200K 10-Year Investment Safest 5% Annual Return?
I don't think there exists a guaranteed 5% investment vehicle. You have to decide how much risk you're willing to take. Splitting your $200k between CD's and stocks (or whatever higher yield investment vehicle you've found) is a way to get a higher rate without risking it all. For example if you've got a CD at 3%, and let's say best case is 10% average annual return on stocks, after 10 years here are potential results using various splits from 100% CD to 100% stock:   The best case based on 10% average stock return and 3% CD return is the Total line for each split, the worst-case would be the CD amount only. Reality could be almost anywhere, but not below the CD amount. "Invest in a high quality dividend paying group of stocks.  Look up ""stock  aristocrats"" to find longterm quality stocks that have regularly increased their dividends for over 20'years. 10'years is a safe period of time to invest in stocks.  If you had bought stocks at their hight in 2007 and kept them through the 40% decline thru 2008 and 2009 and held on to them for 10 years until 2017, you would have earned a 40 % increase from when you purchased them.  That is pretty much a worst case scenerio.  If you had invested in dividend paying stocks and had earned an additional 2.5% per year, you would have exceeded your 5% goal. The lifetime yearly return of the stock market is 10%.  Time is the only downside, but with ten years, you are almost certainly immune."
You’ve really got three or four questions going here… and it’s clear that a gap in understanding one component of how bonds work (pricing) is having a ripple effect across the other facets of your question. The reality is that everybody’s answers so far touch on various pieces of your general question, but maybe I can help by integrating. So, let’s start by nailing down what your actual questions are:  1. Why do mortgage rates (tend to) increase when the published treasury bond rate increases? I’m going to come back to this, because it requires a lot of building blocks. 2. What’s the math behind a bond yield increasing (price falling?)  This gets complicated, fast. Especially when you start talking about selling the bond in the middle of its time period. Many people that trade in bonds use financial calculators, Excel, or pre-calculated tables to simplify or even just approximate the value of a bond. But here’s a simple example that shows the math.  Let’s say we’ve got a bond that is issued by… Dell for $10,000. The company will pay it back in 5 years, and it is offering an 8% rate. Interest payments will only be paid annually. Remember that the amount Dell has promised to pay in interest is fixed for the life of the bond, and is called the ‘coupon’ rate. We can think about the way the payouts will be paid in the following table:   As I’m sure you know, the value of a bond (its yield) comes from two sources: the interest payments, and the return of the principal. But, if you as an investor paid $14,000 for this bond, you would usually be wrong. You need to ‘discount’ those amounts to take into account the ‘time value of money’. This is why when you are dealing in bonds it is important to know the ‘coupon rate’ (what is Dell paying each period?). But it is also important to know your sellers’/buyers’ own personal discount rates. This will vary from person to person and institution to institution, but it is what actually sets the PRICE you would buy this bond for.  There are three general cases for the discount rate (or the MARKET rate). First, where the market rate == the coupon rate. This is known as “par” in bond parlance. Second, where the market rate < the coupon rate. This is known as “premium” in bond parlance. Third, where the market rate > coupon rate. This is known as a ‘discount’ bond.  But before we get into those in too much depth, how does discounting work? The idea behind discounting is that you need to account for the idea that a dollar today is not worth the same as a dollar tomorrow. (It’s usually worth ‘more’ tomorrow.) You discount a lump sum, like the return of the principal, differently than you do a series of equal cash flows, like the stream of $800 interest payments. The formula for discounting a lump sum is:  Present Value=Future Value* (1/(1+interest rate))^((# of periods)) The formula for discounting a stream of equal payments is:  Present Value=(Single Payment)* (〖1-(1+i)〗^((-n))/i) (i = interest rate and n = number of periods) **cite investopedia So let’s look at how this would look in pricing the pretend Dell bond as a par bond. First, we discount the return of the $10,000 principal as (10,000 * (1 / 1.08)^5). That equals $6,807.82.  Next we discount the 5 equal payments of $800 as (800* (3.9902)). I just plugged and chugged but you can do that yourself. That equals $3,192.18. You may get slightly different numbers with rounding.  So you add the two together, and it says that you would be willing to pay ($6,807.82 + $3,192.18) = $10,000. Surprise! When the bond is a par bond you’re basically being compensated for the time value of money with the interest payments. You purchase the bond at the ‘face value’, which is the principal that will be returned at the end.  