How to maximize 70k currently earning 1.5%?

[schin]

All,

 

I have a friend, who has 70k in a savings account earning 1.5%.  My friend is ultra risk-adverse and part of the money is to her parents retirement in like 10+ years.

 

It blows my mind that it's invested so conservatively.  I was hoping to look into some stocks with high dividends (Pfizer), or REITs (FUR or CIM) or some prefers (?)... to give her some extra yield without taking excessive risk.

 

The money maybe need to be accessed withhin 5 years -- not all but some.

 

Thoughts? Ideas on how to approach this?

[CONeal]

My first question would be is your friend even willing to put any money in the market? 

 

My dad hated the stock market (mainly fear) and never put a dime into the market, no matter what approach I gave him.

[Myth465]

Thats a tough one. I would tell her to buy the SFK Debentures yielding 15%. Inflation will destroy that $70k, if its not growing its shrinking. I honestly wouldnt be buying FUR now, not till I saw what they did with the loan transactions this quarter. I hold FUR, but wouldnt add. She probably needs a good old bond fund / cash / laddered CD portfolio.

 

I would recommend 35% in a bond fund like PIMCOs. 30% in FPAs Bond Fund (These guys hold significant cash), 30% in cash or cds, and 5% for you to manage (SFK Debentures).

 

---

 

Personally I would leave her alone. My mom is the same way and would drive me bat shit if I ever tried to manage her money. Show her some clips of Bill Gross or Rodriquez from Wealth Track then show her the returns for 3 - 5- 10 years. If she isnt interested I would leave her alone.

 

 

[Packer16]

I agree.  You should find out if your friend will have hard time sleeping if her investment goes down 10%/20%/30%.  If so, it may lead to a more peaceful life if she keeps it in something safe.  I have known a few folks who do not like risk and the volatility would ruin their lives so it was just not worth it for them to invest in anything but short-term / low-risk investments like money market funds.

 

 

Packer

[scorpioncapital]

"My friend is ultra risk-adverse "

 

That's not a formula for stock investing. Maybe some form of debt if anything.

[Guest kawikaho]

Accessed in 5 years? I wouldn't touch an equity with a 10 foot pole.

 

What's wrong with 1.5%?  I think people vastly overestimate the effect of inflation on cash.  I'd be willing to bet that, statistically, the average person would be better off rolling over 1 year CDs and avoiding the stock market.  The average person tends to do *exactly* what you don't want to do when buying assets: they pour all of their money into the tops of bubbles and sell everything during the troughs crashes.  

 

I concur.  I advise most people to stay out of stocks.  The risk premium over the long haul isn't worth it.  The Dow over the past 60-70 years returned 1-1.5% above 4% inflation.  But it did that with lots of risk and volatility.  I often just recommend a good bond fund, tax-free muni's, property, and if they want some equity exposure, health care stocks.  Health care costs are going to keep compounding at 10+ % until the politicians get serious about health care costs.  I sometimes recommend stocks that have solid leadership at the helm, like Fairfax, maybe Berkshire (but it's too big already), for riskier profiles.  After what I've seen these past 10 years, not going there.

[nodnub]

Thats a tough one. I would tell her to buy the SFK Debentures yielding 15%. Inflation will destroy that $70k, if its not growing its shrinking. I honestly wouldnt be buying FUR now, not till I saw what they did with the loan transactions this quarter. I hold FUR, but wouldnt add. She probably needs a good old bond fund / cash / laddered CD portfolio.

 

I would recommend 35% in a bond fund like PIMCOs. 30% in FPAs Bond Fund (These guys hold significant cash), 30% in cash or cds, and 5% for you to manage (SFK Debentures).

 

Are we looking at the same SFK debentures?  SFK.DB on TSX is at $89 now ($100 par value) and had a yield at par of 7%.  So roughly a current yield of 7.8%...  or have I figured this wrong somehow?

[SharperDingaan]

 

Re SFK Debs. Cash yield is 7.87% [(7/89)x100]; yield to maturity is around 15% (or higher if called earlier).

 

Keep in mind that in the current climate there is a very good possibility that these debs will get restructured in some fashion; but we don't know if it will happen, or what it will look like. Not a good place for those with minimal tolerance to risk.

 

SD

[vinod1]

I/EE bonds should be a no-brainer at the very least. They should yield about 3 to 4% over the long term and tax deferred. You can invest only about $20K per person per year (5K I bond electronic, 5K I bond paper, 5K EE bond electronic, 5K EE bond paper). There is a lock up period for 1 year.

 

Vinod

[schin]

My first question would be is your friend even willing to put any money in the market? 

 

Yes, she is willing to put money to the market. Probably a small percentage like 20-30%

[schin]

Thanks for all the suggestions. I understand how some people are very protective of their nest-egg.  Yet, at 1.5% for eternity, if left only. I know for a fact, inflation would eat that amount alive.

