Neighborly Advice

Mike Zaccardi

NOW MORE THAN EVER, people are hungry for yield or, failing that, a reliable return that doesn’t hinge on the performance of the stock and bond markets. Those puny money market and “high yield” savings account rates may suffice for your emergency fund. But after factoring in inflation, keeping too much in cash investments is a losing proposition.

Last week, a 50-something neighbor asked me for investment ideas to help him bridge the gap between now and retirement. Spoiler alert: I didn’t have an elixir. I simply suggested taking a holistic investment approach that focused on total return—price appreciation plus income—and that was based on his ability, willingness and need to bear risk. My concern: If he started reaching for extra yield, he could end up taking risks he didn’t fully grasp.

Confession: Like my neighbor, I’ve been also pondering how I can boost my returns without taking unreasonable risk. With a little extra cash I had, I recently bought some Series I savings bonds. But I’ve also been considering other riskier options:

  • A target-date income fund. That would represent a step out on the risk spectrum relative to cash.
  • A minimum-volatility stock fund. That would have even more upside, but nobody should assume “minimum volatility” means no volatility.
  • A mini-portfolio of low-beta individual stocks.

There are also alternative investments like physical real estate, art, wine and even farmland—all just a few computer clicks away. These days, it seems anyone can all too easily reach for yield or return in all manner of investments. Be careful. Those alts are expensive and illiquid, too.

Here’s a trick: Pretend you’re managing someone else’s money. While I don’t want to handle my neighbor’s investment account, I found it easy to recommend a simple, low-cost solution to him, even as I’m mildly confounded by the paradox of choice. What to do? I should probably follow the advice I doled out to my neighbor—and stick with plain-vanilla investments.

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Roboticus Aquarius
Roboticus Aquarius
1 year ago

Minimum Volatility did pretty well for many years until the Pandemic correction. This is the problem with most of the math-driven investment schemes (and I include factor spending in this), they are predicated on a normal distribution because the real math is simply too difficult. Reality is that black swan events happen more frequently than a normal distribution would suggest. It doesn’t mean factor investing and other approaches are wrong, but it does mean unexpected risk can strike harder and deeper than the statistics suggest. I still keep a very simple core investment approach, and only work around the edges with attempts at improving the risk/reward balance.

Last edited 1 year ago by Roboticus Aquarius
1 year ago

Good summary Mike, like a lot of us, I too was in the same predicament and gravitated toward MYGA (the single premium fixed rate annuity, a.k.a. CD from an insurance company (with good ratings) for a small portion of my cash.

Is this not something that you would see as an alternative to say a target income fund (with likely exposure to interest rate upticks)? Thanks

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