If you worked through the math for a 6% discount rate on an 8% coupon bond, you would see that it’s “premium”, because you would pay more than the principal that is returned to obtain the bond [10,842.87 vs 10,000]. Similarly, if you work through the math for a 10% discount rate on an 8% coupon bond, it’s a ‘discount’ bond because you will pay less than the principal that is returned for the bond [9,241.84 vs 10,000].  It’s easy to see how an investor could hold our imaginary Dell bond for one year, collect the first interest payment, and then sell the bond on to another investor. The mechanics of the calculations are the same, except that one less interest payment is available, and the principal will be returned one year sooner… so N=4 in both formulae.  Still with me? Now that we’re on the same page about how a bond is priced, we can talk about “Yield To Maturity”, which is at the heart of your main question.  Bond “yields” like the ones you can access on CNBC or Yahoo!Finance or wherever you may be looking are actually taking the reverse approach to this. In these cases the prices are ‘fixed’ in that the sellers have listed the bonds for sale, and specified the price. Since the coupon values are fixed already by whatever organization issued the bond, the rate of return can be imputed from those values.  To do that, you just do a bit of algebra and swap “present value” and “future value” in our two equations.  Let’s say that Dell has gone private, had an awesome year, and figured out how to make robot unicorns that do wonderful things for all mankind. You decide that now would be a great time to sell your bond after holding it for one year… and collecting that $800 interest payment. You think you’d like to sell it for $10,500. (Since the principal return is fixed (+10,000); the number of periods is fixed (4); and the interest payments are fixed ($800); but you’ve changed the price... something else has to adjust and that is the discount rate.) It’s kind of tricky to actually use those equations to solve for this by hand… you end up with two equations… one unknown, and set them equal. So, the easiest way to solve for this rate is actually in Excel, using the function =RATE(NPER, PMT, PV, FV). NPER = 4, PMT = 800, PV=-10500, and FV=10000. Hint to make sure that you catch the minus sign in front of the present value… buyer pays now for the positive return of 10,000 in the future.  That shows 6.54% as the effective discount rate (or rate of return) for the investor. That is the same thing as the yield to maturity. It specifies the return that a bond investor would see if he or she purchased the bond today and held it to maturity.  3. What factors (in terms of supply and demand) drive changes in the bond market? I hope it’s clear now how the tradeoff works between yields going UP when prices go DOWN, and vice versa. It happens because the COUPON rate, the number of periods, and the return of principal for a bond are fixed. So when someone sells a bond in the middle of its term, the only things that can change are the price and corresponding yield/discount rate.  Other commenters… including you… have touched on some of the reasons why the prices go up and down. Generally speaking, it’s because of the basics of supply and demand… higher level of bonds for sale to be purchased by same level of demand will mean prices go down. But it’s not ‘just because interest rates are going up and down’. It has a lot more to do with the expectations for 1) risk, 2) return and 3) future inflation. Sometimes it is action by the Fed, as Joe Taxpayer has pointed out. If they sell a lot of bonds, then the basics of higher supply for a set level of demand imply that the prices should go down. Prices going down on a bond imply that yields will go up. (I really hope that’s clear by now). This is a common monetary lever that the government uses to ‘remove money’ from the system, in that they receive payments from an investor up front when the investor buys the bond from the Fed, and then the Fed gradually return that cash back into the system over time.  Sometimes it is due to uncertainty about the future. If investors at large believe that inflation is coming, then bonds become a less attractive investment, as the dollars received for future payments will be less valuable. This could lead to a sell-off in the bond markets, because investors want to cash out their bonds and transfer that capital to something that will preserve their value under inflation. Here again an increase in supply of bonds for sale will lead to decreased prices and higher yields.  At the end of the day it is really hard to predict exactly which direction bond markets will be moving, and more importantly WHY. If you figure it out, move to New York or Chicago or London and work as a trader in the bond markets. You’ll make a killing, and if you’d like I will be glad to drive your cars for you.  4. How does the availability of money supply for banks drive changes in other lending rates?  When any investment organization forms, it builds its portfolio to try to deliver a set return at the lowest risk possible. As a corollary to that, it tries to deliver the maximum return possible for a given level of risk.  When we’re talking about a bank, DumbCoder’s answer is dead on. Banks have various options to choose from, and a 10-year T-bond is broadly seen as one of the least risky investments. Thus, it is a benchmark for other investments.  