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financial gurus: highest interest rate possible?


dickkotite

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im toying, TOYING with the idea of moving to croatia. the average croatian only makes about 4000 a year

my q is what is the best (and safe) thing to throw $ into? Im seeing a max of about say 5.5% interest in typical savings accts.

any ideas on how i could get a nicer interest rate with no risk or at least very little risk? if i could get 7-8 % that would be swell

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I keep getting emails from these nice folks in Nigeria. They're going to make me rich. I can't possibly invest in all of them, though, so give me your email address and I'll forward a few to you.

Always glad to do a solid for my friend Dickloaf.

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im toying, TOYING with the idea of moving to croatia. the average croatian only makes about 4000 a year

my q is what is the best (and safe) thing to throw $ into? Im seeing a max of about say 5.5% interest in typical savings accts.

any ideas on how i could get a nicer interest rate with no risk or at least very little risk? if i could get 7-8 % that would be swell

How much money do you have to invest?

Open a brokerage account with a reputable investment firm.

A moderate aggressive portfolio should return you between 8%-10%.

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I don't have any specifics on this, but my mortgage guy is pointing me toward something I used to think was crap: whole life insurance policies. If all you want is security, it can push 6% and you get two more goodies: life insurance, and the ability to get the money out without any real tax burden (you can loan it to yourself without any federally defined payback guidelines).

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thanks guys

unfortunately, this is all french to me. i dont know crap about this stuff.

first off, this is all a pipe dream at this point but im still interested. my problem is finding some work there at that might be the issue. I know that the average croatian makes 4k/ yr US. they seem to live alright, but they dont have bmw's . On the other hand, they have nice seaside homes that were hand me downs.

so heres the deal: lets say i liquidate everything and i have 200k to put into a bank. i want to live off this. for a LOnG term. I already have a house there and the taxes/bills are minimal.

I know i can get 5.5 percent at no risk so that 11k yr. I should be able to live nicely on this but CAN I DO BETTER? without risk or minimal risk. whats the deal with taxes too?

i figured if i wanted to return id have that 200k to return so no bridges are burned.

any ideas out there for my pipe dream?

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im toying, TOYING with the idea of moving to croatia. the average croatian only makes about 4000 a year

my q is what is the best (and safe) thing to throw $ into? Im seeing a max of about say 5.5% interest in typical savings accts.

any ideas on how i could get a nicer interest rate with no risk or at least very little risk? if i could get 7-8 % that would be swell

http://moneycentral.msn.com/content/P128311.asp

http://www.marke****ch.com/News/Story/Story.aspx?guid=%7B180E9423%2DFFF6%2D452E%2D8419%2D9A5FC00A95DB%7D&dist=aol&siteid=aol

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I read that moneycentral article and the first quote is by Frank Armstrong III, I swear that I thought it was Frank Moga III.

You're getting good advice here. You can't get 100% security with mutual funds, but that's the best way to get real growth safely. There are some cds out there that slightly better than 5.5, but you want to live on the money. Some of the best current cd rates are short term 6 month-2 year. Still, then you have to deal with them when their term is up.

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I don't have any specifics on this, but my mortgage guy is pointing me toward something I used to think was crap: whole life insurance policies. If all you want is security, it can push 6% and you get two more goodies: life insurance, and the ability to get the money out without any real tax burden (you can loan it to yourself without any federally defined payback guidelines).

Actually, the variable universal life policy (VUL) is a much better tool. This allows the purchaser the flexibility to set the premiums on the insurance piece of the investment while maintaining the ability to pick the mutual fund in which to invest. Just like the whole policy, you can borrow out of the investment portion tax-free.

However, both these products have an insurance policy associated with them. While the tax-free investment (with no withdrawal restrictions) would be appropriate here, there needs to be a driving force behind the purchase of the insurance piece (i.e. you currently provide for someone and you want to continue to provide after you die).

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Actually, the variable universal life policy (VUL) is a much better tool. This allows the purchaser the flexibility to set the premiums on the insurance piece of the investment while maintaining the ability to pick the mutual fund in which to invest. Just like the whole policy, you can borrow out of the investment portion tax-free.

