Ask HN: What's the best way to get 5% on a million dollars? | Hacker News Reader

Ask HN: What's the best way to get 5% on a million dollars?

47 pointshpvic0378 comments

What do you think is the best way to get the lowest risk, 5% annual return on a million dollars?

I'm also interested in how you could get 8% or 10%, though I know that would likely include more risk.

I think you're looking at this the wrong way. Decide the level of risk first. That dictates your stock/bond mix. After that, you get whatever the market gives you.

If you're looking for a guaranteed 5%, it doesn't exist right now, and it won't be back unless inflation spikes close to 5%.

Agreed - a well diversified portfolio of stocks and bonds across sectors and geographies is the right approach to maximise return versus risk.

I'd keep a little aside for investing where you have an unfair advantage versus Wall St. That might be getting into a tech stock early, or investing in an early stage company through friends. For the latter don't expect to get your money back soon, if ever.

AT&T pays a 5.3% dividend. Given they're still effectively splitting a monopoly with Verizon, that's pretty close to guaranteed. You'd want to track the company's quarterlies, the competition (risk of a combined Spring + T-Mobile hurting them), and any big business moves, but otherwise it's predictable. The stock itself - and your principle - would get compressed in any market down turn though. The nice thing about holding T, is that you can liquidate your entire principle at any time easily.

The last big bond issue by AT&T paid 1.4%

http://www.bloomberg.com/news/2013-11-20/at-t-said-to-plan-o...

I'd not call the NPV of any tech stock predictable.

Even if they pay a 5.3% dividend every year, if it ends up going down even 3% in a year, suddenly you're getting effectively a 2% dividend since you've lost capital (rough numbers, no inflation, you get my point).

> What do you think is the best way to get the lowest risk, 5% annual return on a million dollars?

You won't find a zero-risk 5% return; those don't exist. Bank accounts pay approximately zero interest these days.

The lowest-risk return would be to buy an index fund based on the entire stock market, balanced with a fund that buys low-risk bonds; choose a stock-to-bond ratio based on your desired level of risk.

Vanguard has the best index funds in the industry, due to their minimal administrative overhead (0.05% to 0.1% of return). VBIAX is a nice balanced fund that's 60:40 stocks:bonds, which is quite risk-averse. If you want to choose a different ratio, go with a balance of VTSAX for stocks and VBILX or similar for bonds. You could choose anything from 100% stocks (if you don't mind riding out market crashes like 2008's) to 100% bonds (if you're extremely risk-averse and don't mind low returns).

If you're trying to use this as an income, Vanguard has the option to automatically send returns to a bank account rather than reinvesting them.

If you're talking about investing a million dollars all at once, you probably don't need to worry about dollar-cost averaging; if you're saving up a million over time, you should invest a fixed amount every paycheck no matter what the price is. No matter what, don't try to beat the market; you will lose.

> I'm also interested in how you could get 8% or 10%, though I know that would likely include more risk.

Same way, just change the ratio. If you have a high tolerance for risk, such as if you're a long way from retirement or you're otherwise flexible in how much return you get each year, buy 100% stocks (VTSAX); the return was 33% this year, 18% average over the last 5, and 8% average over the last 10 (which includes the 2008 crash).

Yes, thank you. This is the only sane answer.

Putting money in the stock market in anything other than an index fund is just folly. Over any significant amount of time, any other stock investment will do worse than the index fund. It must, by definition (plus or minus a little bit for imperfect efficiency... but the stock market is pretty damn efficient)... plus index fund fees are just so much lower than anything else, which just increases the lead they already have.

And yes, then bonds to smooth out the ups and downs if you can't afford to ride out some big swings (like 2008) without some insurance.

Disclaimer: I'm not a financial advisor, I don't play one on TV, and I don't have a million dollars or equivalent.

Take $10,000 (1%), and accept it as money worth spending. Network well, contact friends, family and ideally successful professionals and discover a financial advisor you can trust. Get empirical proof of this, as many may just be out to fleece clients - and worse, think they're actually doing a good job.

In terms of getting good advice, accept that money will have to be on the table. People have to make a living, and if there's nothing to gain, then why should a good professional waste their time? My hunch is that a good financial advisor will be happy to take a lump sum consultancy fee, rather than a percentage management fee, just to give you general advice - especially one that knows their clients are your friends and will react to any stupidity the financial advisor says.

