Safe Investment

I

inquisitive

Recycles dryer sheets
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Apr 7, 2008
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I have a certain amount invested in retirement accounts as well as a separate stock market account. I decided to have a reserve of maybe $5000 to keep in a money market savings account. Where should I put the rest of the money so that I'll get the highest return, in a safe investment? I don't want to put any more into stocks than what I already have invested.

Thanks!
 
Buy some magic beans.





Seriously, if you do not want more equities and you want low risk, you choices and returns are more limited. CDs would be safest, but returns are pretty low. Bonds could be OK if you stay short and high quality, but your returns might actually be lower than CDs. Then there are a bunch of things that might qualify as low risk for a given definition thereof, stuff like MERFX, LCMAX, etc.
 
inquisitive said:
in a safe investment? I don't want to put any more into stocks than what I already have invested.
Click to expand...
When you use words like "safe", people have to assume that you're talking about FDIC-insured CDs.

They're not actually safe either, but they yield more than Treasuries and they have some sort of insurance on their principal that would eventually get it back to you.

Everything else you're thinking of in bonds & equities is riskier. They're not necessarily "unsafe", but they're certainly not "safe" in the sense that you'd be able to recover your principal.
 
Start investigating your local credit unions.
I'm currently a member of 3 very good ones.
One is tied to a municipality I worked for.
One is a U.S. postal service a family member worked for.
The other is PenFed which anyone can join.
I'm currently getting 3% on a money market fund in 2 of these.
My money is not tied up so I can go get it tomorrow if a better investment comes along.
They are as safe as the U.S. government and the green back as best I can tell.
Hope that gives you some help and thoughts.
Its all about who you know sometimes.
Steve
 
My credit union pays 4% on a checking account, but you have to have direct deposit going into the account so its not of much use if you are retired.
 
utrecht said:
My credit union pays 4% on a checking account, but you have to have direct deposit going into the account so its not of much use if you are retired.
Click to expand...
What is the upper limit on which they will pay this?

Sometimes other direct deposits can be set up, including but not limited to SS payments.

Ha
 
Brewer, Can you please expound on LCMAX, What is this animal and how does it generate that much yield? Thanks
 
Leonidas, you are welcome to all the magic beans your DW can handle.

MERFX: This is a merger arbitrage fund. Basically, company X offers to buy company Y for $50 in stock, but company Y is trading at $47. So MERFX evaluates the likelihood the deal will close and the likely timing and if they like the deal they go long X and short Y. When the deal closes, they net $3. Rinse and repeat. It can get a lot more complicated, but that is the basic idea. This strategy is known in the trade as "picking up nickels in front of an oncoming bulldozer," but if you do it diversified enough and you do not leverage, it is usually a low risk, low volatility strategy. Since the fundametal construction of the fund is long one stock, short another, exposure to the overall market is limited. The risk is that the manager loses their touch or their mind (see Bill Miller and maybe Bill Gross).

LCMAX: This is somewhat similar to a hedge fund. It is a long-short bond fund that puts on a lot of its positions via derivatives. The fund intentionally maintains little or no net exposure to bonds, but makes directional bets as the managers attempt to generate an idiosyncratic return. Ignore the yield: focus on total return.

I would never put more than 10% of a portfolio in an individual diversifier fund like MERFX or LCMAX, but they make nice, market neutral diversifiers that I would expect to generate high single digit returns over the long haul.

FWIW, MERFX has a direct competitor (ARBFX) that is currently closed. Given the choice, I would split money between the two.
 
Onward said:
I keep the year's spending money in Vanguard Short-Term Bond Index Fund (VBISX).
Click to expand...

What has been the average return of this? Is it more than 3-4% that people are getting in credit unions?

Will definitely check out my local credit unions as I am getting about 1% from my bank right now, as well as MERFX.
 
I keep a 45/45/10 (equity/bonds/cash) allocation in retirement. Cash is in a mix of bank account and CD ladder. Bonds are in VBISX and VBMFX and equities are in VTSMX and VGTSX. A KISS approach.
 
inquisitive said:
I have a certain amount invested in retirement accounts as well as a separate stock market account. I decided to have a reserve of maybe $5000 to keep in a money market savings account. Where should I put the rest of the money so that I'll get the highest return, in a safe investment? I don't want to put any more into stocks than what I already have invested.

Thanks!
Click to expand...

Highest return, safe investment or kind of an oxymoron.

