Good day to you! Lately I’ve had a lot of people reaching out to me requesting assistance in helping them determine what to do with spare money they have sitting on the sidelines. Most of these people are maxing an IRA, have a well stocked emergency fund and have the fortunate problem of figuring out what to do with the leftovers. They know it’s not doing much for them resting in a savings account but what scares a lot of people is that they don’t have much investment experience and there are almost an infinite number of options out there.
While I can’t answer these questions for everyone individually, I will provide some investment ideas for you today. The two major questions surrounding investment options are time horizon and risk tolerance. The longer you have to keep your money in the game working for you, the more investment options there are that make sense. Additionally, each of these investment options come with varying levels of risk to your capital…the more risk, the more potential for reward…so keep that in mind. Before we look at specific investment solutions, lets delve into…
Time Horizon – The concept of time horizon is important to discuss when talking about investing because liquidity needs will affect how long you have to let your spare money grow. Investment options that may make sense with a 3-5 yr. time horizon may not make sense if you have a 0.5-1 yr. or a 15+ yr. time horizon. Liquidity needs are driven by how quickly you would potentially need to change your investment in to money in the bank. When it comes to investments, high liquidity with low risk generally means low rate of return…think savings/money market accounts. High liquidity with higher risk (like the stock market) could mean a higher rate or return but Murphy’s Law says that you’ll prob need access to your money while the market is down…I think we call all agree that Murphy is a real Grade-A bastard. I digress…anyways, once your emergency fund is squared away (liquid and moderately safe) it is a matter of personal preference, time horizon and risk tolerance that’ll drive what you do with your leftover money. Now, lets look at some investment ideas that mesh well with different time horizons:
Time Horizon – 0-2 yrs. Unfortunately, with a short time horizon there aren’t many sexy options. You’re either looking at low return with low risk or high risk with uncertain returns. Here’s a look at a few options if you have a short-term time horizon.
- Certificate of Deposit (CD) – Rate of return = rubbish but better than zero. With a CD, your money is locked up for the terms of the CD and there are plenty of 6 to 24 month options out there. CDs are great if you’re looking for a super safe return with low risk and a known period of time required for investment. They ain’t good for much else and likely won’t match inflation!
- High-Yield Savings Account – Savings account interest rates at many online banks are very competitive with CDs. Because online only banks don’t have to manage actual buildings and other resources, they’re often able to pay a higher interest rate than regular banks like Wells Fargo and Bank of America. There are a ton of options out there for high-yield savings accounts…here’s some of the best options for 2018 according to Nerd Wallet. Also, if you’ve got $10K or more to put away, consider the high-yield (like 3%+) checking account at Consumers Credit Union…make sure to check out the details because there are transaction requirements!
- Stock Market – The great thing about the stock market is that it’s liquid af! The bad thing is that with a short-term time horizon it is extremely difficult to predict a rate of return. The market returned about 20% last year but about -40% in 2008…so, you never know what you’ll get in a stretch of just a couple of years. With a short time available for market penetration, I’d recommend looking at the ProShares Dividend Aristocrat ETF (NOBL). Dividend Aristocrat ETFs won’t go up as much during the good times but they’ll also hold their value better during low times…plus it currently pays just over a 2% dividend rate!
Time Horizon – 3-5 yrs. I’m going to refer to this time period as the short-medium-term time horizon. With this amount of time, everything above is still an option. CD rates may creep up a little bit if you lock up your money but not substantially. Stock market risk goes down a bit with a 3-5 year time horizon but it is still difficult to predict what the market will do during that short of a time. Here’s some other ideas if you’ve got 3-5 years to set your money aside:
- Private Real Estate Investment Trusts (REITs) – There are two primary websites that offer REITs to non-accredited investors. Both Fundrise and RealtyMogul offer REITs through there websites and have multiple options available. According to Investor Junkie, both companies provide a great service and require a min to start of $500 and $1000 respectively. Personally, I’ve been using Fundrise for about a year and I have been very happy with the rate of return and service thus far. These REITs ballpark that you’ll earn about 6-12% per year depending on the REIT you select. One shortfall is that these are newer services so there isn’t a long history of return data to rely upon. Check out their websites for more info!