However, both these products have an insurance policy associated with them. While the tax-free investment (with no withdrawal restrictions) would be appropriate here, there needs to be a driving force behind the purchase of the insurance piece (i.e. you currently provide for someone and you want to continue to provide after you die).

ya see im totally confused. i want interest and im hearing about insurance. i dont get it

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ya see im totally confused. i want interest and im hearing about insurance. i dont get it

The products we are describing are the ultimate combo: life insurance in case you croak which equates to providing for your beneficiary as if you lived for the life of the policy + investment subaccounts to maximize your interest accrual and take advantage of the ability to withdraw funds at a tax free rate.

However this only makes sense under two conditions:

1) You have someone you care for that will be disadvantaged if you die

and

2) You care

If you can't answer yes to both, the clear path for you to travel is straight mutual funds. These products are primarily equal to a super-charged Roth IRA + life insurance bundled together.

Quick example, with very raw numbers. Say you have 2 kids, aged 2 and 4, and your major goal is to be able to pay for college. A reasonable solution would be to open a VUL with a $250,000 face (8 years of college at $31,250). If you die day 2 of the policy, your benificiaries get 250k and college is paid for + interest.

If you survive, each year you overinvest in the policy beginning year 1 at 5k. Some portion of the 5k goes to pay the policy premium, the rest gets invested at your direction. Each subsequent year, you probably need to up your investment by ~2% to keep it flowing and reinvest your raises. By the time your kids are ready for college, you will have enough saved to pay for it, assuming 8% AVERAGE growth over the period.

Average growth is the trick. You need to be investing for the long term (10+ years) if you are looking for elevated return rates. Looking at year over year growth with lead to disappointment and is not appropriate for virtually any mutual fund based savings approach.

The beauty of the VUL product is once you get money saved in a subaccounts you can "borrow" the money tax free. Say your payments over the years total 100k tax free and your interest is 15k. Assuming the amount in your investment subaccounts does not exceed the face value of your insurance policy, you can withdraw the entire 115k with no tax implication. Basically, it is recorded as you are taking out a loan at x% and the insurance company is borrowing the money from your insurance policy at x%, which makes it a wash.

There are a lot of additional benefits, such as

-inability for creditors to value this asset

-inability of the federal government to consider this an asset when making a financial aid decision

-no restriction on when you can withdraw money

-no restriction on why you withdraw money

-no interest on the money you earn via interest (much like a Roth)

-complete control over the investments

The major caution of these products is an overly-leveaged policy can get called and the policy cancelled without a large lump sum payment. This doesn't matter year 8 of college in the above example (if you borrow 250K against a $250k policy it's a wash when you die). However, if in year 6 you've borrowed 225k, you will probably need to invest more to keep the option of borrowing open (banks each define their own threshold of borrowing below 100%).

However, and I can't emphasis this enought, you need to have a demonstrated need for the insurance portion of the product. Absent that, there is no reason to recommend these policies over straight mutual fund investments.

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dont know why original article didnt link,, coffeehouse very safe and in long run better than dow

'Coffeehouse' portfolio a winner

Diversification can overcome the worst downturn

By Paul B. Farrell, CBS.Marke****ch.com

Last Update: 12:09 AM ET Mar 8, 2002

LOS ANGELES (CBS.MW) -- Starbucks is more than a daily caffeine fix, it's a cultural institution where, like a fine Irish pub, patrons relax and meet with old friends -- even "virtual" old friends like Bill Schultheis.

Bill, a former Salomon Smith Barney broker turned financial advisor, published "The Coffeehouse Investor" in 1998. It's a simple little book focusing on the only three principles necessary for a successful portfolio: Save, diversify and index.

When I stop by the local Starbucks, I can't help but picture Bill in my mind. Likewise, whenever I glance at his book, the aroma of Seattle java fills my senses, but when Bill's latest newsletter arrived, it wasn't just Starbucks, coffee and camaraderie that came to mind, it was Bill's powerful message.

Once again, we have proof positive that a passive indexed portfolio is the best strategy for the average Main Street investor -- even in the crappy bear market of the past couple years.

Winning seven-fund portfolio

So listen closely folks: Bill's simple Coffeehouse Portfolio "consists of a 60/40 stock-bond split, with the bond portion reflecting an intermediate-term bond index and the equity portion equally divided between the S&P 500 Index, Large Value Index, Small Index, Small Cap Value Index, MSCI EAFE International Index, and a REIT index."

Here are the numbers for the seven Vanguard index funds Bill used in the portfolio, with $10,000 allocated to each of the six stock funds and $40,000 in the bond fund. Returns were for calendar years 2000 and 2001.

