms the stock market in good times but outside of a severe stock market meltdown will provide steady returns because it is concentrated mostly in bonds.
posted by deanc at 4:00 PM on December 15, 2013 [2 favorites]

Your advice is going to vary. If you're a conservative investor and want to go for equities, diversify. ETFs let you sort of diversify without giving a cut to the "money manager" types that make out no matter how you make out. Plus, if you are aiming for a return of 6-10%, then do you really want to be giving a mutual fund guy or money guy 2%? (And, yes, they are mostly guys).

Here is a primer to start learning about etfs.

But, if you want to be stable invest in a dow heavy etf or something like gas/financial stock etf -- the dow is high now but you're hoping 16,000 is around 20,000 in 4yrs right? I think that's reasonable giving the growing population and such. A crash or run or unregulated speculation a la the housing crisis might cause a crash, but if you're young enough, it would come back....

Let me put it this way....if the Dow is only 20,000 say 15yrs from now, you'll have bigger problems.

DIA is an ETF of the Dow-Jones stocks, which I own btw, but other Dow indexes are out there and you can just focus on a certain sector so if you'd like.

Another thing: if you believe in Buffet, buy a "Baby Berk" (I own stock there too) and you'll do how Berkshire Hathaway does. Lots of momentary winners on Wall Street but Buffet's got to where he is betting safe, wise, and looking at fundamentals.

Good luck.
posted by skepticallypleased at 4:01 PM on December 15, 2013 [1 favorite]

Please see here. You want the lowest risk possible and depending on how liquid it needs to be i.e. can you wait 5-7 days or does it need to be very easy to access?

I would look into either an i-bond for half, a CD, or just stash it in a money market account. 3-4 years isn't a great timeframe to enter the investing market.
posted by lpcxa0 at 4:03 PM on December 15, 2013

25k for less than 5 years = 3 year CD or a high-yield savings account. Note that the savings account interest rate changes, but these still seem more worthwhile than a money-market account if you put the money into one that has a reasonably good interest rate.
posted by belau at 4:37 PM on December 15, 2013

Pay off all credit cards and any other debt. Set aside money for a rainy day in a savings account. Drop 5k into a Roth IRA. If you have any extra money after that, just hold onto it and start maxing out your 401k, or if your job has a stock purchase plan, do that.

Getting and staying out of debt is way more important than investing, when you only have that amount of money to play with.
posted by empath at 4:53 PM on December 15, 2013 [2 favorites]

Whoa! I would go see an accountant, myself! You could put it into a CD, yes, but you need to gauge your risk level for your age and retirement goals. Any sort of investment is a risk. Can you afford to risk any of your money? Yes? If so, what is your level of risk?

Think of it this way. You get paid $300 a week. $200 of that goes to rent and groceries. You have $100 extra. Should you spend it all on scratch tickets?

For some reason, people who have large amounts of money want to gamble it on investments. No. No, no, no. Just keep it and hang onto it. Think about it. It won't go away in a savings account, it will still be there next week, a year from now, that $25,000 will still be there, even if earning a small amount of interest while you decide what to do with it.

Let it ride. Let it sit there for a while. Pretend it doesn't exist. And then take your time to consult an accountant on how to best use it. But please, please don't gamble it on the stock market on a whim. A CD, okay, but make sure it will grow, not decrease.
posted by Marie Mon Dieu at 5:00 PM on December 15, 2013

Likening investing in stocks to investing in scratch tickets is absurd. The stock market historically gives, what, 9-10% returns per year on average; scratch tickets will, on average, lose you significant amounts of money. Of course that 9-10% is not guaranteed, and of course you could lose money on it, but "it's like scratch tickets" is either ignorant or fearmongering or both.

And a CD is not the way to "make sure it will grow". There is no way to "make sure it will grow", but even ignoring that, CDs stagnate, not grow. A CD will essentially keep pace with inflation, nothing more, or barely more if you're lucky. That's not growth; that's stagnation.

You should decide how much risk you're willing to take, and then invest accordingly. The general rule is that to achieve higher average returns, you must risk greater losses, and on the flip side, to protect what you have, you must settle for lower average returns. Either (or something in between) is a valid strategy, depending on what you're hoping to achieve and how much risk you're willing to take to achieve it.

Buying a broad-based stock index fund (such as Vanguard's Total Stock Market Index Fund Admiral Shares will (historically speaking) give a significant amount of risk but a high average rate of return. I don't know exact numbers off the top of my head, but maybe something like 9-10% average yearly, but something like a 1/3 risk of losing money in any particular year. A historically awful year (such as the start of the Great Depression) would lose like 40% in a year, and a historically great year (like relatively soon after the start of the Great Depression) would gain like 40% in a year.

Buying something like Vanguard's Wellesley Fund (mentioned above by deanc), which includes significant amounts of stocks but is heavily weighted towards bonds, will cut down on both the potential downside and the potential upside, and on average grow less. Again, I'm not claiming these are accurate historical numbers, but maybe 6% average. You're still risking significant loss, but likely not as much as investing 100% in a stock fund.

A CD would, as mentioned above, be way less risk, but your money will just keep pace with inflation; you won't really gain anything in any meaningful sense. I'm not saying this would be a bad decision; if you want to make sure you will retain what you have, and you're willing to forgo the possibility of gaining anything, it's a fine decision.
posted by Flunkie at 6:46 PM on December 15, 2013 [4 favorites]

Personally, I would choose 5 or 6 ETFs and diversify across industries and asset classes:

Something like the following -
One with bonds or TIPS
One with gold
One with small and mid-cap growth funds
One with large-cap blue chips
One with energy stocks
One with emerging markets or BRIC funds
posted by SarahBellum at 6:52 PM on December 15, 2013

Why only 3-4 years?
posted by Dansaman at 8:19 PM on December 15, 2013

how much storage space does your friend have? i like nickels, not for the whole 25 grand, but certainly 1 or 2 grand. they are now at about 90% parity (melt value/face value) and in the past they have been as high as 140% parity (each nickel worth seven cents). they earn no interest, but they are risk-proof and inflation-proof. parity can be tracked on $1000 in nickels will weigh approx. 220#.
posted by bruce at 8:34 PM on December 15, 2013

I would listen to empath and use the money to pay off any debt I owed interest on, which would be most debt. Particularly worthwhile is paying off high interest debt like some credit card debt. In the long run that would benefit you a lot more than just protecting that $25k from inflation which is really all you're looking at doing with a 3-4 year timeframe and little risk tolerance.

Seriously; paying off debt isn't sexy but it sets your financial house in order.

Also don't buy $25k in nickels.
posted by Justinian at 12:00 AM on December 16, 2013 [1 favorite]

Even if you are risk averse, savings or CDs are a waste with the current interest rates; like someone above said, they don't keep pace with inflation, so you're actually losing money. I would put it in the S&P index and hope there isn't a market crash. But I understand that you may be wary. How about an index-linked CD? It's zero risk in that you're guaranteed to recover the principal, plus whatever the average of the market gains between now and then. This link explains why they're not a great idea, comparing it to actually investing in the index -- but they're still generally far better than CDs.

Do not buy nickels. At this point, don't buy gold or silver either.
posted by redlines at 3:12 AM on December 16, 2013

Note that a Roth IRA is not a necessarily a great choice for a 3-4 year window because they have a 5 year seasoning period before with withdrawals of profits are not tax free.
posted by srboisvert at 5:23 AM on December 16, 2013

It's illegal to melt nickels for profit.
posted by Flunkie at 5:43 AM on December 16, 2013

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