- Peer-to-Peer Lending – Through websites like Lending Club and NextSeed, investors can participate in the world of peer-to-peer loans. Lending Club provides (relatively) small loans to regular people and small businesses and when you invest, you’re investing in baskets of loans with a similar risk profile and not just single individuals. I’ve been using Lending Club for several months now and have been very happy so far…the site is very user friendly and they help you in selecting the investment strategy that works best for your personal risk tolerance. Returns through Lending Club will vary depending on your risk profile…more risk = (potentially) higher returns! Lending Club reviews are mostly positive but you should visit their website to see if it’s a good strategy for you. All loans through Lending Club come with a 3-5 year term, so plan on your capital being gone for that period of time. NextSeed, on the other hand, provides loans to small businesses only. All projects available for investing on the site are pre-vetted to ensure that there’s a high probability that the project will succeed and you’ll get all of your money back. Most projects have really low minimum investments and are currently paying 11-15% for a term of 3-5 years…but every deal has different terms. I have invested in two separate projects thus far and have been very happy with the results. Like Lending Club, these loans do come with a default risk and your capital is not protected if the business doesn’t survive paying off your loan. Check out their website for more details…they’ve got a referral program going on and you’ll get $20 in your account using a referral code (hit me up if you’re interested).
Time Horizon – 5-10 yrs. If you can afford to have your money on the sidelines for 5-10 years, then you’ve got more flexibility. Everything from the above sections is certainly on the table. CD rates will definitely be a bit higher with this timeline. If you go with something like Fundrise, Lending Club or NextSeed, you can reinvest all of your payments/earnings to really maximize them gains! Within the stock market, you’ll likely see a full market cycle with a correction/recession and a recovery. Specifically, if you’ve got 5-10 years, I recommend a blend of all previously mentioned ideas (at percentages that make you comfortable) as it spreads your risk and gives you exposure to different markets and industries. Here’s one other idea:
- Real Estate Purchase – If you have a good 5-10 years and enough money to pursue an investment real estate project, then consider adding some real estate to your portfolio. You can certainly get in to real estate investing with a shorter time horizon…especially if you’re flipping houses…but IMO, it’ll take a good five years until you truly have a firm grasp on what you’re doing. Before you dive into the realm of becoming a landlord or house flipper, you’ll want to educate yourself. I highly recommend the Bigger Pockets website as the have a multitude of resources from their blog, podcast, video webinars and forum section, you really can’t go wrong. You can sign up for a paid account, but most of their resources are available with a basic free account. I also recently wrote a piece on educating oneself when getting started in investment real estate. If you play your cards right and have 20-25% for a down payment, you can make a nice chunk of change in real estate during a 5-10 year stretch.
Time Horizon – 10-20 yrs. With 1-2 decades at your disposal, your investment options are pretty much limitless. At about 15-20 years you can expect to average the market rate of return of about 8-12% annually in the stock market (obviously there’s no guarantees). The biggest question if you have this much time to spare is whether or not it makes sense to put this money in a retirement account (IRA, 401k, TSP). The answer to this question will differ for everyone and really depends on your timeline until retirement and desired lifestyle goals during retirement. To get assistance with answering these questions I highly, highly recommend talking with a Financial Advisor like Dennis Lott to ensure you’re making good long-term decisions with your money and that you’re on track for your retirement goals.
Once thing to always consider when investing is the taxation of your investments…each option is a bit different so it’s best to talk to a CPA if you’re not sure. However, know that unless you’re investing your money in a tax sheltered account (IRA, 401k, TSP) there will be taxes owed on your gains. Stock market gains are only due after you sell your positions but dividend income will be taxed in the year it’s received. Bottom line, prepare for taxes appropriately.
There are a ton of investment options in today’s world and I hope that this piece shed some light on some things you were unaware of or hadn’t considered before. If none of these peak your interest, hit me up to discuss some other ideas.
Finally, before purchasing any investment vehicle, you should do your own research and consult a financial professional because, disclaimer, I’m not a paid finance professional. You can research stocks and ETFs for free on websites like Seeking Alpha and Yahoo Finance. For other investments, sites like Nerd Wallet have a lot of great reviews and comparisons.
See ya! ‘Merica!