How do I conservatively invest a large sum of money?
I need advice on how to invest $3 million in a conservative market, limiting any risk. Can I make a 5% return without risk to my principal? I already have a fair amount of money in annuities, therefore I don't want to invest in them any further.
This is the age old question isn't it? How do I get a return without taking any risk? Most of us just don't like the honest answer. . .you can't. However, let's talk about what you can do. Here are a few ideas and the risk associated with each.
1) 12 different savings accounts. You will earn next to nothing but will have the FDIC on all the money. (Most people wouldn't do this, and I am guessing neither would you, but it is the only way to not have risk to principal).
2) CD's. You could purchase a series of CD's with different maturities. You will not get the 5% you are looking for, but there is limited risk. The downside is they are not liquid.
3) Fixed Annuity (not fixed index annuities or variable annuities) - I know you have annuities, however there are a few short term fixed annuities out there that offer a higher rate than CD's. Search some highly rated insurance companies to see what they offer.
4) Municipal bond portfolio. Talk with a qualified advisor who can design a laddered municipal bond portfolio for you. The amount of money you are looking to invest will allow you to purchase individual bonds as opposed to bond funds. If interest rates rise and the value of the bonds decreases, you can simply hold them to maturity and get a return of the principal. This strategy is more complicated and there are several risks involved, however an experienced financial advisor who understands municipal bonds should be able to help you with the details.
Lastly, I think you need to be prepared to adjust your expectation for getting a 5% return without taking much risk. That is a very difficult task in the current interest rate environment.
I hope this helps some. Happy investing!
“Conservative,” and “5% return,” are mutually exclusive in the current environment. Checking/CDs are safe, but their yields are paltry. Stock market can produce a return, but there is no guarantee. The only instrument offering some kind of guarantee is through annuity, but that’s not what you desire. In order to get the goal, closely to your wish, you need to talk to a professional CFP®. Show him/her what you currently have; your tax situation, risk tolerance, there may be other solutions for you. Best luck!
You are asking a question that's on everyone's mind these days, particularly since it's now been almost a decade since the last major market correction.
One source of comfort can be found in they historical data I reviewed in the following article:
Going back and reviewing market data from 1928-2015, there has never been a 7 year period in which a simple 60/40 stock/bond portfolio has lost money. In other words, in historical terms, there is effectively zero risk to principal as long as your holding period is a minimum of 7 years. We know that history has no guarantee of future returns, but it's all we have to make decisions.
It's also worth noting that average annual returns for a 60/40 bond portfolio are 8.92% for all seven year periods from 1928-2015, which is above your 5% target. Unfortunately we don't know what the next seven years will hold. It could be an "average," period with annual returns coming in around 9%. It could be an above average period with annual returns above 10% or it could be a below average period with returns less than your goal of 5%. And let's face it, the markets don't always behave like they have in the past. Although not likely, it is possible your returns could even be negative over this period.
Here's a suggestion for your consideration if you're concerned with the short-term direction of the market- split the money into 6 equal parts of $500,000 each. Work with your financial advisor to invest the first $500,000 in a well diversified portfolio of stocks, bonds and hard assets such as commodities and real estate. Then invest $500,000 each in a 1 year, 2 year, 3 year, 4 year and 5 year CD.
Going forward, as each CD matures, invest that $500,000 into the market so that by the end of year 5, all the money is invested. This is effectively a win/win approach. If markets continue on their overall positive trajectory, you'll at least be enjoying the benefit with a portion of the $3 million and if we have a correction in the next 5 years (which is a good possibility) a portion of your portfolio will be shielded from risk.
Good luck with this important investing decision!
With Kind Regards,
That is a great question. It is wise to view your investment options with an eye for both risk and return. What you should be looking for is good returns for the amount of risk that you are taking. While your question is hard to answer without knowing your exact situation. For example:
- What is your time horizon, i.e. When will you need the money?
- Will you need the entire amount or will you need to only pull out income periodically?
- What is your risk tolerance? How much volatility are you comfortable with?
Knowing these factors would make it easier for me to give you a more detailed recommendation, but I will do my best to give you something to think about.
First, look at your risk tolerance. Obviously you are conservative, but what does that mean? Here is a link that will allow you to determine your risk tolerance:
Once you are on the above referenced page, just click the link: “Free Portfolio Risk Analysis”. This will take you through a handful of questions and should only take 5 minutes.
Second, based upon your risk tolerance and situation, a money manager that specializes in risk management should be better equipped to give you advice. I would recommend someone who is an “active” money manager, in addition to one that has specific knowledge in minimizing risk. I say this because the traditional methods of investing like buy-and-hold can be very effective if you have time on your side and can stomach the risk (volatility) associated with this strategy. However, based upon how you worded your question, it sounds like you are probably not willing to accept meaningful fluctuations in your account.
There is no money manager that will be able to invest in stocks/bonds and eliminate all risk; however, there are ways to substantially reduce risk that may get you to a level of risk that you are comfortable with.
Realistically, in this economic time that we are in, there are very few, if any conservative investments. This is especially true if you set aside annuities, investments that can give you 5% return with zero risk. One option is looking at different alternative investments. These are typically a time deposit like annuities, and definitely carry some risk, but are not tied to Wall Street and the market. I would not recommend a REIT as these are ill-liquid and backed in many cases by loans that may default, therefore fairly risky. Talk to your advisor about options such as Preferred Apartment Communities and BlueRock. These investments still carry risk, but they both hold tangible assets to back up the investment, which can limit that risk. You are capped at only 10% of your investable assets being able to be invested though. To keep the funds in a liquid position you still have the opportunity to invest in the market. Being diversified and implementing an actively managed strategy vs. a buy and hold can also help limit your risk.