Of safe from what? For example, money in a money market may be safe from stock market decline, but not safe from inflation. Likewise, money in stocks might stay ahead of inflation, but has the market decline risk.

Rather than have a set amount (as in your case, $5000), would break that down into percentages (asset allocation). So much held back in a money market as "chicken money", i.e., emergency fund. So much in fixed income, so much in equities, etc. All at levels you feel comfortable with.
 
easysurfer said:
Highest return, safe investment or kind of an oxymoron.

Of safe from what? For example, money in a money market may be safe from stock market decline, but not safe from inflation. Likewise, money in stocks might stay ahead of inflation, but has the market decline risk.
Click to expand...
Intersting hypothesis, but in the last bigtime inflation that we experienced in the USA(1970s), money market funds and t-bills fared much better than either stocks or bonds.

Ha
 
Mainly, there's just no one size fits all investment that always safe and has a high return. If there was, wouldn't we all just do that? That would be too easy :).
 
haha said:
Intersting hypothesis, but in the last bigtime inflation that we experienced in the USA(1970s), money market funds and t-bills fared much better than either stocks or bonds.

Ha
Click to expand...

I'm going from memory here, but if I remember correctly money market funds were created, or at least became popular, because inflation was exceeding what banks were ALLOWED to pay. Their vulnerability is that the Fed has a very very strong influence on interest rates at that end of the market. Which makes for horrible days like now when the Fed wants to stimulate the economy, but wonderful days when the Fed is raising rates to try and tame inflation.

The large cap "nifty 50" stocks definitely underperformed in the 70s after their bubble, just as large cap US stocks have underperformed since the tech bubble burst. However, I believe that small cap stocks had a great run in the 70s just as they did fairly well during the past decade.

Conventional bonds always get killed by unexpected inflation. However, they were obviously a great place to invest once the Fed raised interest rates sky high to kill inflation.

As always diversify to maximize safety.
 
bamsphd said:
I'm going from memory here, but if I remember correctly money market funds were created, or at least became popular, because inflation was exceeding what banks were ALLOWED to pay. Their vulnerability is that the Fed has a very very strong influence on interest rates at that end of the market. Which makes for horrible days like now when the Fed wants to stimulate the economy, but wonderful days when the Fed is raising rates to try and tame inflation.

The large cap "nifty 50" stocks definitely underperformed in the 70s after their bubble, just as large cap US stocks have underperformed since the tech bubble burst. However, I believe that small cap stocks had a great run in the 70s just as they did fairly well during the past decade.

Conventional bonds always get killed by unexpected inflation. However, they were obviously a great place to invest once the Fed raised interest rates sky high to kill inflation.

As always diversify to maximize safety.
Click to expand...
Go back and look. I was there- small cap stocks got absolutely gutted in the 73/74 downturn. Today, when we have perhaps history's worst central banker at the helm of the Fed, it is possible that results would be different from what they were back then. I really do not speak to money market funds per se, but more to short term instruments in general. I survived that period quite well in 3 month bills.

Obviously today might be different. I am just saying that whatever links there may be beween stocks and inflation rates, they are not only loose, they can operate in reverse.

This information is not hard to find, but it conflicts with industry/FA bs.

Ha
 
veremchuka said:
3% at a credit union? i looked at local cu online and they were paying a whopping 10 basis points up to (are you sitting down?) 50 bp. ally and ing are far better than this, where are these cu?
Click to expand...

Not sure if this question was for me but I'm currently getting 3% at 2 different CU's in alabama.
Neither are easy to become members of though.
One you have to be an employee or x employee.
The other one is basically the same but family members of an employee can get in, as I did.
Funny thing to me, I never paid much attention to either one of them until all the interest rates went south. Now I'm squeezing all the cash I have available into them.
I actually called to close one of the accounts and the clerk told me if I closed it, I would never be able to get in again, because I had retired. I said, "so what" you guys never pay good rates anyway. That's when I got the nice surprise that they were paying more than any of the banks in my area at the time.
Both CU's have managed to stay at 3% all this year to.
 
I wondered myself how these CU's manage to pay more interest than the banks. I think it has to do with being tied to a big employer. They have a trapped audience. They make all types of loans to employees and cut the payment straight out of their pay checks. When I go in to make a deposit there is usually 3 or 4 people in the (small) office applying for loans.
The CU's probably charge 6% on the loans.
Steve
PS. Don't you guys think penfed makes a lot of loans to soldiers & government employees?
At least I would think that is where they started from. But I don't know very much about penfed, I'm a new member.
 
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