New Visitors Privacy Policy Sponsorship Contact Us Media
Baby Boomers Family Green Home and Auto In Critical Condition Just Starting Out Lifestyle Money
- advertisement -
Bankrate.com
News & Advice Compare Rates Calculators
Rate Alerts  |  Glossary  |  Help
Mortgage Home
Equity
Auto CDs &
Investments
Retirement Checking &
Savings
Credit
Cards
Debt
Management
College
Finance
Taxes Personal
Finance

Money Matters
Bankrate.com

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.

- advertisement -

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

top of page
See Also
Interest-rate roundup
Leading rate indicators
CD Rate Trend Index

Print   E-mail

30 yr fixed mtg 4.23%
48 month new car loan 3.22%
1 yr CD 0.69%
Alerts


Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?
VIEW MORE CALCULATORS

BASICS SERIES
Begin with personal finance fundamentals:
Auto Loans
Checking
Credit Cards
Debt Consolidation
Insurance
Investing
Home Equity
Mortgages
Student Loans
Taxes
Retirement

MORE ON BANKRATE
Ask the experts  
Frugal $ense contest  
Quizzes  
Form Letters


- advertisement -
 
- advertisement -

About Bankrate | Privacy Policy/Your California Privacy Rights | Online Media Kit | Partnerships | Investor Relations | Press Room | Contact Us | Sitemap
NYSE: RATE | RSS Feeds |

* Mortgage rate may include points. See rate tables for details. Click here.
* To see the definition of overnight averages click here.

Bankrate.com ®, Copyright © 2014 Bankrate, Inc., All Rights Reserved, Terms of Use.