Also note, the "Coffeehouse" asset allocations were originally set in 1999 -- at a time when most investors were chasing triple-digit tech funds and laughing at ultra-conservative portfolios like this:

  • S&P 500 (VFINX : Vanguard 500 Index;Inv

    VFINX123.06, +0.92, +0.8%) This index fund was down 9 percent in 2000 and off 12 percent in 2001. So the original $10,000 investment was only worth $8,001 by the end of 2001.

  • Large Value (VIVAX : Vanguard Value Index;Inv
    VIVAX24.83, +0.18, +0.7%) Your $10,000 investment in the Vanguard large-cap value fund would have dropped a bit to $9,337 by the end of 2001.

  • Small-Cap (NAESX : Vanguard Sm-Cp Indx;Inv

    NAESX30.53, +0.15, +0.5%) The 10 percent allocation in the small-cap growth index fund just about broke even. So your investment here would have been worth $10,035 after two years.

  • Small-Cap Value (VISVX : Vanguard Sm-Cp Val I;Inv


    VISVX16.08, +0.07, +0.4%) A big favorite with investors during the past couple years. And no wonder, $10,000 invested in January 2000 -- when small-cap value wasn't so sterling -- would have grown to $13,839 by the end of 2001.

  • Total International (VGTSX : Vanguard Tot I Stock;Inv

    VGTSX16.13, +0.07, +0.4%) Here's the biggest drop in the portfolio. Your $10,000 allocation in this MCSI-EAFE international index fund would have dropped to $6,739. Who would have guessed back in 1999, many of the world, global and international stock indexes were returning over thirty percent.

  • REIT Index (VGSIX : Vanguard REIT Idx;Inv

    VGSIX23.77, -0.05, -0.2%) The REIT index was hot the past couple years. In fact, $10,000 here would have grown to $14,643 in two short years while the bear was ripping apart huge chunks of the rest of the stock market.

  • Total Bond Index (VBMFX : Vanguard Tot Bond;Inv

    VBMFX10.00, -0.02, -0.2%) A bond index fund offers safety, capital preservation and a nice return in a bear market. Laughably low returns in the late 1990s, but real huggable the past couple years, as $40,000 grew to $48,312.

>>> Compare funds

Coffeehouse Portfolio 2000-2001

So what's the bottom line? Simple: If you had invested $100,000 in this particular indexed portfolio beginning in 2000, you'd have been worth $110,905 at the end of 2001. That's an average of 5.31 percent annually for the two-year period.

Once again, we're looking at the bear market of 2000-2001: Dow Industrials were down more than 12 percent, the S&P 500 was down more than 20 percent, and the Nasdaq was down more than 50 percent.

In contrast, by sitting passively in Starbucks drinking coffee and ignoring the market completely, your Coffeehouse Passive Index Portfolio would have beaten the Dow by 17 percent, the S&P 500 by 25 percent and don't even ask about the Nasdaq -- all of which has to be an embarrassment to hyperactive Wall Street gurus.

For example, this passive index portfolio even beat the average U.S. hedge fund, which according to BusinessWeek earned 5.6 percent last year, not including fees. After their huge fees, hedge funds would be lucky to bear either Treasuries or passive indexing.

Amusing isn't it? The big Wall Street firms make a big sales pitch around their great stock-picking prowess -- and it turns out that you can do just as well making passive investments.

He won by totally ignoring the market

As we leave, the virtual Bill Schultheis sits in Starbucks, sipping coffee, rhetorically asking, "Does the Coffeehouse philosophy work? While most major indices (and maybe a few of your neighbors' portfolios) are trying to recover from double-digit losses of the past two years, this simple portfolio has captured double-digit gains, generating a total return of 11 percent (5.31 percent annualized).

"Not bad for someone who completely ignored the financial markets the past two years amid the worst investing period in the last quarter century."

Not bad at all, Bill

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Regarding the Insurance thing, I think the VUL is what my guy was mentioning and I just said "whole life" because it's all I knew.

My general opinion is that it's a conservative way to get about 6% and it's pretty liquid.

The insurance is a pleasant byproduct. If insurance were all I wanted I'd just get simple term.

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Regarding the Insurance thing, I think the VUL is what my guy was mentioning and I just said "whole life" because it's all I knew.

My general opinion is that it's a conservative way to get about 6% and it's pretty liquid.

The insurance is a pleasant byproduct. If insurance were all I wanted I'd just get simple term.