With that money set aside and taken as ceded to the task of figuring out how to manage your money, take some time out and learn enough to make reasoned decisions. Research, study, understand the basics and importantly - understand the absolutely stupid and worst options, and the worst that sound like the best. It won't get you that much time, but it gets you more than nothing.

Given you're making 5% minimum, a 1% loss can be fixed in a year and regain you access to any of the funds that you fell below the minimum for. But the time and effort spent now is better than finding out in ten years that the risk-free 5% growth option was actually highly risky indeed....

> In terms of getting good advice, accept that money will have to be on the table. People have to make a living, and if there's nothing to gain, then why should a good professional waste their time? My hunch is that a good financial advisor will be happy to take a lump sum consultancy fee, rather than a percentage management fee, just to give you general advice - especially one that knows their clients are your friends and will react to any stupidity the financial advisor says.

Perhaps if OP consults a sworn fiduciary? I've not much experience with either of these, but theoretically a fiduciary is supposed to legally act in your benefit at all times where as a financial advisor isn't really.

I have no idea, though. I don't have much money. This is something I read somewhere.

While I agree with the general concept, investing 10k comes with a substantially different cost/risk/benefit profile to investing 1,000k. The 1% rule is a great general rule for a single investment, but to invest 99% of your porfolios gain on 1% risk seems like asking for 1995 google stock.

My personal investment in this profile is about 10k per position [equity] and up to 15k per position [option risk] - where a position is defined by the total risk as affected by the underlying stock - you still could end up with 100 positions with a 1mm portfolio, but usually by 20-30, you find ones that you understand well and have reason to believe are undervalued -- those are when you break the 1% rule, and you do it a couple of times. Some will become worth less than 1%, some more than 10%. Re-balance judiciously, hold if it produces income greater than its risk, and sell anything not nailed down when someone offers you a gold-laying goose for it -- you can always by short-term risk with options if you're that confident, and cash is infinantly more exchangeable to immediate needs than paper stocks held at the DTC are to your grocer.

Depending on your age, if you have little to no investment experience, i'd check out the professional lists at fool.com (rule your retirement, etc) - those are the profiles I put my family in. If you're bored and looking to day-trade, there are similar lists for options, but those are for play money or experienced readers, not retirement money.

Great comment, although I think I didn't make the intended use of the 10k quite clear enough. Whilst one way of spending it is in live experimentation, yes, and that can be a very good option, I meant it more in a "be prepared to pay for help, with the only return being knowledge" sense

After rewriting my response 3 times I decided to lay out some basics.

basics

-----------

a. The most common fallacy in investing is that higher risk equates to higher returns.

b. Any half decent investment strategy should have a solid risk management strategy, should account for (and discount) inflation and should have a strategy in place to emulate dollar cost averaging (most commonly by scaling into investments from a cash position or using a re-balancing strategy). Risk management (and discipline to follow it, being the most important).

c. Different sources of returns are taxed very differently, for example: most non-govt interest income is taxed at the marginal tax rate, so if you're at 30% tax rate, 5% interest is actually 3.5%.

Then to be safe deduct the inflation, if the inflation is 2%, the real rate of return is 1.5%.

d. The next thing to consider is the goal of return. Is it geared towards income or growth(compounding).

e. If you are looking at percentage return it implies that you want growth. But that may not be the case. If you instead want an income of $50000 the whole situation changes, even though the value is the same. Simply because, if your investment loses 10% value now your 900k requires a 5.555% return to net the same $50000. I have seen and know a lot of people who went bankrupt for not understanding this, the bigger problem is I know more financial professionals who don't understand the distinction.

example scenarios

--------------------------------

1. If the goal is income, the strategy should be funneled to account for recessionary periods, market corrections etc. I can explain a funnel in more details on request.

2. If its for growth and you want to get a higher return with lesser risk a leveraged risk reduction strategy can be employed. Can explain further on request.

3. For people older than 45 (preferably older that 55) an Insured Annuity is also an nice option when Income is the goal. Even better if they are not healthy (higher mortality risk, higher return).

