It is always tempting to take a windfall and spend it on something fun, but if you are approaching retirement (and all of us should consider ourselves to be in that boat--just with different finish lines) investing at least part of it is a smart money move. Here are some options.
- Peer to Peer Lending: If you have at least $2,500 dollars to invest, Peer to Peer Lending via Lending Club or Prosper offers returns between 5% and 8% annually, with decent, though not instant liquidity. You can read my posts about Peer to Peer Lending here. Statistics going back before the bear market/recession of 2008 show that less that 1% of people who have invested in at least 100 notes at $25 each have lost money.
- Kickfurther: Kickfurther is a platform by which investors finance inventory for businesses by purchasing that inventory and returning it to the company to sell on consignment. When the inventory sells, investors receive an agreed-upon return. There are two risks. The first is that the inventory doesn't sell. If that happens, the investors can vote to repossess the inventory and try to sell it in some other way to recoup their investment. The second is that the business will sell the inventory and then use the money to pay the rent, and not have enough to pay investors. The advantage of Kickfurther is that you can invest as little as $20, and most offers are for much less than a year, and once the repayment term starts, payments are supposed to be made monthly. I've been investing in Kickfurther for about a year and at this point I would classify it as a relatively high risk/high return investment. Click here to get $5.00 towards your first investment.
- Motif: If you want to try the stock market, Motif is an interesting concept. For one sales commission of $9.95 you can purchase one "motif" or group of stocks. Motif has a wide selection of company-designed motifs, and it allows investors to design their own motifs and market them to other investors. Most motifs have a theme, just as "Growing Dividends" or "Video Gaming" and the stocks in the motif reflect that theme. I have written about Motif before. If you invest via this link, we both get $100.
- Loyal3: Another option, if you want to pick stocks, is Loyal3. While they only offer the stocks of about seventy companies, all trades are commission-free, and you are allowed to buy fractional shares. This means you can use Loyal3 not only to invest a substantial sum, but also to purchase a few dollars with of stock on a weekly or monthly basis. I'm using Loyal3 to invest the money I save by not eating out at lunchtime. Read about my investments.
- Mutual funds: For people who don't really want to learn about the stock market or how to pick stocks, mutual funds allow you to outsource that job to either a professional or a computer. With mutual funds, the money of many investors is pooled, and investments purchased. If the investments increase in value, the price of the shares goes up; if the value of the investments falls, so does the share price. While there are a lot of flavors of mutual funds they are basically divided into index funds, which purchase shares of stocks or bonds to mimic one of the indexes and actively managed funds which have a manager who, following the policies laid out for the fund regarding the types of investment it makes, buys and sells investments trying to beat the market as a whole. Few succeed long-term. All cost more than index funds. One of the best place to get index funds or low-cost actively managed funds is Vanguard.
If you are investing adequately to meet your future goals, then spending a windfall on fun isn't necessarily a bad idea; however if you are behind on your retirement savings, you'll spend a lot more time wishing you had more money than you will spend at Disneyworld with your tax refund.
Interesting possibilities!
ReplyDeleteIt's always tempting to use a windfall to have a little fun without jeopardising your financial plans. It could however function as a flywheel if you would use it wisely, especially when you are still in debt.
Pay off debt is first!
ReplyDeleteI really think that depends on your age and the type and amount of debt you are carrying. If your debt is only a mortgage on a house, then I think you should have a regular investment program going and that you evaluate investing vs paying off the mortgage by looking at your other assets, at your interest rates and at the likely return on the investments you are considering. Putting $1000 extra on your mortgage and then having to borrow because you have no assets that can be converted to needed cash doesn't really help you. On the other hand, putting that money toward credit card debt absolutely makes sense.
DeleteI agree that if your only debt is mortgage, you should be saving. Would you recommend putting your emergency fund into any of these funds?
ReplyDeleteWhat percent of your portfolio would you put into these different funds?
When you cash out of Loyal 3 do you have to do dollar cost averaging on every transaction? Do they keep those records for you? How about reporting the capital gains on the other investments. How does that work? Do they simply send you a statement at the end of the year for all of your investments? Mutual funds (outside of my IRA) drove me batty because of the paperwork.
We sold a bunch of mutual funds last year and I "enjoyed" doing my taxes today; the forms gave me the basis price and the sale price. Honestly I hadn't thought of the tax nuisance of all those transactions in Loyal3. Lending Club/Prosper aren't bad from a paperwork perspective. They send you forms and you enter the numbers. Unfortunately, the more bad loans, the more numbers to enter.
DeleteI think asset allocation depends a lot on how much money you have an how much you need. We regularly spend much less per month than we make. We have about six months pay in the bank--not much interest but safe and available. No, I wouldn't invest money I might need next month in any of these things--the bank is really the only place for that kind of money. On the other hand, you are never going to get ahead by putting money in the bank. If you have $2500 you aren't going to need quickly, I think P to P is a good place for it. Long term, for most of your money, index mutual funds. Kickfurther--right now, the platform is too new to know and they don't do tax forms; that's on you. It is "play" money I'm hoping turns out well, not something I am counting on for retirement.
Thanks for the answers Ruth. I have loads of questions. I have been out of the market for a while and am wondering how to approach investing again.
ReplyDeleteI think giving the grands a Loyal3 account where you can buy them a few dollars worth of Disney or some other interesting stock would be a good idea. If you like to play with your money, motif is interesting and lets you buy into various ideas at a relatively low cost. I think P-to-P is a good alternative investment--something to make money when the market is down. It is too new IMO to make it a major portion of your portfolio. They recommend 10% of investible assets and I think that's about right. If you don't want to fool with it--if you just want to fix it and forget it, go with Vanguard index funds. See what they invest the target date funds for your age group in and just buy those funds and rebalance them yourself periodically. Or for that matter, the target date funds aren't that expensive, buy them and go do something else, if this isn't your idea of a good time. Right now I'm enjoying playing with and writing about money. When I move on, I'll take the money out of my toys and put it in Vanguard, unless they are doing a whole lot better than Vanguard.
DeleteGreat ideas. My first thing I always do with my refund is to invest it in my Roth IRA - always pay myself first!
ReplyDelete