Investing Personal Finances
The best ways to invest personal cash for 3 to 5 year time horizon include dividend stocks, index funds, P2P lending, bond ETFs, and certificate of deposit.
All the required information has been entered into the spreadsheet here. The research methodology and an overview of our findings have been presented below.
We began our research by examining various media sources such as Forbes, WSJ, Business Insider, Reuters, Live Mint etc; investment portals such as Bloomberg Quint, Capital IQ, and FT Blog. We also looked into research reports on the personal investment sector from Deloitte, McKinsey, Market Intelligence, and Forrester and personal investment blogs such as Enterprising Investor, Vanguard Blog, and InvestmentWatch. We were able to garner a few relevant articles regarding the best passive investment options, ranked based on risk, liquidity, and return profiles. We selected the most mentioned and recommended investment options among the rest. We also tried to have an optimum mix of high/medium/low risk investment options and made sure that the liquidity of any investment is not beyond five years.
Risk determination has been classified as low, medium, and high based on asset class (Equity/Bonds etc) and its nature (secured vs unsecured). In cases where the cash flow or return is guaranteed by some federal agency such as FDIC, we segregated the asset class to be 'low risk'. In case of equity investments which are exposed to vagaries of market fluctuations or P2P involving unsecured third party lending, we have classified these to be 'high risk'. Finally, asset classes with market exposure but regular cash flow stream have been deemed to have 'medium risk'.
- Dividend stocks involve investing in high dividend paying companies. As the company brings in earnings, part of them is siphoned and paid back to investors as a dividend. This money can be reinvested to purchase additional shares or can be received as cash payment.
- Index funds are mutual funds that are tied to a particular market index. These funds are designed to mirror the performance of the underlying index they track. Index funds are passively managed and the securities included in them does not change unless the composition of the index changes.
- P2P lending involves peer-to-peer lending to disintermediate banks and help denied borrowers to get loans at potentially lower rates compared to the rates of larger financial institutions.
- Bond ETFs are akin to exchange-traded fund (ETF) that exclusively invest in bonds. They hold a portfolio of bonds with different strategies, from U.S. Treasuries to high yields, and holding periods, between long-term and short-term. Hence, bond ETFs are similar to bond mutual funds.
- Certificate of deposit is a savings certificate with a fixed maturity date and specified fixed interest rate that can be issued in any denomination aside from minimum investment requirements. CDs are generally issued by commercial banks and are insured by the Federal Deposit Insurance Corporation (FDIC) with up to $250,000 per individual.