Author Topic: Recommendations Low Risk and High Returns  (Read 3533 times)

Greystache

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Recommendations Low Risk and High Returns
« on: December 17, 2015, 07:43:26 AM »
I have too much money in cash and am looking to put about $20K to work in something that is low risk and with high returns.  My income is around $50K per year (pension payment).  I also have $ 1.2M invested (60% stocks/40% bonds) in low expense Vanguard Mutual funds. Historically, these have returned around 7%. As you can see, I am somewhat risk averse.
Here is how I plan to invest my excess cash:
1. Solar Prepaid Lease. I spend $10K up front and get savings of at least $1200 per year for 20 years.  As electricity prices rise, so do my savings, so the $1,200 annual figure is adjusted for inflation. I can then invest some or all of these savings in something else.  Plus I get to be one of those smug solar guys who is saving the planet.
2. Max out my HSA.  My wife and I can each contribute $3,800 for a total of $7,600.  This reduces my MAGI and which reduces my tax bill and increases my ACA subsidy. Together this should save me over a thousand dollars this year.
Does anyone have any better ideas for relatively risk free investments with a high rate of return?

Financial.Velociraptor

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Re: Recommendations Low Risk and High Returns
« Reply #1 on: December 17, 2015, 09:41:50 AM »
My idea and your idea of "low risk" and "high return" may not be the same.  But I'll take a stab anyway.

For surplus cash that needs to be 'safe', 'liquid', and 'performing', I like closed end municipal bond funds.  I'm in IIM, IQI, NEA, and NIO.  I earn a little better than 6%, tax exempt, on the average across the positions.  I also hold some JPS which is a closed end fund invested in preferred shares.  Yields 7.8% at today's price.  I got in a little better and earn a little over 8% on my shares so maybe try a stink bid good till canceled order to see if you can catch a break.

My focus here is more on the "safe" than "high return" so YMMV.

Mighty-Dollar

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Re: Recommendations Low Risk and High Returns
« Reply #2 on: December 18, 2015, 02:39:15 AM »
I have too much money in cash and am looking to put about $20K to work in something that is low risk and with high returns.
There is no such thing as low risk and high returns. The two are opposites.
I would invest in a stock index fund and a bond index fund. If you want more risk then invest more in the stock index fund. If you want less risk the go more on the bond side.

Financial.Velociraptor

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Re: Recommendations Low Risk and High Returns
« Reply #3 on: December 18, 2015, 08:27:04 AM »
A 8% return on tax free munis in the current market is not sustainable.  These closed funds are either using leverage or are heavily investing in sub investment grade paper like Puerto Rico or something.  Historically, falling rates gave some good gains, but that ride is nearing an end.  Either way, these do not sound as low risk as OP is seeking.

1% online savings accounts is safe.  Solar is a good deal, especially if subsidized, but we bought.  I like owning the assets and having utilities guaranteeing the rate to me directly.

I suppose this is a nit but I wanted to clarify since my post was clearly misunderstood.  The 8% return is on taxable preferreds (JPS), an entirely different asset class.  Not risk free but still a very boring asset class. 

The muni CEFs all use between 30-40% leverage (reasonable, I think, on a low beta asset class) and yield about 6% tax free.  So the underlying are running about 4.5% nominally, right about ballpark for investment grade munis.  These funds (IIM, IQI, NEA, NIO) are not barn burners.

Mighty-Dollar

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Re: Recommendations Low Risk and High Returns
« Reply #4 on: December 18, 2015, 03:17:36 PM »
The higher the return the greater the risk. There's stocks and REITS that pay 20% dividends. Watch for falling share prices!

Indexer

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Re: Recommendations Low Risk and High Returns
« Reply #5 on: December 18, 2015, 04:15:44 PM »
Risk and return are directly correlated AND normally each 1% increase in potential returns requires taking on more risk than the previous 1% increase.

Example:  traditional 60/40 well balance portfolio. Historical returns around 8.5-9%. Crisis year returns are normally around -25%.
100% stock well diversified portfolio. Historical returns around 10%. Crisis year returns are normally in the -40 to -50% range.

To get 1-1.5% more return per year you have to almost double the  downside in a crisis.

Anytime you see an investment that seems to offer better returns with lower risk ask yourself why.

If the going rate for an intermediate term municipal bond is <2% and you see one paying 6% ask why. Why would a municipality issue bonds at 6% when other municipalities are paying 2%? They could be idiots... in which case you should question other decisions they will make, and how this could affect their ability to pay you back. They could have a low credit rating and be desparate(most likely). More return = more risk.

MustacheAndaHalf

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Re: Recommendations Low Risk and High Returns
« Reply #6 on: December 20, 2015, 10:31:32 PM »
A 8% return on tax free munis in the current market is not sustainable.  These closed funds are either using leverage or are heavily investing in sub investment grade paper like Puerto Rico or something.  Historically, falling rates gave some good gains, but that ride is nearing an end.  Either way, these do not sound as low risk as OP is seeking.

1% online savings accounts is safe.  Solar is a good deal, especially if subsidized, but we bought.  I like owning the assets and having utilities guaranteeing the rate to me directly.

I suppose this is a nit but I wanted to clarify since my post was clearly misunderstood.  The 8% return is on taxable preferreds (JPS), an entirely different asset class.  Not risk free but still a very boring asset class. 

The muni CEFs all use between 30-40% leverage (reasonable, I think, on a low beta asset class) and yield about 6% tax free.  So the underlying are running about 4.5% nominally, right about ballpark for investment grade munis.  These funds (IIM, IQI, NEA, NIO) are not barn burners.
Just to add another voice, Morningstar shows that Nuveen Quality Preferred Income Fund 2 (JKS) lost -47% in 2008 after losing -22% in 2007.  While this fund lost 59% (.78 x .53 = .41), Vanguard Emerging Markets lost 34%, and unfortunately I can't think of a riskier asset class for 2007-2008.

Tyler

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Re: Recommendations Low Risk and High Returns
« Reply #7 on: December 21, 2015, 08:48:04 AM »
When it comes to risk management in investing, one book I recommend is "Risk Less and Prosper" by Zvi Bodie and Rachelle Taqqu.  I especially appreciate how they dive into what "risk" even means to different people at different times in their lives.  Too many people solely speak of investing risk in terms of standard deviation, when in reality things like default risk and uncertainty for planning purposes (will the funds be there when my child starts college?) are the real dangers. 

In any case, I think the OP isn't looking so much for asset allocation advice but for alternative "risk-free returns".  Maxing out tax-deferred accounts is a great idea.  If you haven't already, paying off any debt (like a mortgage) is always a great choice, especially considering your healthy savings & pension situation.  And while it's not my area of expertise, I know some people say good things about annuitizing a portion of their portfolios as they get older. 
« Last Edit: December 21, 2015, 12:14:23 PM by Tyler »