What would you do?

[pegd]

If you had $300,000 cash and wanted it to generate income immediately of at least $12,000 a year with no risk of loosing the principal, what would you do?

 

[tlg501]

For Money market fund Ing or CD would be Pen Fed,

 

[retire@40]

If you had $300,000 cash and wanted it to generate income immediately of at least $12,000 a year with no risk of loosing the principal, what would you do?

Let me think about this for a while..............................................................................................................
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Oh, ok.  How about putting $100K in money market accounts paying at least 4% in 3 different FDIC insured banks?

 

[JPatrick]

Yup, earning 4% will work great the first year, then inflation kicks in and you are just kidding yourself from that point on.
You may want to shoot for at least 7% and I don't have a risk free answer for you at the moment.

 

[Slarty]

How about 3 non-correlated asset classes so the average value doesn't bounce around that much, but it should give you a decent return to stay ahead of inflation. I might go with $100k in Large Cap Value Stocks, and $100k in Emerging Market Funds (or International funds), and $100k in energy/oil. Then kick back, and hope for the best. 8)

 

[JPatrick]

How about 3 non-correlated asset classes so the average value doesn't bounce around that much, but it should give you a decent return to stay ahead of inflation.  I might go with $100k in Large Cap Value Stocks, and $100k in Emerging Market Funds (or International funds), and $100k in energy/oil.  Then kick back, and hope for the best.   8)

No fair slarty--the deal is NO RISK!!  Feel free to try again.

 

[gindie]

retire@40 - Wouldn't you need to put it into at least 4 separate accounts?  With only 3 accounts, the interest would put you over the $100K FDIC limit.

 

[retire@40]

retire@40 - Wouldn't you need to put it into at least 4 separate accounts?  With only 3 accounts, the interest would put you over the $100K FDIC limit.

Yes, if the interest is to be reinvested. It sounded like the OP wants to generate $12K of income for spending purposes.

 

[free4now]

pegd if you are looking for advice on a real situation you'll probably want to provide info about how long you need the income for, whether it needs to grow with inflation, and why the "no risk" requirement.

 

[cute fuzzy bunny]

Since you cant get an adjusted 4% every year with no risk (note the word 'adjusted') I'd put it into Wellesley. Its hardly "NO risk" but its got a 4.28% yield right now, hasnt had a double digit loss in one year, and hasnt had two sequential years loss. Usually has done very well in the year after its had a loss. Since you would never have to sell principal, volatility of the fund would be moot. Historically wellesley has kept up with inflation and then some. Handled 'stagflation' and a couple of bear markets, and was even good to own the last 5 years during the ups and downs.

Really silly option as far as risk goes, but I suspect it would work pretty well would be to buy vanguards high yield corporate, take 4% of the 6.8% yield and reinvest the rest. The credit quality on that fund is so good compared to other junk funds I think the risk isnt really that substantial unless the entire economy comes crashing down. Again, never sell principal. You'd come close to 4% plus inflation looking at the funds historical data (9.3% annually since 1978).

 

[Andre1969]

What about putting as much of it into I-bonds as is allowable? I think they're paying around 6.75% right now. The downside is that you couldn't touch the interest for 3 years without a penalty, but the money grows tax deferred, and when you redeem them you don't pay state and local taxes.

 

[cute fuzzy bunny]

I thought about that too, but I dont think they produce an 'immediate income'; you have to sell them to get the inflation adjustment, no?

So since you cant get an income stream in the 4% from anything inflation adjusted that has a fairly certainly stable NAV, I looked at options that provide a steady 4%+ income stream with a potentially unstable NAV. But since you never sell shares, the NAV volatility becomes irrelevant unless you get mass corporate bankruptcy or mass corporate bond defaults. Neither is particularly likely. And if they do occur, I wouldnt be too sure about that money you've got in the bank or your FDIC insurance

 

[free4now]

I think you could purchase ibonds in a ladder with one maturing every year for however long you needed them. You'd probably have to go to the secondary market to buy them (and pay some frictional costs) because the maturity dates when you buy them from the treasury are not that flexible.

 

[cute fuzzy bunny]

You could, but I think you have to wait 5 years to cash them in without a penalty. Hence the problem with 'immediate income'. I dont believe you can buy or sell ibonds on any secondary market...just tips.

Tips navs on the secondary market are more volatile than wellesley or vanguards high yield corp. So far volatile upwards in a good way, but not entirely stable. And since you're having to "sell principal" here you've gotta be concerned about variable navs.

I wouldnt have even come close to suggesting something with a variability in principal if sales of the principal would be needed to maintain the income stream.

 

[JPatrick]

If you had $300,000 cash and wanted it to generate income immediately of at least $12,000 a year with no risk of loosing the principal, what would you do? 

Let's face it sports fans, given todays rates and probable inflation, this poster can't be promised 4% with no loss of principal.
The logical questions  to Pegd are:
* Are you willing to overlook inflation and simply accept accept $12000 per year?
* If the answer to the above is no--then how much risk are to willing to accept to meet your goal.
* Speaking of goals--how long would you like to draw from this money?

 

[Slarty]

OK, maybe I cheated on my last posting by recommending a portfolio that has some risk in it. But, maybe there are different kinds of risk to be considered. Pegd, which risk are you trying to minimize? Is it the risk that your origina principle may go down? Or is it the risk that your principal will not keep pace with inflatio and will therefore go down in value without the perception that it's going down? Which risk is most important to you and why? Professional risk managers use various tools, but one is the FMEA (Failure Modes and Effects Analysis).

The output of a FMEA is a risk index number that is usually derived from three inputs. Number 1 is how probable something is to occur. Number 2 is how detectable a problem is when it does accur, and Number 3 is the severity of a problem when it occurs. Each of these categories are scored and then the scores are multiplied together to get the total risk index. Even if you look at this conceptually instead of crunching some numbers, you may want to think about each of these categories with respect to the risks you're focusing on mitigating.

This thought process is why I see traditional "low risk" investments as very risky to me. I believe the probability if significant inflation occuring over the next 30+ years is very high. I also believe that it will be very detectable to me if I monitor the right metrics, which is part of my mitigation strategy. I also think that the chances of inflation having a severe impact on the value of my income stream from investments to be very large. That means, I need to protect myself from this risk, and a traditional "low risk" investment won't do that.

Just something to think about.

 

[Howard]

There is no such thing as a Risk free Investment, all Investments carry a degree of risk, Assets need to be spread over a variety of classes to earn an expected return.

A CD could lock you into low rates while rates are climbing, a long term Bond in increasing rates will lose its' asset value until redemption, a house could fall in value and be in a market where it can not be sold or sold at fire sale prices.

I like ETF's, they make it simple to slice and dice, long term hold.

40% AGG.

10% EEM

10% DIA or A Dividend Mutual Fund

10% MDY

10% QQQQ

5 -10% High Yield bond Fund

10-15% cash, Money Market.

Do not watch daily gyrations, this is a long term hold.

Not a professional jut a DIY, Due Diligence.