Q: My wife & I have saved up enough money for a down payment on a house but we’re afraid we’ll have to move in the next year for my job. We want to make some short-term investments in the meantime. What can you recommend?

A: Congratulations on nearing the joys of home ownership. Not only have you already saved enough for a down payment, you have some time to spare. With that in mind, my expert, detailed recommendation to you is to DO NOTHING. Put the money in the bank and start thinking about whether you’ve accounted for all those additional costs such as property taxes, furniture, and your wife’s obsession with something called “crown molding.” (oops, I’ve said too much)

On a serious note - the real reason that you shouldn’t be pursuing short-term investments in this case is because your timeframe is too short to risk anything but a cash vehicle. If there is a possibility you may move within a year and need the money for a down payment at that time, there is no acceptable risk/return instrument available to you.

First of all, consider the upside in terms of actual dollars. if this down payment is $25,000 (10% on a $250,000 home) an investment that gets you an extra 1% only means an additional $250 in actual gains, before expenses, on the whole amount. That’s simply not enough upside to put any of your hard-earned house money at risk.

In addition to the relatively small amount you’ll gain from a short-term investment besides cash, there’s also the reality that most providers of financial and investment products have little desire to capture such short-term dollars. Thus, the product offerings in this space (less than 1 year) are extremely limited. In a low interest environment such as this - for the companies to make any profit at all - their fees pretty much would wipe out the extra interest that most of these products offer. Even short-term CDs aren’t a good fit since they often are illiquid for a period of time, such as 6 or 9 months, and you may need the money on short notice if you find a home to purchase.

Also, due to the very short timeframe at hand, you wouldn’t have enough time to recover your principal should it sustain any losses from a potentially riskier investment.

For all of these reasons, your best bet is to seek out the highest yielding money market or interest-bearing checking account you can find and safely deposit your down payment.

Click to Comment   |  Comments (3)  

Quick note from the publishers of the MyCity Finance Blog. We wanted to post a quick note to encourage you, our community of MyCity users, to participate in our blogs whenever you’d like. Please feel free to post your comments or any additional questions you have for Azim by clicking onto the “Comments” button on the bottom of each article.

Also, on the upper right hand part of this page, there is a place that says “Click Here to Ask Azim”. This will enable you to email Azim (Azim@mycity.com) directly to ask him any financial specific question that you have of your own. Azim is a highly qualified financial advisor, and is here for you to utilize for FREE through MyCity.

Enjoy!

Click to Comment   |  Comments (0)  

One of the fastest growing segments in the Asset Management world today is Socially Conscious Investing. Many investors are wielding their dollars toward supporting a socially conscious agenda. It’s not just the little guy either - major endowments, foundations, and even some institutional investors have built social screens into their investment decision process.

While this is both noble and increasingly less restrictive (as more and more socially conscious investment products are developed), the real question remains - are these investors actually “doing the right thing”? After all, does socially conscious investing really advance an agenda of ideas and values, or does it simply pour dollars into the latest marketing trick in the investment world?

I would argue strongly that it’s the latter. Socially Conscious Investing is at best an imprecise strategy that is more about drawing dollars into a cleverly marketed investment product than it is about prudent investing or even right and wrong. Put more simply – socially conscious investing is almost an oxymoron. The purpose of investing is simple – to make money. It’s a mutually exclusive concept from social activism and to attempt to blend the two makes very little practical sense.

First, the concept begs the question – where do you draw the line? Socially conscious money managers employ specific screens to rid their portfolio of “objectionable” industries such as alcohol, tobacco, or firearms. To me, this is an abstract and dangerous policy. Let’s say Company A is eligible for the portfolio because it is not in those types of industries. Let’s also say, for arguments’ sake, that Company A has the worst history of minority and female hiring in the market. Is Company A any more socially redeemable than Anheuser Busch? Or, is it much worse? What if Company B is in Health Care? No problem there – “welcome aboard” say the usual social screeners. However, closer inspection finds that Company B pollutes the environment and hasn’t given a penny to a single charitable cause in its history. Still think that company is in the socially conscious category? Starting to see my point? The truth is that unless an investment manager is going to look at every last variable, there is no way to draw the line and separate companies on the basis of social consciousness.

Next, consider the reality of how the investment world actually works. Major stock markets are extremely liquid. If one socially conscious dollar doesn’t buy the stock, there’s always another dollar that will. Thus, NOT investing dollars in certain companies has no adverse effect on those companies’ stocks. That’s just the reality of our highly liquid market, in which millions of shares are traded every day. So, if a goal of these investors is to punish certain companies for their behaviors or businesses, they are losing that battle in a big way. Admittedly, that’s not the real motivation here. These investors aren’t usually trying to punish companies; instead they are choosing not to support them with their own money. The problem with that simple choice is that it’s way too indirect – the net effect doesn’t really make a difference. If someone wants to make a statement with their money, it’s infinitely more effective to put those dollars directly toward a cause, charity, or organization than it is to withhold those dollars from buying a company’s stock.

Many socially conscious investors believe their portfolios have reduced risk because of the healthy nature of their businesses. Presumably, they mean the threat of lawsuits or legislation, but if the intent is to avoid these suits or rulings – does it work? Again, I say not a chance. Enron, WorldCom, Tyco, and Adelphia are all in industries that are free and clear from virtually any social investment screen. Needless to say, their behavior set new lows for corporate crime and each of their stocks has been decimated by legal woes, government intervention, and bankruptcies.

Perhaps the single best argument against socially conscious investing is the proverbial Bottom Line. In our society, SIN = PROFITABILITY. The evidence is overwhelming – just take a look at the balance sheets of Philip Morris (Altria), Molson Coors, Lockheed Martin, Las Vegas Sands, or Playboy Enterprises – safe to say these companies are making money hand over socially unconscionable fist. In fact, there is a mutual fund called Vice Fund which invests ONLY in gaming, alcohol, tobacco, aerospace & defense. The fund believes these industries are “recession proof” and the fund has returned 18.4% annually since its inception, including 27.5% over the last year. Ironically, my best advice to those of you who would like to be socially conscious investors is to put your money wherever you can make the most attractive rate of return, and then use your profits to directly execute some real change wherever you see fit.

Click to Comment   |  Comments (0)