Before doing anything a good amount of reading(books) would be ideal, start of with:

a. The richest man in Babylon(fiction) - read first, no particular order after this

b. The Ivy Portfolio

c. The intelligent asset allocator

d. The permanent portfolio

e. The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between

f. Value Averaging

Thanks for posting bushido. That was great.

Thanks for all the information! I may contact you for more info soon.

The best and only way is to educate yourself, so that you won't be at the mercy of financial advisors (who are just salesmen) or flawed financial products.

Yes. Increase your financial IQ, as it were. My wife and I run a service business to keep bread (organic) on the table, hired our first coach, researched, and are now purchasing investment properties that realize >= 9% on investment, and since they cash flow, continue providing returns. In addition to all of the tax advantages (we live in the US, so US tax law, but similar elsewhere).

Now we just hired our second coach, and will be learning paper asset strategies for cash flow and for capital generation to continue purchasing real estate.

FWIW: I think that we are successful so far because we believe in ourselves and put in the hours and sweat.

I'd buy a small newer (post 1979 construction so no rent control) rental property in San Francisco. With that much down you should be able to get it cash flow positive plus increase your equity at the same time if you needed to liquidate.

I realize this is San Francisco we are talking about but the idea that $1,000,000 is merely a down payment for a small living space is mind boggling to me (yes, I live somewhere much less desirable and much cheaper).

I think what he means is that with $1MM you'd be able to pay off a large chunk of the house which would reduce the amount of interest owed. It doesn't necessarily equate to just being a 20% down payment.

That's an interesting idea. I'll look into that.

Buy a flat in Battersea, London, get some letting agency to manage it for you and reap the rewards:

http://www.londonpropertywatch.co.uk/average_rental_yield.ht...

Who cares if you are pricing someone else out of a place to live in London? Seemingly nobody cares. The government love it that there is rampant house price inflation. The ride should be good for a while. Wherever you put your money it will not be immune to the next big crisis of capitalism, in London property you will be well insulated.

As well as the return in rental, you will also have a property that will appreciate in value over time. Sure you might have to sit things out when the property market is depressed, but I would be surprised if your $1M flat is worth less than that in 5+ years time even if the whole housing market goes 2008-style again.

Just buy the S&P and make 30% a year. The Fed's got your back! If that's not good enough, buy the Nasdaq or Russell.

Municipal bonds will yield 5-7%, very safe, all will be state tax free, some are also federal tax free.

LendingClub can yield 10%+. You have to be pretty engaged, since you'll need to loan a small amount to a lot of people. At $1M, probably $2,500 to each of 400 people so the risk of default (there will be defaults) is diversified. You'll have to actively re-invest the principle/interest. But it pays back monthly and is kind of like paying yourself a salary in some respects.

Do you have personal experience with LendingClub? I'm curious as to how reliable their returns are and how much work it takes.

Yes. I've been experimenting for about 8 months. You need to attend to it at least on a monthly basis. The payments start to add up and you either want to take them out for spending, or reinvest them to keep the interest coming.

The key metric for LendingClub is the predicted default rate. If they are accurate, you can have good predictability of results and good returns. If not, then it's a long term problem for them. One might assume that their algorithm should improve as they get more data, and I'd love to hear from their modeling statisticians how that works, though it seems pretty close to their core IP. So I am taking it on faith a bit that they will get that part right.

My experiment was to lend $25 to 100 people. I loaned to the same rated borrowers so I did not have to deal with too much tracking. All pay 17.6% and there was a 5% predicted default rate and about 0.65% fees. Net yeild to me was predicted to be 11.95%. Fees are only paid on what is actually paid back to me.

At this time, 8 months in, I have 99 current 3 more than 31 days late 0 defaulted 0 charged off 2 repaid in full 11 sold at full price

The reason there are 115 total is that I loaned to more borrowers as payments came in.

I also put 15 up for sale on LendingClub's sister site to see how one might exit. 11 sold in a couple of days. The other 4 are still offered. Not sure why they have not sold yet, I put them up for sale last Friday.

The actual 'Net Annualized Return' as calculated by LendingCLub on my notes is 18.07%. That is expected to drop each time there is a charge-off.