Actually, whole life is a fairly conserviative way to get 4-6%. Most whole life policies are not variable, meaning the investment portion of your product is directed by the insurance company. They typically invest in very safe markets thus yielding a small return. Some policies will even guarantee you a return of 4%.

The catch is the management fees are not always clear up front, so you wind up paying out a lot more than expected.

The VUL product was designed to provide the alternative approach of "Just buy term and invest the rest."

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Well, then whole life is what my mortgage guy was probably talking about. Here's his deal... his philosophy is that home equity is bad, and that if I'm responsible (I am) I'd do better to refi into a 40yr interest only mortgage...which makes for a really LOW payment, and put the difference in a conservative side fund (above).

He has plenty of evidence that over 20yrs I'll have more cash with this than I'd have accumulated as equity. And the upside is that the cash is liquid in case of job loss or other catastrophe.

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Well, then whole life is what my mortgage guy was probably talking about. Here's his deal... his philosophy is that home equity is bad, and that if I'm responsible (I am) I'd do better to refi into a 40yr interest only mortgage...which makes for a really LOW payment, and put the difference in a conservative side fund (above).

He has plenty of evidence that over 20yrs I'll have more cash with this than I'd have accumulated as equity. And the upside is that the cash is liquid in case of job loss or other catastrophe.

An interesting idea assuming you are planning to live in the house for a number of years. If you think you'll move within 3-5 years, the more aggressive approach would be to refi into a 3 year I/O ARM with a prepayment penalty. This will be one of the most attractive (but risky) approaches, with your interest rate (and payment) extremely low.

The downside is when you are mixing the two approaches, you need to be sure you can survive a downward trend in the real estate market. There is currently a real glut of homes on the market and prices are dropping. Refinancing on the way down may not be the best approach.

The thing I don't understand is why he would direct you to whole life rather than a VUL given your time period (20 years). A self-directed portfolio consisting of a mix of mutual funds will almost certainly outperform the conservative investments typically chosen by insurance companies. It really boils down to a simple question: Who is more likely to make investments that align with your goals: you (or a broker you pay to make decisions on your behalf) or an insurance company?

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I think he really just wants a liquid investment that can push 6%. I think Mutual funds wouldn't be as liquid as he'd like...but there are other investments (some bonds etc) that he's ok with.

And yes... one must be in the home long-term, and the market here in central Michigan has been very stagnant. It never really had a bubble, so it doesn't have anywhere to fall.

His unique approach has created a good niche for him here. He's really popular with landlords because his terms (low payments) help people get better cashlflows out of newly purchased rental properties.

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Well, then whole life is what my mortgage guy was probably talking about. Here's his deal... his philosophy is that home equity is bad, and that if I'm responsible (I am) I'd do better to refi into a 40yr interest only mortgage...which makes for a really LOW payment, and put the difference in a conservative side fund (above).

He has plenty of evidence that over 20yrs I'll have more cash with this than I'd have accumulated as equity. And the upside is that the cash is liquid in case of job loss or other catastrophe.

A 40 year I/O payment does not really make for as low of a payment as you think. A P and I payment would be $1756.37 on a 300k mortgage at 6.5%. The I/O payment would be $1625.00, meaning the principal amount is $131.37. Bear in mind an I/O 40 yrear would have a higher rate, but I'll use the same one for comparison sake.

The difference is in one year, the P and I payment would have $140.17 going to principal and $1616.20 going to interest. This continues for 10 years, which is the longest you'll find for an I/O period on a 40 year loan. At the 10 year mark you will be paying 235.44 to principal and $1520.93 towards interest. Your total mortgage balance will be 280k by that point, a 20k equity earning. Total interest paid by that point will be 171,966.44. Paying I/O will be 195k over 10 years, a difference of 22k. You will have invested 15,765 by that point (131.37 times 120 months-10 years). It will need to be worth $42k to break even at 10 years (22k plus 20K, the equity you earned by paying down principal). At a 6% return over those 10 years, your entire investment will be worth $21,528, or a loss of approximately $20k. With inflation factored in the investment would be worth $17,371 approximately compared to todays dollars. An even worse proposition. Without factoring inflation you would need to earn an average of almost 15% a year to come out ahead. With inflation it would need to be near 22% to come out ahead.

The bottom line, an I/O loan should NOT be used as a means to free up spendable cash to invest. You will always fall behind. An I/O loan is right for someone who will be coming into a large chunk of money down the line (whether from the sale of a property or an inheritance, etc..) So they can pay off a substantial amount of the principal balance and refinance at that point.

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