 

I get investors like Buffett, Pabrai, and Bob Rodrigez who can sit on cash until the right opportunity comes. What I worry about is my friend will sit in cash forever, and thus let inflation eat them alive.

 

My concern with the PIMCO/bond fund options is the I don't see there being a high likelihood of interest going down. With the green shots of the economy coming up, I feel there a higher chance (75%) of interest rates going up or staying stagnant (20%) than going down from here (5%).

 

That said, I'm not sure any bond fund with current low yield would have a great return over the next 1-3 years. 

 

My rough thoughts were:

 

1) CDs and money markets (25%)

2) Inflation adjusted bonds seem like an interesting option. (50%)

3)Possibly, some good quality, highly capitalized companies (like PFE, PG, and WMT) might be good bond subsitutes with dividends around 2%-4% with a equity kicker (15%)

4) Deep value (suggestions welcome) (10%)

 

[sswan11]

Well, if you can stomach tobacco they have much higher yields.

[Viking]

Buffett's number one rule is don't lose what you got.

 

I find giving other people suggestions a VERY tricky thing. What everyone should have learned from the past 18 months is higher return strategies carry higher risk (even US treasuries).

 

I only give (a small number of) people ideas that I consider very fat pitches. Right now there are not alot of very fat pitches so I would suggest leaving the $ earning 1.5% and wait for things to get ugly again (which they likely will in the next 6 to 12 months).   

[scorpioncapital]

Thanks for all the suggestions. I understand how some people are very protective of their nest-egg.  Yet, at 1.5% for eternity, if left only. I know for a fact, inflation would eat that amount alive.

 

 

This doesn't make any sense at all. Do you really think the bank or whatever instrument she is getting 1.5% interest on is going to keep it at 1.5% for eternity? Interest rates paid on cash change, they don't remain static. 12-month % change in Inflation in 2009 was negative 0.4% so she is beating inflation now, no problem with that. If inflation is higher next year, she'll get higher interest on cash. Philip Fischer said it best in paths to wealth through common stocks, people are way too concerned about inflation when there are other things to worry about.

[Myth465]

Holding cash for 20 years is the surest way to lose money. Thats why people mention inflation. Between taxes and inflation she is losing money.

 

Buffett said cash for the long term is the worst investment.

[mranski]

Have you considered a Life annuity. I don't know alot about them, but there is some appeal in that they can be indexed, creditor proof, payments for life etc. like a defined benefit pension plan. I know the fees drag but so do market mistakes. I'd be curious what other board members think of this as an investment option?

 

 

[tradevestor]

How about asset allocation based on index funds (or ETFs) and rebalance every year or so. No guessing, no timing, easy to do.

 

http://www.bogleheads.org/wiki/Lazy_Portfolios

[schin]

This doesn't make any sense at all. Do you really think the bank or whatever instrument she is getting 1.5% interest on is going to keep it at 1.5% for eternity? Interest rates paid on cash change, they don't remain static. 12-month % change in Inflation in 2009 was negative 0.4% so she is beating inflation now, no problem with that. If inflation is higher next year, she'll get higher interest on cash. Philip Fischer said it best in paths to wealth through common stocks, people are way too concerned about inflation when there are other things to worry about.

 

ScorpionCapital:

 

I'll agree that the 1.5% will not be for eternity. But, banks are interested in spread. If they can pay out at 1.5% and lend at 6% -- they'll do it all day every day. There are several questions here:

 

1) Optimization approach -- At 1.5% (CD or checking or money market) -- what's the best rate anyone can get for safe, risk-free return? If I said, she was getting .5% on her CD. Would you say it's still a good return since it's beats -0.4% inflation?

 

2) At a 1.5% hurdle rate, are there other options out there if we add some risk to it. I'm not talking about lottery tickets, but possibly, a corporate bond, which is super senior and from a well-capitalized company? Maybe, from a Graham 'Net-Net' company? Who knows? Just throwing it out there.

 

3) Long term approach -- I've never heard of anyone extending their wealth investing in CDs. All told, I'll bet it would erode your purchasing power over the long-term. There is a different between keeping "dry powder" for "fat pitches" and just keeping "dry powder" and never deploying it when "there is blood in the streets".

 

Would you rather have a "lumpy" 10% or "stable 5%"? I know Charlie and Warren would pick the former.

 

 

 

[twacowfca]

Third Avenue Focused Credit Fund is my recommeddation (TFCIX).  It's safe by Marti Whitman's definition and adequately, but not excessively, diversified. They buy a lot of bank debt and other issues that are low duration.  Therefore, a rise in interest rates will have a relatively small impact on them compared to most bond funds.  When the high yield index declined @9% this winter their NAV went down only @2 1/2%.  Their management company, Third Avenue Funds, has an outstanding record picking distressed or mispriced debt over the last two decades, much batter than their record for stock picks.  Their long term record for their distressed debt picks may be about 15% to 20% per annum, although I haven't taken the time to root through their past filings and accurately compute these returns which aren't broken out separately.  :)