An investment with likely 2% or greater return and 2 years time horizon?

[nico08]

Hello:

Can you identify an investment with a likely 2% or greater return and a 2 year investment time horizon. I understand that all investments involve risk, but a low investment risk is of course preferred. If you can't identify a specific investment, you can suggest an asset class (ie. investment grade bond, high yield bond, corporate bond, preferred stock, etc).

I know that CDs and money market accounts, on average, are currently providing a very low rate of return.

Thank you.

 

[REWahoo]

I'm not sure you'll find an investment with low risk paying 2%. PenFed CU is currently offering 1.4% on a two year CD, 2% on a 3 year term.

 

[JPatrick]

Perhaps a Floating rate fund or ETF.
There are many funds, one I own is FFRHX. The premier ETF choice would be BKLN.

These should maintain or rise as interest rates rise. Both would exceed your 2% goal.
However, if the overall market takes a serious tumble, these will follow.

 

[Fermion]

Buy Apple stock at $548, sell Jan 2015 $300 call for $248, paying a total of $300. Collect a year's dividends of $12.20.

Total return $12.20/$300 = 4.06% - commissions

For Apple to fall below $300 in one year, a small scale nuclear war would need to break out. They have over $150 in cash per share.


Or go with an index. Buy SPY at $183, sell Jan 2015 SPY $100 call at $83, collect a year's dividends of ? (estimate 2%, so about $3.66)

Total return $3.66/$100 = 3.66% - commissions - 0.09% fund fee

 

[galeno]

Sounds like a no-brainer. What could possibly go wrong?

Buy Apple stock at $548, sell Jan 2015 $300 call for $248, paying a total of $300. Collect a year's dividends of $12.20.

Total return $12.20/$300 = 4.06% - commissions

For Apple to fall below $300 in one year, a small scale nuclear war would need to break out. They have over $150 in cash per share.


Or go with an index. Buy SPY at $183, sell Jan 2015 SPY $100 call at $83, collect a year's dividends of ? (estimate 2%, so about $3.66)

Total return $3.66/$100 = 3.66% - commissions - 0.09% fund fee

 

[Midpack]

You're asking us to read between the lines with "likely" and "low investment risk", it may be wishful thinking. But it looks like the answer is nowhere as I define those criteria (without some equity exposure and associated risks). Munis may get you close or you might be able to find a brokered bond (not a fund) with a 2% return over 2 years, but there's more risk than a fund. Everyone wants more return without the associated risk...but it is what it is.

 

[nico08]

Buy Apple stock at $548, sell Jan 2015 $300 call for $248, paying a total of $300. Collect a year's dividends of $12.20.

Total return $12.20/$300 = 4.06% - commissions

For Apple to fall below $300 in one year, a small scale nuclear war would need to break out. They have over $150 in cash per share.


Or go with an index. Buy SPY at $183, sell Jan 2015 SPY $100 call at $83, collect a year's dividends of ? (estimate 2%, so about $3.66)

Total return $3.66/$100 = 3.66% - commissions - 0.09% fund fee

Thank you for your creative investment idea. I understand call and put options in a basic way, but I have this far not included them in any investment strategy. Perhaps now is the time....

 

[nico08]

You're asking us to read between the lines with "likely" and "low investment risk", it may be wishful thinking. But it looks like the answer is nowhere as I define those criteria (without some equity exposure and associated risks). Munis may get you close or you might be able to find a brokered bond (not a fund) with a 2% return over 2 years, but there's more risk than a fund. Everyone wants more return without the associated risk...but it is what it is.

Finding relatively low risk returns in today's market is frustrating, isn't it?

 

[Midpack]

Finding relatively low risk returns in today's market is frustrating, isn't it?

It is what it is for now. We'll see more than 2% on MM funds again one day, but it may be a while. For the average investor (like me), there is little hope of a real return without some equity exposure for now. I look at the expected returns and risks of my entire portfolio, and less on each asset class individually.

 

[jetpack]

You didn't mention size of investment. The stock option trades are shown here per share, but you need 100 minimum, so the Apple play would require $54,800 margin to buy 100 shares, you get $24,800 back with the call right away.

 

[Fermion]

You didn't mention size of investment. The stock option trades are shown here per share, but you need 100 minimum, so the Apple play would require $54,800 margin to buy 100 shares, you get $24,800 back with the call right away.

You do it all in one trade, called a buy-write. For the Apple play, it would thus require $30,000 (I wouldn't go margin though...you would lose all your gains in margin interest charges).

I am not advocating this trade...it was just a silly way to get a higher return than CDs or bonds without a huge risk.

I am holding a Apple spread right now but I was after a bit more return. Last year I bought 5 Apple Jan 2015 $400 calls for $100 each and at the same time sold 5 April 2014 $520 calls for $28 each. I thus paid $72 per spread. I just checked today, and even with Apple down a bit, the spread is worth $106. I am going to hold it until April for the full $120. I actually will make a bit more than $120 if Apple drops closer to $520 because the time value of the Jan 2015 call will go up a tad. That is a very fun situation...profit from a fall, stagnation or a rise.