I do expect some of the >31 day late to fall into charge off, but you can review the contact history between LendingClub and the borrower when LendingClub is trying to collect late payments. Checking one right now, I see that a payment is processing, so it looks like they are back on track.

I'll preface this with a disclaimer: I don't have a million dollars and I am not an investment professional. That said, as an amateur investor, my gut says that with the fed keeping interest rates low for the short term, you won't see 5% without taking on some risk. With the 10 year treasury at about 3% [1], that's about the best you will see for the time being as far as low-risk investments go. Slightly more risky but still pretty safe would be AAA corporate bonds, which are currently 4.6% [2]. To get to 8 or 10%, you'd have to get pretty risky, and go with junk bonds, or high yield dividend stocks like REITs (I've gotten 11% returns over the past 3 years with these). If you want anything higher, then you'd have to take on more risk than I have the appetite for, like angel investing.

1. http://www.treasury.gov/resource-center/data-chart-center/in... 2. http://research.stlouisfed.org/fred2/series/AAA

Can you recommend some good REITs for high dividends? Is there anything special you do when researching them?

Like I said, I'm just an amateur, so I wouldn't be qualified to recommend any stock in particular. I signed up for a an account at dividend.com and looked at their ratings to see what to invest in. Anything above 20% seemed too good to be true, so I focused on a few with yields between 10 and 15% that had long histories of paying out.

I always assumed anything that pays over 5 or 6% these days has some fundamental problem and I should stay away.

Is that not necessarily the case? Why aren't more people buying good high dividend stocks and pushing the yields down?

REITs are different from normal stocks in that they get a tax break if they distribute at least 90% of their taxable income to shareholders each year, so their yields are much higher. REIT yeilds (and stock prices) should continue to rise now that housing prices are rising, and the overall improvement in the economy is creating growth in commercial real estate.

I've been pretty lucky with Canadian bank stock.

In Canada, there's pretty much zero competition in the banking industry because of how it's regulated. The risk is generally minimal (not factoring macro economic risks) and the returns somewhat steady.

These stocks typically will return a 3% dividend plus some minimal growth. Add it all up and it's fairly easy to get a 5% return if you diversify a bit. I personally own BMO and RY. It has worked well.

go back 5 years; I have some IBOC that's just breaking even =)

5 year on BMO and RY:

http://www.google.com/finance?q=bmo&ei=FjDOUqiwMZGQqwHDJQ http://www.google.com/finance?q=ry&ei=GzDOUtiwAoGEqgHvUA

Plus 3.77% and 4.34% yield, it's not a bad deal at all!

If you are looking for the lowest risk, you could look into some sort of annuity - you should be able to get something close to the percentage you're looking for. These things are complex and varied so you'd probably be wise to consult one or more certified financial professionals before doing anything rash. (I'd carefully factor in inflation for your returns for example.)

My personal approach to investing has been to get acquainted w/ the basics of Modern Portfolio Theory (see: A Random Walk Down Wall Street) and then do a couple things:

* Set a sane asset classes allocation. Indexes are good where applicable. The less correlation the better: http://www.indexuniverse.com/publications/journalofindexes/j...

* Rebalance regularly - once a year is fine

* Take advantage of tax efficiency where possible (tax loss harvesting, tax-deferred investing)

If that's too much work, you could do worse than parking your money in a Vanguard LifeCycle fund, which rebalances for you: https://investor.vanguard.com/mutual-funds/lifestrategy/

BTW, if you're talking about real and not hypothetical money, $1M net investable makes you a "high net worth individual" - while I wouldn't necessary recommend going w/ a financial advisor (if you do, be sure to get personal/professional recommendations), you should at least avail yourself to some pitches to get an idea of what's out there. Initial consultations are typically free and you can ask them your exact question yourself. I'm sure they'll be more interesting answers than "buy a house in X."

I just searched on http://www.infochoice.com.au/banking/savings-account/term-de...

and it returned a 5% p.a. term deposit with RaboDirect for a 5 year term on amounts from $1000 to $2,000,000.

http://www.infochoice.com.au/banking/term-deposits/rabodirec...

I suspect the OP has USD, and that the RaboDirect account will be in AUD. Investing in AUD would be a bold investment approach, and certainly not risk free.

Probably!

