Expert: Gina Boykin - 9/1/2008

Question
I am looking to invest $50K in the near term.  My risk tolerance is low to medium.  Could you provide any suggestions where I could invest these funds to receive a better than average return? Thanks

Answer
You have a lot of options and your decision will be based on your time frame (when you need the money), your risk tolerance ("medium" to you could be low or high to someone else), what you want from your money (cashflow or capital gains), and your tax needs.

Let's start with time frame.  If you need the money in the next few years (around 5 years), then you'll need to keep the money in a savings account, CD, or money-market account.

If you have around 10 (or more) years until you need the money, you have the ability to actually invest the money.

Risk tolerance - to really determine what your risk tolerance is, you may want to do one or both of the following: (1) do virtual investing so that you see how you react when your account declines, (2) take a risk tolerance quiz online (discount brokers have them on their websites or just do a search online).  Then you can see if "low to medium" is really accurate, and what that means in terms of the types of investments match your investment style.

Cashflow or capital gains.  Do you want your money to provide income or to grow?  

If you want income, you can look into individual bonds or bond funds.  Bonds are issued by government entities and corporations to raise money for large projects.  For example, a government may issue a bond so that they can purchase land for a playground.  If you purchased that bond, you are loaning the government money, in exchange for getting intererest every month, quarter, or year.  At the end of the bond term (which is called the maturity date) you get all of your money back.  You can also become a lender by using a loan broker-type company.  These companies bring together borrowers and lenders so that you can lend money to people based on their credit score, credit history, and loan purpose, just like the bank.  Of course, loaning money has risks as well.  If you hold a bond for a company that is not doing well financially and they go bankrupt, you could lose your money.  However, you can lessen your risk by getting bonds for highly rated companies/government agencies.  (No junk bonds!)  Getting a highly rated bond is like loaning money to someone with a high credit score - the risk is lower but that means you'll make less interest.  Savings bonds have the least risk when it comes to bonds.  These can be purchased directly from the government at www.treasurydirect.gov.

Another way to make cashflow is to invest in real estate and rent the property your purchase.  This is something that will require a great deal of learning/research, but is an alternative.  If you are interested in this type of investing, start by reading information on the internet and/or at the library and then talk to someone who is already investing in real estate (and has been for several years).

The most common way people invest for capital gains is to invest in stocks, stock options, or mutual funds.  To get the basics on stock investing, go to investopedia.com or fool.com (or similar website).  You can also learn alot by reading the information on the major discount brokers' websites.  If you think you may want to put your money in mutual funds, look into index funds and exchange traded funds because these are great for beginners, and have very low costs.

If you don't want to purchase stock through a brokers, there are alternatives.  DRIPs (Divided Reinvestment Programs) allow people to buy stocks directly from the company with little or no fees.

Do you need tax-free income?  Municipal bonds (or bond funds) and tax-exempt unit investment trusts may be an option for you.  Municipal bonds are simply bonds that come from municipalities (government).  UIT's are a set of prepackaged bonds that lock in a certain rate of return.  They are not "managed" like bond funds so there is no manager that is buying/selling bonds within the fund.  Once the initial bond purchases are made, it stays the same until all of the bonds mature.

Hopefully this gives you a starting point in your decision-making process.