5% fully secured note vs equities......

[Bluegrass]

Hi. I'm a long time reader of this site, but this is my first post (I just joined).

Assume you have a reasonably balanced portfolio involving equities, real estate and cash. 100 bucks in equities (currently available vanguard funds), 100 bucks in RE and 100 bucks in cash.

Assume you have the chance to participate in a no risk, fully secure note paying 5%. It will be paid off in 18 to 24 months, but it's one phone call check cut the next day liquid. Assume you could put up to 200 bucks in the note if you wanted to.

What is the right move?

Thanks.

[treeofpain]

There is no "right move", just the right move for each of us.

5% guaranteed with no risk and full liquidity - sounds great for someone who wants to balance/reduce risk but still get a reasonable ROI.

[Sunset]

What did Bernie Madoff get out already ?

How can it pay 5% and absolutely be no risk ?

If everyone in that city loses their job it's still no risk ?

[Bluegrass]

Obviously there is always risk with anything. And there is risk with the note I've described as "no risk". But I didn't want any responses (for which I'm grateful) to be about that particular risk. So, for purposes of my question, pretend you know definitively the note is going to perform as stated but that you have no guarantees as to anything else.

Thus, it kinda boils down to this question (at least for me): Would a prudent investor take all of the money he/she has in equities in this current market and put it in the "no risk" note I've described? To do so seems like the right thing to do.......but it also sorta feels like a step towards an overall no no of trying to time the current market.


So, in sum, yes.....there is risk. And yes, I know choices are individual and there is not necessarily a universal "right move". I'm simply trying to gain some insight from folks who are no doubt far more experienced and savvy regarding these kinds of questions than me. Thanks.

[brucethebroker]

Your question "Would a prudent investor take all of the money he/she has in equities in this current market and put it in the "no risk" note I've described?" contain "prudent" and "all of the money" which contradict themselves IMHO. 10% of the money, sure. 25%, maybe. "All", no way. I love rental properties, but I would never put all of my money into one property, no matter how enamored I was. But that is just me.

[traineeinvestor]

Quote:

Originally Posted by brucethebroker Your question "Would a prudent investor take all of the money he/she has in equities in this current market and put it in the "no risk" note I've described?" contain "prudent" and "all of the money" which contradict themselves IMHO. 10% of the money, sure. 25%, maybe. "All", no way. I love rental properties, but I would never put all of my money into one property, no matter how enamored I was. But that is just me.

+1

I don't think I could bring myself to invest even 10%* of our nest egg in a single asset no matter how good the promised returns and how confident I was in the absence of default risk.

* our home is a fraction over 10% of total assets which has always felt high to us.

[Bluegrass]

in addition to my clarifying post.

Not all of my nest egg nor all of the money.

"all of the money in equities"........which is, at most, 1/3 of the overall portfolio.

And again, please assume the 5% is no risk for purposes of answering the question (even though it isn't).

[DrRoy]

I would put my 1/3 that's in cash in the note, not the equities.

[jetpack]

Considering the taxes on moving out of equities, definitive no. I do have some 3% cd's, and I'd certainly consider moving those to higher interest investments that have no risk.

[Senator]

Quote:

Originally Posted by jetpack Considering the taxes on moving out of equities, definitive no. I do have some 3% cd's, and I'd certainly consider moving those to higher interest investments that have no risk.

Quote:

Originally Posted by Sunset What did Bernie Madoff get out already ? How can it pay 5% and absolutely be no risk ? If everyone in that city loses their job it's still no risk ?

I have been more money on a principle payment on a rental property mortgage. $6K a month. The mortgage is at 5.375%. It is 100% no risk, as the return is 100% guaranteed. And I have the real estate valuation risk no matter what, so that is not a risk for paying more.

The 5.375% return is more guaranteed than any government bond, as the bank is more likely to take away my property if I do not pay, than the government is likely to default.

[Sunset]

Ok, I'll play.
5% and God says no risk, I'd move everything into it that I could without creating a huge tax cost, as that would defeat the purpose.

[timemoveson]

I have such a note. I understand every possible nuance behind the issuer of the note and the risk inherent in the structure of the note, etc..

It pays an appropriate risk-adjusted rate of return well above market to compensate for the risk.

I deemed the risk-return to be acceptable and put about 10% of our net worth into the instrument. It constitutes a good portion of our fixed income allocation. I am talking about a high six figure amount, so this isn't play money.

In other words, your note in your situation is also just a risk-adjusted investment opportunity and you need to view it as exactly that and invest accordingly based on your investment strategy.

[OldShooter]

Quote:

Originally Posted by Bluegrass ... And again, please assume the 5% is no risk for purposes of answering the question (even though it isn't).

Your question makes no sense to me. It is like asking me: "If you had a guaranteed effective anti-gravity belt, would you jump?" The premise is so ridiculous that answering the question is meaningless.

Are you really asking whether people think equities will outperform a 5% yield over the next couple of years? That one I can answer:

No experienced investor IMO would bet on any particular equity yield over such a short period. History leads us to believe that over the long term equities will yield significantly more than 5% but it will be an unpredictable and wild ride.

So if an experienced investor with an asset allocation suitable to his psyche and needs encountered this mythical note, he would attempt to substitute it for some lower-yielding asset in his fixed-income bucket. But it would not occur to him to change his asset allocation because of the note's availability.

Not that it matters to the decision but if the gains are taxable, the equity gain will probably be taxed at a lower rate than the note interest.

[Sojourner]

Quote:

Originally Posted by DrRoy I would put my 1/3 that's in cash in the note, not the equities.

Quote:

Originally Posted by jetpack Considering the taxes on moving out of equities, definitive no.

+1

At most, I would move a chunk of the cash portion of the portfolio to the 5% note. The tax burden of moving money from equities to the note alone would make the 5% return effectively much lower, plus I would never personally want to go below 33% equities from an AA standpoint.

[euro]

Quote:

Originally Posted by Senator I have been more money on a principle payment on a rental property mortgage. $6K a month. The mortgage is at 5.375%. It is 100% no risk, as the return is 100% guaranteed. And I have the real estate valuation risk no matter what, so that is not a risk for paying more. The 5.375% return is more guaranteed than any government bond, as the bank is more likely to take away my property if I do not pay, than the government is likely to default.

Good point and very valid strategy - although uncle Sam likely helps paying a portion of that 5.375%?

[Fedup]

I say anything too good to be true category is too good to be true. I would only risk a small portion of my portfolio.

[jollystomper]

I would not put all my money into it. I would consider putting perhaps 1/2-2/3 of my cash position in it, based on my plans for my cash position. I agree with those about not putting all ones eggs in one basket.

[bmcgonig]

I would do it. Assuming that it's like putting all my equities into a penfed 18mo CD at 5%. And assuming no tax burden. Definitely. I would take a guaranteed 5% over what the market might give me. But I'm risking losing upside that's for sure.

[kcowan]

How about XOM with a 10-year annualized total return of 15.5%? Is that too risky for you?

[Senator]

Quote:

Originally Posted by euro Good point and very valid strategy - although uncle Sam likely helps paying a portion of that 5.375%?

Uncle Sam likes to take a bit off the top of any other investment. And I would rather have to pay less $1.00 interest even if it costs me 0.50 in taxes. I am still ahead.