5. So… now, why do mortgage rates tend to increase when the published treasury bond yield rate increases? The traditional, residential 30-year mortgage is VERY similar to a bond investment. There is a long-term investment horizon, with fixed cash payments over the term of the note. But the principal is returned incrementally during the life of the loan.  So, since mortgages are ‘more risky’ than the 10-year treasury bond, they will carry a certain premium that is tied to how much more risky an individual is as a borrower than the US government.  And here it is… no one actually directly changes the interest rate on 10-year treasuries. Not even the Fed. The Fed sets a price constraint that it will sell bonds at during its periodic auctions. Buyers bid for those, and the resulting prices imply the yield rate. If the yield rate for current 10-year bonds increases, then banks take it as a sign that everyone in the investment community sees some sign of increased risk in the future. This might be from inflation. This might be from uncertain economic performance. But whatever it is, they operate with some rule of thumb that their 30-year mortgage rate for excellent credit borrowers will be the 10-year plus 1.5% or something. And they publish their rates. "The key is to look at total return, that is dividend yields plus capital growth. Some stocks have yields of 5%-7%, and no growth. In that case, you get the dividends, and not a whole lot more. These are called dividend stocks. Other stocks pay no dividends. But if they can grow at 15%-20% a year or more, you're fine.These are called growth stocks. The safest way is to get a ""balanced"" combination of dividends and growth, say a yield of 3% growing at 8%-10% a year, for a total return of 11%-13%. meaning that you get the best of both worlds.These are called dividend growth stocks." "John Bensin's answer covers the math, but I like the plain-English examples of the theory from William Bernstein's fine book, The Intelligent Asset Allocator.  At the author's web site, you can find the complete chapter 1 and chapter 2, though not chapter 3, which is the one with the ""multiple coin toss"" portfolio example I want to highlight. I'll summarize Bernstein's multiple coin toss example here with some excerpts from the book.  (Another top user, @JoeTaxpayer, has also written about the coin flip on his blog, also mentioning Bernstein's book.) Bernstein begins Chapter 1 by describing an offer from a fictitious ""Uncle Fred"": Imagine that you work for your rich but eccentric Uncle Fred. [...] he   decides to let you in on the company pension plan. [...] you must pick   ahead of time one of two investment choices for the duration of your   employment: Certificates of deposit with a 3% annualized rate of return, or, A most peculiar option: At the end of each year Uncle Fred flips a coin. Heads you receive a 30% investment return for that year, tails a   minus 10% (loss) for the year. This will be hereafter referred to as   ""Uncle Fred’s coin toss,"" or simply, the ""coin toss."" In effect, choosing option 2 results in a higher expected return than option 1, but it is certainly riskier, having a high standard deviation and being especially prone to a series of bad tosses.  Chapters 1 and 2 continue to expand on the idea of risk, and take a look at various assets/markets over time.  Chapter 3 then begins by introducing the multiple coin toss example: Time passes. You have spent several more years in the employ of your   Uncle Fred, and have truly grown to dread the annual coin-toss   sessions. [...] He makes you another offer. At the end of each year,   he will divide your pension account into two equal parts and conduct a   separate coin toss for each half [...] there are four possible   outcomes [...]: [...]   Being handy with numbers, you calculate that your annualized return   for this two-coin-toss sequence is 9.08%, which is nearly a full   percentage point higher than your previous expected return of 8.17%   with only one coin toss. Even more amazingly, you realize that your   risk has been reduced — with the addition of two returns at the   mean of 10%, your calculated standard deviation is now only 14.14%, as   opposed to 20% for the single coin toss. [...] Dividing your portfolio between assets with uncorrelated results increases return while decreasing risk. [...]   If the second coin toss were perfectly inversely correlated   with the first and always gave the opposite result [hence, outcomes   1 and 4 above never occurring], then our return would always be 10%.   In this case, we would have a 10% annualized long-term return with zero risk! I hope that summarizes the example well.  Of course, in the real world, one of the tricks to building a good portfolio is finding assets that aren't well-correlated, and if you're interested in more on the subject I suggest you check out his books (including The Four Pillars of Investing) and read more about Modern Portfolio Theory (MPT)." "Thanks for your question. Definitely pay the car down as soon as possible (reasoning to follow). In fact, I would go even further and recommend the following: Why? 1) Make money risk free - the key here is RISK FREE. By paying down the loan now, you can avoid paying interest on the additional amount paid toward principal risk free. Imagine this scenario: if you walked into a bank and they said, ""If you give us $100, we'll give you $103 back today"", would you do it? That is exactly what you get to do by not paying interest on the remaining loan principal. 