panafrica
08-18-2005, 08:34 PM
Q: I'm a college student with about $13,000 saved up. How can I get a 25% return on my money in the two to three years that I'm still in school?
A: It's great you've been saving so much money. Since you're young, these dollars you've saved will compound over the years. Time and risk tolerance are two factors that have a big determination on your money's returns.
Let's take a look at your goal, piece by piece. The first step is to analyze your expected return. You've done a good job estimating that. Since you're looking for a 25% return in three years, that works out to 7.7% a year (note it's not 8% even due to compounding).
The next step is to find out what investments could generate that kind of return for you. The closest match would be a five-year global or government bond index fund. Both of these have generated 7% to 8% returns the past 20 years, says IFA.com, although their returns are about two percentage points lower when studied over a 78-year time frame. You might also consider investing in the broader S&P 500 stock index. If history is a guide, the Standard & Poor's 500 index, tradable by buying an exchange-traded fund that is available under the symbol SPY, returns 10.3% a year on average for the long-term.
There's just one huge issue — timing. You need to be aware of the volatility of any stock investment. It turns out that 68% of the time, the S&P 500 will either be up 29.8% in a year or DOWN 9.2%. There is a great chance that if you need the money in three years or less, the S&P 500 could be down.
That's why you need to decide now what you need the money for. If you can leave it there for many years, you can consider investing in the SPY or other value-based stock indexes (large or small). But if you'll need the money in a shorter period of time and can't accept the risk, you should accept the lower, but less risky, return of bonds. And if the money is your emergency fund, you should keep at least three to six months worth of expenses in your savings account or a money market mutual fund.
http://www.usatoday.com/money/perfi/columnist/krantz/2005-08-18-index_x.htm
A: It's great you've been saving so much money. Since you're young, these dollars you've saved will compound over the years. Time and risk tolerance are two factors that have a big determination on your money's returns.
Let's take a look at your goal, piece by piece. The first step is to analyze your expected return. You've done a good job estimating that. Since you're looking for a 25% return in three years, that works out to 7.7% a year (note it's not 8% even due to compounding).
The next step is to find out what investments could generate that kind of return for you. The closest match would be a five-year global or government bond index fund. Both of these have generated 7% to 8% returns the past 20 years, says IFA.com, although their returns are about two percentage points lower when studied over a 78-year time frame. You might also consider investing in the broader S&P 500 stock index. If history is a guide, the Standard & Poor's 500 index, tradable by buying an exchange-traded fund that is available under the symbol SPY, returns 10.3% a year on average for the long-term.
There's just one huge issue — timing. You need to be aware of the volatility of any stock investment. It turns out that 68% of the time, the S&P 500 will either be up 29.8% in a year or DOWN 9.2%. There is a great chance that if you need the money in three years or less, the S&P 500 could be down.
That's why you need to decide now what you need the money for. If you can leave it there for many years, you can consider investing in the SPY or other value-based stock indexes (large or small). But if you'll need the money in a shorter period of time and can't accept the risk, you should accept the lower, but less risky, return of bonds. And if the money is your emergency fund, you should keep at least three to six months worth of expenses in your savings account or a money market mutual fund.
http://www.usatoday.com/money/perfi/columnist/krantz/2005-08-18-index_x.htm