where to invest?
April 18, 2008 9:09 PM   Subscribe

so ive got like $3500 or so that i want to put into either a roth ira and some index funds.....or that id like to put all together in the market. there are these funds ive been reading about a little in the market itself that are labeled as 'safe' bets. they pay anywhere from 10-15% return and are pretty much all in energy, oil, gas, drilling, and that sort of thing. it's buy and hold on a smaller scale. anyway, that's one option and the other option is to just put the minimum in a roth and buy about a grand's worth of fidelity funds. my goals are to be able to help pay rent and to build small amounts of wealth. alright, lemme know what you think.
posted by locoindio to Work & Money (18 answers total) 7 users marked this as a favorite
Check out Permanent Portfolio, PRPFX and look at its 5-year. It has a bunch of gold but is well-diversified. Timothy Sykes talks about it a bit.
posted by disillusioned at 9:14 PM on April 18, 2008

Anything that pays 10-15% is practically by definition not a "safe bet". It has a high probability of carrying a greater risk than a diversified market fund which, historically and over the long run notwithstanding periodic multi-year dips, is lucky to return 8% annually.
posted by meehawl at 9:36 PM on April 18, 2008

I am compelled to point out that anything that purports to give you a 10-15% return year over year is not and cannot be "safe". The safer an investment is, the lower the return will be. A consistent 15% return is enormous, and must almost by definition include a high amount of risk.

If you don't have any real experience investing I would put all $3500 into a roth IRA account and buy a simple S&P index fund. An S&P index fund has historically outperformed some absurd amount of more specialized and actively managed funds once you include management fees. Unless you want to spend a lot of time researching and following what your money is doing day in and day out you are almost certainly better off just buying the index fund.

I reiterate that anything and anyone suggesting you will get a 15% return in a "safe" investment is lying to you. Flat out lying.
posted by Justinian at 9:39 PM on April 18, 2008

safe' bets. they pay anywhere from 10-15% return
posted by Flunkie at 9:40 PM on April 18, 2008

Well, first decide whether you want to do the investing in a Roth IRA or not. The Roth IRA isn't an investment, it's a wrapper for other investments. It means that you don't ever have to worry about paying income or capital gains taxes on what's inside the wrapper ever again. But you can't start taking stuff out of the wrapper until you're 59.5 years old. So money invested in the IRA won't help you pay your rent.

If you invest outside an IRA, you will have to pay taxes on your dividends and gains. That really eats into the usefulness of that kind of investment. What's left over, though, you can use to help pay taxes.

An investment that pays a 10-15% return is not 'safe'. Everyone was saying that New Century Financial, which was paying anywhere from a 10-30% dividend annually since 2000, was 'safe'. It paid out its last 10% dividend in December of 2006; by February of 2007 it was out of business and its assets disbursed to the senior creditors. Stockholders lost everything. Right now the risk free rate of return is around 3%; if you are looking at a prospect of higher returns, you are taking on higher risk.
posted by ikkyu2 at 9:40 PM on April 18, 2008

Just to expand on my "Wrongo", and add to what people here are saying, in no uncertain terms:

Whoever or whatever told you that this investment you're looking at is a safe bet for 10%-15% annually... never, *never* take *any* financial advice from this person. They are either lying to you, delusional, or both.
posted by Flunkie at 9:45 PM on April 18, 2008

It sounds as if you have two different goals: a) save the money to use for expenses like rent, and b) begin building wealth. These are pretty much mutually exclusive and demand different treatment of your money.

If I were in your position, I'd put a certain percentage (let's say half, just to make things easy) into a high-yield online savings account, such as the one offered by ING Direct. That $1750 would earn modest interest (3.00% right now) and could be used to pay rent or save for short-term goals.

For the "wealth-building" half of the money (or whatever percentage you decide), I'd open a Roth IRA (perhaps through Zecco or Sharebuilder). As ikkyu2 noted, a Roth IRA is just a wrapper. Or, as I like to think of it, a bucket. You put other investments into this bucket. Your idea to buy index funds sounds good.

By splitting the money this way, you're able to pursue both of your goals at once.
posted by jdroth at 10:18 PM on April 18, 2008

Index funds are your best bet. As people have mentioned, they are low cost and have consistently produced decent returns. Looking through all the past posts on investing will give you lots of good info as well.
posted by triggerfinger at 1:56 AM on April 19, 2008

The Roth IRA isn't an investment, it's a wrapper for other investments. It means that you don't ever have to worry about paying income or capital gains taxes on what's inside the wrapper ever again. But you can't start taking stuff out of the wrapper until you're 59.5 years old.

