Author Topic: Where should I invest for a small income fund August 2015?  (Read 2712 times)

financiallyfree

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Where should I invest for a small income fund August 2015?
« on: August 20, 2015, 07:38:30 PM »

Dear MMM Friends:

My wife and I need to set aside a small fund of about $100,000.00 as a "home repair fund" with the goal to produce about 5%, or about $5,000.00 per year, to make home repairs over the next five years.  After the first five years, we then intend to let the fund grow untouched for ten years after our roof and painting projects are completed.

The problem we're having is, where do you put $100,000.00 to generate a steady 5%-6% over the next five and then fifteen years overall?  Almost no one is putting money into No Load - No Fee - High-Yield Corporate Bond mutual funds right now, although that's a typical go to for this rate of return.

We just want to generate the $5,000.00 - $6,000.00 per year by just locking this fund into place indefinitely, but we're worried about how bond funds have dropped so much in the past year and that interest rates haven't even really started to rise yet.  What would you do?

Would anyone be willing to help us out with some advice?  Thank you all so much and have a great day.

Sincerely,

"Financially Free"

cincystache

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Re: Where should I invest for a small income fund August 2015?
« Reply #1 on: August 20, 2015, 08:54:33 PM »
Hi FinanciallyFree!

I'm not sure I have a great answer to this one. 5-6% safe and guaranteed returns aren't really out there right now with rates so low.

If you for sure want 5,000 a year for the next 5 years (25k) I would just keep the first 25k in accessible cash and then invest the other 75k in a target fund for whenever you think you'll need it (ie 15 years from now would be 2030 or VTHRX from vanguard). Let compounding do the rest.

This might not be what you are looking for but it is pretty simple and will probably get you close to where you want to be.

I hope this helps get you started.

financiallyfree

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Re: Where should I invest for a small income fund August 2015?
« Reply #2 on: August 22, 2015, 09:03:45 AM »

Hello CincyStache!

Thank you for your response; I really appreciate it.  I think that your advice is very prudent and probably the safest bet.

However, the purpose of this fund that we're setting aside is to PRODUCE some income to cover the full cost of the home repairs and then reinvest the income dividends going forward once we're done with the repairs.  This $100,000.00 will be "parked" in this fund for 15 to 25 years until we need to self-annuitize it at some point to spend it down in our golden years.  While setting aside the $25,000 for the repairs means that I won't risk any of that money, that basically resigns myself to spending it so that it is then gone.  That $25,000 also won't be working for me as part of producing the income for the repairs.

You're absolutely right that there's nothing safe out there.  But I think that I'll have to accept the risk on my high yield bond fund, taking the dividends for the repairs until those are complete, and then reinvesting them permanently thereafter.  Any suggestion on the best high-yield products out there, with my full understanding that this is a extremely risky market? 

We're in it for the long run, and in the short run, I'm willing to risk a 20% reduction in the principal until the market eventually craws back up.  If there is a 20% reduction in the high-yield products on the horizon, I bet that a lot of other products like stocks and target funds will see reductions as well, so there's probably nothing for sure out there.  I want to pay my expenses off of the dividends for this home repair fund and try not to worry about the declining NAV under current conditions.  Thank you again and thank you to everyone reading this.

Sincerely,

Financially Free

financiallyfree

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Re: Where should I invest for a small income fund August 2015?
« Reply #3 on: August 22, 2015, 09:32:17 AM »

What do you all think of Exchange-Traded Funds (ETFs) like Market Vectors® Emerging Markets High Yield Bond (HYEM)?  HYEM ETF seems like an interesting strategy for an "Income Fund" that is traded more like a stock than a typical mutual fund.  Do the dividends pay out monthly like typical bond mutual funds?  Thank you all again.

daverobev

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Re: Where should I invest for a small income fund August 2015?
« Reply #4 on: August 22, 2015, 09:35:43 AM »
5% is stretching it. You could go for a REIT ETF. Or just a high divi yield ETF. VYM (Vanguard ETF) isn't that high, though!

GGNoob

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Re: Where should I invest for a small income fund August 2015?
« Reply #5 on: August 22, 2015, 10:07:18 AM »
Lending Club could be a good option if you wanted to do something different than stocks/bonds. You can sign up with something like LendingRobot (<-referral link) to completely manage it for you and get the best returns possible for your risk level.

Otherwise, if I had to choose a mutual fund, I'd put it in the Vanguard Wellesley Income Fund.

financiallyfree

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Re: Where should I invest for a small income fund August 2015?
« Reply #6 on: August 22, 2015, 09:20:31 PM »

Thank you all for your help and advice; I really appreciate it.  I think that I've found a combination of mutual funds and ETFs that will work for me.  I hope that they don't continue to decline in NAV, but I'm in it for the long term no matter what, so short term declines will be bearable as long as the income dividends hold hope up in these funds as they have historically.

Have a good night and good luck with all of your investing decisions.

- Financially Free

milesdividendmd

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Re: Where should I invest for a small income fund August 2015?
« Reply #7 on: August 23, 2015, 12:47:00 AM »
I would absolutely steer clear of high yield bonds. The credit spreads are very low meaning you are taking on a ton of credit risk without being paid to do so. Not wise.

If it is income you are after at a 5% clip then you must be willing to take on the real risk of principle loss in the current environment. There are no free rides.

Chevron is currently yielding about 5%. BP is yielding 6%.

Get the picture?

You are better of thinking in terms of total returns, IMO.


financiallyfree

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Re: Where should I invest for a small income fund August 2015?
« Reply #8 on: August 23, 2015, 08:42:43 AM »

Thank you, MilesDividendMD!

We are setting this money aside to generate income for our projects.  It's basically our first "Older Folks Fund" to make sure that there's a designated fund generating income to accomplish a specific objective.  I understand that in this climate, people are fleeing stocks and bonds right now, so there's no safe haven. 

We are prepared to accept some principal "loss" in the short term, but in the long run (10-20 years), it will come back.  The world is not going to give up trying to borrow and build, and if it does, then we're all cooked.

In my opinion, there's no "total return" right now for the next five years.  The market had its big run up from 2008 to 2014.  Stocks are likely to go down now, too.  I even thought about stock dividend funds, but I think that companies can dial dividends down more easily than they can dial down what they pay for borrowing.  The most attractive investment to me right now is Gold, but I'm unwilling to watch the pot until it boils.  I need to set it and forget it for my peace of mind and well-being.  Have a great Sunday and thank you all for your help and excellent advice.

Sincerely,

Financially Free