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No-risk, big-return investment? Dream on
Dear Money Matters,
I'm looking for an investment to generate a return of a minimum
7 percent interest. I have $180,000, and I am looking to protect
my principal as much as possible. I have 10 more years to work before
I can retire. I'm looking for a short-term investment until the
market returns to normal.
Judy
Dear Judy,
Looking for an investment that's both completely safe and returning
at least 7 percent these days is akin to finding an honest Enron
executive. The primary reason is that interest rates are so low.
That's been good news for borrowers because low rates push down
the cost of debt, from mortgages to credit cards. It's lousy news
for savers -- the return on fixed-rate investments is abysmal.
To illustrate: The going national average for a five-year
certificate of deposit is around 4.75 percent -- well below the
targeted 7 percent you specify. The shorter the time frame of the
CD, the lower the interest. By contrast, money market mutual funds,
while offering flexibility, are even lower (there, the prevailing
national average for a high yield money market is in the neighborhood
of 2.6 percent).
Another issue to tackle is what you mean by "short-term."
If I can be granted the liberty of reading into your question a
bit, it sounds as though you're looking for a safe place to park
some cash (maybe for a year at most?) before the markets become
more appealing. If that's the case, you should toss
the idea of a safe 7 percent return on the compost heap of great
ideas that never were because that simply isn't around.
Instead, go for a money market fund or a one-year
CD. The national average was an anemic 2.18 percent in mid-March;
click
here for current CD rates; click
here for current money market rates. Granted, it's nowhere near
what you hope to earn, but it keeps your money absolutely safe and
accessible.
That leaves you with two final variables -- whether
you'd be willing to take a little risk in hopes of getting to your
7 percent return target or, by chance, if your view of "short
term" is longer than a year. If you're comfortable taking on
a modest amount of risk over the short term, you may want to look
at a bond fund. These invest in a portfolio of bonds, which offers
you immediate diversification.
Additionally, bonds often prove less volatile than
stocks, particularly if they're government bonds or high-quality
corporate bonds. I looked up one short-term bond fund and found
that, in 2000 and 2001, the fund returned more than 8 percent, which
betters your 7 percent goal. However, bonds are by no means a sure
thing, particularly if interest rates go up, which lowers the value
of existing bonds. By contrast, the fund I found only returned a
paltry 3 percent in 1999.
Another option, particularly if you're looking at
more than a year, is an index mutual fund. These -- whose holdings
mirror the stocks in a particular index, such as the Standard &
Poor's 500 -- are generally inexpensive to own and solid performers,
particularly in down or volatile markets. Again, though, no absolutely
safe bet. If the markets go down, index funds inevitably follow.
-- Posted: March 26, 2002
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