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Comment by School-Cotton | Hacker News Reader

What gives higher returns but near-zero risk?

Short-term federal debt funds like VFISX and VSGBX have very low risk and do better than most savings accounts. The risk is probably close enough to zero for most people, considering it's basically all interest rate risk on short-term U.S. federal government bonds.

Bonds, at least? Mutual funds that make use of bonds?

(This is a question, not an answer, by the way. I have no idea.)

Bond rates are low too and have transaction costs. Very poor substitute for a savings account with an emergency fund.

http://www.bloomberg.com/markets/rates-bonds/government-bond...

(.27% for 3 month treasuries, just .79% for 2 year)

Short-term, low-risk bonds (like T-bills) have super low interest rates also.

Longer-term bonds are significantly higher risk than a savings account.

Index funds, through a reputable and low-overhead fund like Vanguard's; you'll never do worse than the market. They can absolutely go down, so don't put any money in them that you might need right away, but as a long-term investment, they'll always give you a rate of return approximating the overall economy.

You're basically saying the same thing as I am.

I don't deny that there are better investment vehicles than a savings account. I'm just asking whether there is something of similarly low risk with a better interest rate. Stocks are definitely not lower-risk.

Stocks are not low risk. Stocks are not low risk. It bears repeating.

Index funds aren't individual stocks. They're pretty low risk. If an index goes to 0, T-Bills, CDs, and cash won't be worth anything either, you'll need shotgun shells, generator fuel, and canned food.

Index funds are stocks. The market contracts - frequently. Over long periods of time its gone up.

See the chart below [0] - If you invested all your money in 1965, there is only a 8 year window at the end of the 90s where you would have averaged a 3% return per year. Much of the rest of the time you're looking at negative returns.

[0]: https://static01.nyt.com/packages/images/newsgraphics/2011/0...

If you invested at the worst time in the past century that would be bad. If you invested in T-bills or CDs you'd have gotten murdered by inflation in that period too. NYT piece you're referencing says the average annual return over 20 years is 4.1% net of taxes, fees, and inflation. Not too bad.

This isn't what "near-zero risk" means. Near-zero risk investments are things like savings accounts, CDs, and T-bills. Index funds that track stock-based indexes are intrinsically risky, as you yourself point out, unless you look at time scales of a decade or more.

Near-zero risk of what? If you mean "risk of decreasing in value", then checking and savings accounts aren't near-zero-risk either; cash tends to decrease in value over time due to inflation, and you're nearly guaranteed to lose money over time (though somewhat predictably). If you mean "risk of disappearing completely", then neither a savings account nor an index fund will do that.

A comment further up the thread asked for "very low risk"; the reply to that changed it to "near-zero risk".

Better to consider the type of risk you care about, and how much money you want associated with each type of risk. Checking accounts and index funds both make sense as part of an overall strategy. I don't know that savings accounts do, though, except perhaps as a purely organizational tool.

Risk is about uncertainty - how well you one can predict what will happen to the money.

Treasury Series EE Bonds (~3.5% yield...)

These are vulnerable to changes in interest rates. If interest rates increase, their value drops.

They are guaranteed to double after 20 years (hence 3.5% rate).

In current dollars.

To explain a bit more what I mean by interest rate risk: Imagine I buy $1000 in EE bonds today. Then tomorrow, conditions change, and the government starts selling 20-year bonds with a 7% rate. My bonds are now worth much less than $1000 -- no one would buy them from me on the open market, except at a substantial discount, since they could just buy the higher-yield ones for $1000.

These conditions that led to a higher interest rate are probably also leading to a higher inflation rate. So my $1000 is locked up for 20 years in an instrument where it's decreasing in real value.

Yes, I know that. EE Bonds are not intended to be that liquid, they are meant to be held to maturity.

Okay... so they're higher risk than a savings account.

Well, depends on what "risk" means...default risk? Inflation risk? How about currency risk? What if the dollar gets weaker? You need a totally different hedge for that...a savings account would not help.

You also nicely elide that since a savings account currently averages a 6 basis point APY[1], it's already giving an inflation adjusted negative return. So a savings account has gone past the "risk" stage to the "losing money" stage.

[1] https://www.fdic.gov/regulations/resources/rates/

In any case, my answer was only half-serious.

But you wanted to know "What gives higher returns but near-zero risk?" and assuming by "risk" you meant "default risk" there you go....a high interest low denomination savings instrument backed by the federal government.

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