Taking on too much investment risk when you’ve already built up a massive fortune for yourself is a pretty bad idea, even if you’re a risk-taker who’s more than willing to go a bit further for a shot at outsized returns.
Indeed, as the great Oracle of Omaha, Warren Buffett, once put it, “you only have to get rich once.” And with $5.3 million in the bank at the age of 50, this wealthy individual I saw posting on the r/fatFIRE subreddit may wish to consider resetting their expectations before they overreach on risk and put themselves in a spot where their early retirement dreams could be diminished greatly.
As it stands today, this 50-year-old millionaire is wondering if there’s a “safe” place to stash away a considerable amount of capital for the next 6-18 months or so.
They’re looking to achieve a 5-10% return on such an investment. Undoubtedly, a 5% gain seems achievable, even if it’s for someone investing for a year. That said, earning a 10% or so market return requires some degree of risk-taking. And for a time horizon as short as six months, I’d argue that something as simple as the S&P 500 could prove a risky bet, especially as its price and valuation ascend to new highs.
Key Points
It’s hard to score a return over 5% without taking on some risk. For a short-term investor, it’s not worth it.
This individual has a very short time horizon and should stick with risk-free securities that offer closer to 4% returns in a year.
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Equities can gain 5-10% in 18 months. But market risks seem too high for someone with a short-term horizon
Of course, the S&P is a fantastic bet for the long haul. But if you need a short-term store for a cash hoard, I’d suggest going down the route of either a high-yield savings account (HYSA) that yields just north of 3% or a CD (Certificate of Deposit) with a yield in the 4% range. U.S. Treasuries can also be a relatively secure place to park cash that’s needed in a few quarters down the road.
Indeed, a HYSA and CD entail no risk. And while the 3-4% return is going to fall well shy of the 5-10% expectation, I’d argue that such a short investment horizon limits what our Reddit user can invest in without taking on significant risk.
And while utility stocks, defensive dividend payers, low-volatility ETFs, value funds, and all the sort may seem like great ways to score a solid double-digit percentage return without all the risk for the next six months to a year and a half, I would encourage such short-term investors to look at what happened during the Liberation Day sell-off suffered just a few months ago. Indeed, many investors panicked and sold stocks at a loss.
Even the more defensive securities took a hit to the chin, with the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD), often seen as a more defensive way to play the broad stock markets, sinking just over 15% from peak to trough. Indeed, for short-term investors, even the more defensive plays can cause one to lose money once it’s time to withdraw the cash in a year or so down the road. While it’s never easy to settle for lower returns, I do think that the magnitude of risk is far too elevated to be chasing after that extra 5% or so in gain.
A risk-free 4% return beats a 5-10% gain from a risky asset for short-term investors
Sure, a 4-4.5% yield from a year-long CD may fall shy of the expectations of this 50-year-old investor. That said, I view the smaller, risk-free return as beating a much higher return from a risky asset if we’re talking about an investment horizon that’s less than 18 months.
Sometimes, it’s better to be safe than sorry, especially if one already has a ton of capital to be considered very wealthy by most Americans’ standards. In any case, CDs, HYSAs, and Treasuries are the options I’d look into if I were in the shoes of this individual. It’s not exciting, but if there’s not enough time to wait for a recovery if a risky asset were to implode, it’s far better to not risk one’s shirt, especially as the market stakes rise.
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The post At 50 with $5 million in cash, I’m unsure where to invest short-term – can I safely earn 5-10% without risking my nest egg? appeared first on 24/7 Wall St..