 

[brewer12345]

Pen Fed Cds would be my pick.

 

[nico08]

You didn't mention size of investment. The stock option trades are shown here per share, but you need 100 minimum, so the Apple play would require $54,800 margin to buy 100 shares, you get $24,800 back with the call right away.

The investment size would only be about $31,000. So I guess the call option transaction is off the table?

 

[seraphim]

If you only have a two year time horizon, go to your bank and put it in a CD- investing in the market with such a short time horizon will not be low risk.

 

[photoguy]

I think a CD is the best bet but won't get you to 2% (maybe 1.5%) unless you go longer than 2 years.

Vanguard total bond has a 2.2% yield right now. I'd call that low risk.

If you don't like that you could also do something like an 80-20 mix of total bond fund / total stock market. If at any point in time, your investments go over ~4% starting value sell everything and shift to CD.

 

[Fermion]

I think a CD is the best bet but won't get you to 2% (maybe 1.5%) unless you go longer than 2 years.

Vanguard total bond has a 2.2% yield right now. I'd call that low risk.

If you don't like that you could also do something like an 80-20 mix of total bond fund / total stock market. If at any point in time, your investments go over ~4% starting value sell everything and shift to CD.

You could lose a significant amount in a bond fund if we got a rate spike. Don't think that bonds can't drop 10% in a very short period.

 

[Animorph]

Seriously, I'd buy something like gold stocks (GDX or similar) on a dip, wait for it to go up 5% (that's the fun part, but you have 2 years), then sell and call it a day. Anything with lots of volatility would work, GDX is just one I've been watching.

 

[photoguy]

The OP didn't define what he meant by low-risk. For my personal portfolio, I'd certainly consider vanguard total bond to be low risk. The OP may not however.

Eyeballing morningstar returns on vanguard total bond, there hasn't been a 2 year period where the fund lost money (in nominal dollars) in the past decade. This includes the years pre 2007 when 5-year treasures went up from 3% to 5%.

Future could be worse, but again there's no guaranteed way to get 2% with no risk (maybe a stable value fund but that's not available to everyone).

 

[Fermion]

Sounds like the way to go would be the 5 year penfed CD with a 3+% yield and just plan to break it at 2 years and give up a year of interest, thus giving you a 1.5% per year return. Or do 2 year CDs give you more than 1.5%?

I personally would actually do some sort of very deep covered call, probably on an index. The reason is if we have a market drop greater than 50% over the next two years, I shouldn't be spending the $30,000 on whatever I was going to buy anyway.

 

[David3]

Check out Merger Fund (MERFX). They buy/sell both sides of announced acquisitions, so the performance is market neutral. Very long track record - sailed right through 2008 with barely a blip.
MERFX Chart Merger Fund Chart

 

[Midpack]

Check out Merger Fund (MERFX). They buy/sell both sides of announced acquisitions, so the performance is market neutral. Very long track record - sailed right through 2008 with barely a blip.

That's an asset class I've never read about before. Expenses are high but a beta of 0.13 - never seen anything that low, and the chart seems to bear it out. Might meet the OP's ask, but I don't fully understand what the fund is (yet), something to look into...probably too esoteric for me.

 

[Bestwifeever]

Nico, I assume you are asking as a follow up to this thread: http://www.early-retirement.org/for...loan-or-pay-it-off-itt-69903.html#post1397195

If I could afford to lose some of it and still make the equity payments, I might put it into Vanguard's Wellington fund, which yields a little more than 2 percent in dividends but also is likely to appreciate in value. It is very unlikely you would lose it all. You would of course have to pay taxes on the gains and dividends.

But really, I would more likely just pay back the home equity loan

 

[brewer12345]

That's an asset class I've never read about before. Expenses are high but a beta of 0.13 - never seen anything that low, and the chart seems to bear it out. Might meet the OP's ask, but I don't fully understand what the fund is (yet), something to look into...probably too esoteric for me.

There are two merger arbitrage funds with a longish track record, MERFX and ARBFX. I own both and they are a nice, low risk way to earn modest, steady returns. There is a fairly detailed explanation of how these things work here: Life, Investments & Everything: Picking Up Nickels In Front Of A Steamroller

 

[CoolChange]

There are two merger arbitrage funds with a longish track record, MERFX and ARBFX. I own both and they are a nice, low risk way to earn modest, steady returns. There is a fairly detailed explanation of how these things work here: Life, Investments & Everything: Picking Up Nickels In Front Of A Steamroller

I've been considering these for years but never pulled the trigger. This may be the year.

I am tentatively planning to hold them in tax sheltered accounts; but, I have not given this too much thought yet. What are your thoughts on proper location of these investments?

 

[brewer12345]

I've been considering these for years but never pulled the trigger. This may be the year.

I am tentatively planning to hold them in tax sheltered accounts; but, I have not given this too much thought yet. What are your thoughts on proper location of these investments?

They are not tax efficient in the least, so if you can put them in tax sheltered accounts it is a boon. I have small amounts in an after tax account, but otherwise I have them in IRAs.