Just a minor detail clarification on that comment - with a Roth IRA you can always remove whatever you have contributed without any penalty, you just can't remove any appreciation until retirement. I.E. - you put in $1000, invest it in an index fund, and down the road the value has increased to $1100. You can pull out that first $1k, but the $100 has to stay in. Of course, if you go taking out funds like that it defeats the entire purpose of a retirement account.
posted by Lokheed at 2:38 AM on April 19, 2008

As others have mentioned, if you need this money to pay rent, you shouldn't put it in a retirement account that makes it a pain to get to till you old.

On the other hand, if you are looking to build wealth, drop the whole thing into an IRA (I like Scottrade, it's nice to have a "real" broker with branches, but that is cheap anyway). Once it's in the IRA, use it to buy a S&P ETF (SPY) or Mutual Fund, or a total market ETF/Fund. The person at scottrade will help you, they've always been great to me.

Then... and this is the key... don't touch it. Don't panic during down times, don't get elated during up times. Wait 30 years. If you want to retire on this money though, it's not nearly enough to get started, and you should just contribute to the account regularly. One hundred bucks a month is pretty easy to swing, and will grow huge over time. More is even better!
posted by cschneid at 8:06 AM on April 19, 2008

I think what you're looking when you see "10-15%" are the PAST returns of the funds. What happened in the past, happened in the past - there's no guarantee that those returns will be repeated in the future. Investing in the "safe" bets you've been reading about is more akin to gambling than investing.

No self-respecting investment advisor would tell somebody that investing in a single sector of the economy (in this case, oil and gas) is "safe". Just ask the people who invested in the "safe" tech stocks in the late 1990s, and promptly lost 80-90% of their money.

Investing in a sector that seems "hot" because it has had above-average returns for the past year or two is just going to get you burnt. No investment stays "hot" for any length of time, despite what the people selling the investment might say.

If you want a safe place to park your money for the long term, index funds are the way to go. In the USA, Vanguard seems to have good offerings in that category.
posted by gwenzel at 8:08 AM on April 19, 2008

Late to the party, but how can we have a thread like this and not include this Q&A with Warren Buffett? And who better to ask for advice like this?

QUESTION: What advice would you give to someone who is not a professional investor? Where should they put their money?

BUFFETT: Well, if they’re not going to be an active investor — and very few should try to do that — then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They’re not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don’t buy all at one time.

J.D. Roth has a great post on his blog about this crazy market and, "What Would Warren Buffett Do?"
posted by Gerard Sorme at 9:49 AM on April 19, 2008

Investing in the stock market is not a good source of income for necessities like paying rent. If you invest, invest for the long term, meaning at least 10 years in the future.

A Roth IRA is an excellent way to prepare for retirement if your employer doesn't have a good 401k plan (meaning, little to no matching). That's what I did-- I work for a small company with no matching, so I set up a Roth IRA with a mutual fund geared towards income (as opposed to growth).

If you are going to do your own investing, as opposed to dealing with mutual funds, then make sure you 1) diversify and 2) invest with your brain. Meaning, don't make impulse buys based on hot tips, or even what you read in the paper, but make a plan and stick to it. Decide in advance what percent of your money you want to put in index funds, what percent in bonds, what percent in growth funds, etc. Every year, analyze your portfolio and see how those percentages have changed due to market fluctuations. Then, adjust your investments to maintain the balance you intended.

If you do decide to deal with mutual funds, select the fund based on its performance over the last 10 years. And, look for the ones that don't charge you fees for drawing money out of them.

Just a few pieces of advice I've picked up from parents, co-workers, advisors, etc. Good luck!
posted by Laugh_track at 10:07 AM on April 19, 2008

I second half to ingdirect.com and would consider putting the rest in prosper.com thought it would lock you money for 3years you would probably be safe making 15% I have been doing it for about a year and currently make 16% with no defaults. Prosper has a promotion going on right now that offers $25 on referrals.
posted by tke248 at 11:52 AM on April 19, 2008 [1 favorite]

you would probably be safe making 15%

And here we have a perfect example of someone giving you bad information. You will not be "safe" making 15%. No way, no how.

FWIW, the median rate of return for big prosper lenders is like 5%.
posted by Justinian at 1:13 PM on April 19, 2008

I was going to chime in but ikkyu2 and lokheed covered what I was going to say. I'll just add that if you anticipate needing this money for rent anytime in the next couple years, just put it in a CD already. You'll get a little interest and the market won't have dropped out from under your investment just when you need to pull out rent money. That always happens- it's Murphy's Law or something.
posted by small_ruminant at 2:12 PM on April 19, 2008

I believe the reason your so called "big prosper lenders" only make 5% because they don't scrutinize the people they are lending money to they just pushing money into the system as fast as possible. I personally am doing well on prosper..
posted by tke248 at 6:28 PM on April 19, 2008

That's good. But that doesn't mean that it's a safe 15% return!
posted by Justinian at 7:04 PM on April 19, 2008

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