Interestingly, if I had $1m to invest and split it with my wife, with Australia's tax cutting in at 19c for each $1 over $18,200 up to $37,000, we would pay $2584. Since we have children, we qualify for a tax break called the family tax benefit [1], which would pay $13,773 per year. Total post-tax return would be $61,189. A yield of 6.12%, risk free! Now where did I put my million dollars?

[1] http://www.humanservices.gov.au/customer/enablers/online-est...

Pretty simple. Buy an index fund. Average return of 10%.

Unless you happen to be buying near the top of another stock market bubble. Then you might easily see a negative 50% return over the next 10 or 15 years inflation adjusted.

Move to India. 9% annual return, 0 risk.

Is that the interest rate of bank accounts in india?

For Fixed deposits, Yes. Senior citizens get an additional 1%. Savings accounts are at around 4%

India's inflation is almost as high, making the real return much lower

India's inflation is around 11%. Plus after taxes you're down to 6-7%. (Indian here)

how did u arrive with the 6-7% number, just curious

Use it all to buy shares of DNP. At today's closing price of 9.34, the monthly dividend of 6.5cents will net you 8.35% per year (not counting compounding, higher if you have a divident reinvestment plan). After taxes you should still be above 5%.

Please be careful and understand what type of fund this is before choosing this investment.

There are going to be a lot of appropriately downvoted Bitcoin comments, but consider what effects the true believers being correct might have on traditionally safe investments, like bonds.

None?

Contact a commercial real estate agent, invest in a NNN property in most major cities. Getting 5% unleveraged is extremely easy, if you leverage you should be making over 10% per year.

5% won't be enough to outpace inflation in the next 10 years. Invest 100% now in 20 different companies at $50,000 each, with the expectation that one will go 30, 40 or 50 to one.

If you use Wealthfront (www.wealthfront.com), a risk score of 6.5/10 supposedly has a median return of 5%/year.

Pretty risky, though. Over 70% stocks.

How does that compare to Betterment?

Wealthfront is very rigid on its asset allocation. You pick a risk score, and that's it.

Thus, they can do some pretty interesting things that Betterment can't. Such as, if your assets are more than 500k, they replace the S&P 500 index with all 500 stocks, which increases the amount of tax loss harvesting.

There are a few startups that are letting investors fund student loans. People pay 7% to sallie Mae, so I think these investors get about 5%.

one of them is prodigy

https://prodigyfinance.com/investor_home

Here is an unusual one. I have followed this similar strategy for the past 4 years on a more aggressive plan, and have returned 36%, 28%, 33%, and 6% for the past four years. The strategy heavily shorts the market, and goes partially long in a way that 99% of the time generates reliable, steady returns, and in the 1% extreme cases offers adjustment techniques to handle what the market is giving you. The aggressive nature of my approach causes the high volatility in the returns, but a much safer approach can be taken which would have nearly a 99.9% assurance of the 5%.

Sell calls and puts on the SPX index on a weekly basis. You need to generate $1K of income each week. On an account that uses Portfolio Margin at a broker like IB, $1M would allow you to open nearly 100 contracts on both the call and put side.

To appropriately manage risk, at the SPX trading at $1840, you could open up 50 calls at $1935 with 1 week to expiration for $.05. This will generate $250 of income as long as the stock market doesn't climb >6% in a single week. This has happened in the past, but only after the market has crashed the day before. 3% climb in a single week on a broad based index would be a once in a generation blue bird event, so the risk on this money is incredibly low. And even if the market did climb up steeply suddenly, there are many options adjustment techniques where you give yourself more time, generate more income, and create additional buffer to stay away from the market.

By selling 50 calls for $.05, you still need to generate $750. You do this by selling puts on the offsetting side. Markets have a tendency to crash downward, so you want to sell far fewer contracts and buy some insurance for the rare case of a market crater situation. You could sell 15 puts at $1730, again 6% below where the market is currently. A 6% drop in a single week is a rather rare event. And to hedge against a flash crash event, you buy $.10 puts at $1515. In the rare event that the market crashed or the market did drop >5% in a single week, then the same sort of adjustment techniques available in the call scenario exist here. There would be a side benefit of while you have to adjust the trades to wait for the profit, the market's volatility would have skyrocketed and the potential to gain more money is really high. Essentially, you could make your $1,000 of income by being 10-15% away from the market with high volatility instead of being 6%.

