Hello, We recently sold a home. We have about $200,000 to invest for a year or two until we remodel our new home and start our daughters in college. Any ideas where we should put the money? We have already funded our IRAs/401k as much as allowed. Thanks!

The chart in our article “How Long Should I Give An Investment Plan?” shows that you need to give the S&P 500 at least 7 years before the worst return within one-standard deviation is positive, and at least 19 years before the worst return within two standard deviations is positive.

The chart also shows why investing money which you will need in the next five years in the volatility of the stock market is a gamble. Yes, on average you will make money, but if you absolutely need that money it may be better to keep it invested in the relative stability of fixed income bond funds.

On the other hand, if you can afford to lose 10% you could risk investing in stocks to gain the chance having the investment appreciate.

Which type of investor are you?  If you have a taxable brokerage account worth as much as $600,000 and your asset allocation is 75% stocks and 25% bonds, then you could afford to add an additional $200,000 into that mix and invest it according to your normal asset allocation. You would invest $50,000 in bonds and $150,000 in stocks to keep the 75%/25% mix. After adding this extra money you would have $200,000 invested in bonds and $600,000 invested in stocks. If the markets go up in your two years, take some of the appreciation by selling some of the stock. But if the markets go down in those two years, sell the $200,000 in bonds for the money you need and keep the stocks invested until they rebound.

Having more than enough money allows you to take more risk because you know that you will still be able to meet your goals in two years even if the markets do not perform well.

Assuming that you are not overly-rich and do not want to risk investing it, fixed income is a better way to keep the money earning something.

Generally speaking, the more interest that fixed income pays, the greater the volatility. Even bonds can have a bear market. Here are several ideas to consider in increasing order of risk:

1. Bank Account: Keeping the money in a bank account will keep the money FDIC insured. Currently such investments are paying very little and this is probably the reason you asked the question. Cash is devalued by inflation every year making cash one of the riskiest long term investments. Cash is safe in the short term, but not safe in the long term.

2. Certificate of Deposit: Bank certificates of deposit (or CDs) pay a better interest rate. Banks use these teaser rates to get you to open an account with them. CDs are often the safest place where you can get a little return for your money. Call your local banks and ask them for their CD rates.

3. Bond ETF: Invest in an exchange traded bond fund with no transaction fees. We use Charles Schwab as our custodian and these funds provide an easy way to keep cash invested and hopefully earn a little bit of interest to try to keep up with inflation. While the funds below are just examples, similar funds may provide some return for some risk.

I have listed the current SEC Yield and the 12-month Yield as a measure of the amount of return you might receive. And I have listed the current average effective duration in years as one indicator of the amount of risk being taken with each fund. If interest rates rose suddenly by 1%, a bond fund with an average effective duration of 5 years might drop in value by as much as 4.4%. (The formula is much more complex than that, but this is an approximate rule of thumb.)

• Schwab Short-Term US Treasury ETF (SCHO) currently has an SEC Yield of 0.65%, a 12-month yield of 0.74% and an effective average duration of 1.91 years. This is the safest and easiest investment and probably the best recommendation if you can’t find bank CDs paying a higher rate of return.
• Schwab Intermediate-Term US Treasury ETF (SCHR) currently has an SEC Yield of 1.13%, a 12-month yield of 1.53% and an effective average duration of 5.25 years.
• Schwab US Aggregate Bond ETF (SCHZ) currently has an SEC Yield of 1.82%, a 12-month yield of 2.09% and an effective average duration of 5.27 years.
• Schwab US TIPS ETF (SCHP) currently has an SEC Yield of 5.38%, a 12-month yield of 0.26% and an effective average duration of 7.77 years. This fund invests in Treasury Inflation-Protected Securities (TIPS) and you should understand how TIPS function before investing in them.
• Vanguard Emerging Markets Government Bond ETF (VWOB) currently has an SEC Yield of 4.24%, a 12-month yield of 4.55% and an effective average duration of 6.49 years. This fund has a transaction fee of $8.95 to buy or sell it at Schwab. And you should understand this fund before you invest in it. This fund seeks to track the performance of a benchmark index that measures the investment return of U.S. dollar-denominated bonds issued by governments and government related issuers in emerging market countries. We use this fund as part of a balanced portfolio, but its higher rate of return is not without risk.
• High-Yield Bond Funds are, in our estimation, even more risky than emerging market bonds and not something that we would recommend. Rather than trying to squeeze more bond yield by investing in riskier bonds, we believe that a balanced portfolio of diversified and non-correlated stocks and bonds could offer a higher return for a lower amount of volatility.

Return comes with an element of risk. There is no safe investment which also pays a good rate of return. Again, a safe recommendation would be bank CDs or a short-term US Treasure fund.

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