This technique requires weekly trades to be opened, which is a bear. And you have to learn the adjustment techniques, but once understood and accounted for, things are pretty regular and consistent. There is a side benefit of these options being 1256 contracts in the US, so there is beneficial tax treatment. Even though your trades are 1 week long, 60% of the gains are long term cap gains treatment.

So this isn't entirely low risk, but in all of the scenarios where is a bond / stock mix, there is inherent market risk as well. Even bonds that payout 5% can drop in value, so the principal isn't $1M anymore. So finding a great balance is a lot of work.

Selling strangles on broad indexes is a type of diversification, just of a completely different nature.

I have a fairly involved white paper that I have drafted that outlines the strategy for anyone that wants to review it.

I'd like to have a read of that with paper. can you post a link?

Hi: I placed a link in my public Dropbox.

https://dl.dropboxusercontent.com/u/9657839/Investment%20Fun...

Yes please do send the white paper: carbtrader at gmail

Thanks!

That's a very interesting strategy. Thanks for the info & the whitepaper.

Clearly not a good question to ask on HN... surprised bitcoin hasn't been mentioned yet :-)

edit: it has now. I rest my case.

You could invest in my startup.

Why?

It's a time machine.

because its awesome :)

http://www.dogsoftheseason.com/

Is this true?

If not, please explain why not?

He doesn't say how to choose the right stocks. And I assume he's choosing them after the fact for his graph.

I'd be curious to see a random sampling of S&P 500 in autumn vs. spring. That would give a better idea of if it works.

> And I assume he's choosing them after the fact for his graph.

So it's possible to edit tweets or change their timestamps?

https://twitter.com/DogsOfTheSeason

Hi, I'm Tomo - the owner of the DogsOfTheSeason site.

I don't know about the timestamps, but I guess it's possible to write several stock recommendations and delete the ones that do not make profits. Also, it is possible to build dozens of sites like DOTS and promote only those who consistently earn money.

I can assure you that I don't do any manipulations with my performance. I don't do almost any marketing for DOTS. The number of my subscribers is very small and if it starts to grow significantly, I'll limit the maximum number of subscribers or raise the subscription price.

I guess there are sites that do manipulate with the performance, so you have to decide for yourself whether you're going to believe me or not.

I noticed that links on my page http://dogsoftheseason.com/subscribe (actual emails) were not working due to a missing script. Now this is fixed.

How did this just get bumped to the third page of HN? It was on the front page just 1 minute ago.

Buy a house in Australia.

But not 9% that would just be weird...

I'm specifying those numbers because I expect they will each come with different risk levels. 9% is fine too.

BitCoin

I wouldn't disagree, except I'd only recommend putting a small percentage, like 1%, into it, unless the OP is a big believer. In that case, maybe 5% max. And in all cases, only put in what you can (really) afford to lose without losing too much sleep.

ETFs: http://en.wikipedia.org/wiki/Exchange-traded_fund and REITs: http://en.wikipedia.org/wiki/Real_estate_investment_trust

Are other investments you can look into. A mix of some blue chips that pay out dividends in combination with some ETFs which trade in commodities or specific growth markets might be a good idea. Balance out that risk with bonds or other instruments.

I would buy property in Marin County if I had a million dollars. One house. A neighbor moved next to me. I scared him away--I think? (another story). He was in his house for 5 months and made 90 grand on on a $650,000 investment. It's a weird market here.

I'm thoroughly convinced 90% of stock gains are made through inside information. I thought the Internet would level out the playing field, but it seems like the wealthy "connected" types are always in a bull market? (This year was an exception--everyone seemed to make money if they bought stocks?)

As to leveling out the winners in the stock market; I hope some young dude makes an app--a app that would help investors who don't have wealthy friends. And Stocktwits in not that app.

(I see a lot of posters advising on making money off renters. Personally, I couldn't live with myself making a huge profit on Renters. A nice family moves in and can just afford the rent, and the Landlord continually raises the rent. It's not moral. Sorry, but a place to stay, especially if the family has kids, is more than just a Revenue Stream. )

Reply on news.ycombinator.com