2) The spread you might make by investing is not as large as you may think. Let's assume that by investing, you can make a market return of 10%. However, these are future cash flows, so let's discount this for inflation to a ""real"" 8% return. Then let's assume that after fees and taxes this would be a 7% real after-tax return. You also have to remember that this money is at risk in the market and may not get this return in some years. Assuming that your friend's average tax rate on earned income is 25%, this means that he'd need to earn $400 pre-tax to pay the after-tax payment of $300. So this is a 4% risk-free return after tax compared to a 7% average after tax return from the market, but one where the return is at risk. The equivalent after-tax risk-free return from the market (think T-Bills) is much lower than 7%. You are also reducing risk by paying the car loan off first in a few other ways, which is a great way to increase peace of mind. First, since cars decline in value over time, you are minimizing the possibility that you will eventually end up ""under water"" on the loan, where the loan balance is greater than the value of the car. This also gives you more flexibility in terms of being able to sell the car at any point if desired. Additionally, if the car breaks down and must be replaced, you would not need to continue making payments on the old loan, of if your friend loses his job, he would own the car outright and would not need to make payments. Finally, ideally you would only be investing in the market when you intend to leave the money there for 5+ years. Otherwise, you might need to pull money out of the market at a bad time. Remember, annual market returns vary quite a bit, but over 5-10 year periods, they are much more stable. Unfortunately, most people don't keep cars 5-10+ years, so you are likely to need the money back for another car more frequently than this. If you are pulling money out of the market every 5-10 years, you are more likely to need to pull money out at a bad time. 3) Killing off the ""buy now, pay later"" mindset will result in long-term financial benefits. Stop paying interest on things that go down in value. Save up and buy them outright, and invest the extra money into things that generate income/dividends. This is a good long-term habit to have. People also tend to be more prudent when considering the total cost of a purchase rather than just the monthly payment because it ""feels"" like more money when you buy outright. As a gut check for whether this is a good idea, here is an example that Dave Ramsey likes to use: Suppose that your friend did not have the emergency fund, and also did not have the car loan and owned the car outright. In that case, would your friend take out a title  loan on the car in order to have an emergency fund? I think that a lot of people would say no, which may be a good indicator that it is wise to reduce the emergency fund in order to wipe out the debt, rather than maintaining both." This all depends on your timeline and net worth.  If you're short on time before you plan to start spending it or have a large net worth, parking some of your money in CDs is a good idea. If you have lots of time or not much net worth, then index funds are a better bet. Equity or dividend index funds are the way to go when you have 10+ years before you reach your goal. CDs major downside is that they don't beat inflation 1 - 3% a year. This is why you only use them when it's absolutely critical you hold onto every penny of the principal. The reason is because with CDs your 10k is actually losing its value (not the principal) the longer you leave it in CDs. I generally wouldn't recommend CDs unless you are in or approaching your 60s or have assets over 500k. Even still I would limit the use of CDs to no more than 20%. I would view them as catastrophic loss protection. You should definately have a stop loss in place to manage your risk. For a time frame of 5 to 10 years I would be looking at a trailing stop loss of 20% to 25% off the recent high.  Another type of stop you could use is a volatility stop. Here the more volatile the stock the larger the stop whilst the less volatile the stock the smaller the stop. You could use 3 or 4 x Weekly ATR (Average True Range) to achieve this. The reason you should always use a stop loss is because of what can happen and what did happen in 2008. Some stock markets have yet to fully recover from their peaks at the end of 2007, almost 9 years later. What would you do if you were planning to hold your positions for 5 years and then withdrawal your funds at the end of June 2021 for a particular purpose, and suddenly in February 2021 the market starts to fall. By the time June comes the market has fallen by over 50%, and you don't have enough funds available for the purpose you planned for. Instead if you were using a trailing stop loss you would manage to keep at least 75% of the peak of your portfolio. You could even spend 10 minutes each week to monitor your portfolio for warning signs that a downtrend may be around the corner and adjust your trailing stop to maybe 10% in these situations, protecting 90% of the peak of your portfolio. If the downtrend does not eventuate you can adjust your trailing back to a higher percentage. If you do get stopped out and shortly after the market recovers, then you can always buy back in or look for other stocks and ETFs to replace them. Sure you might lose a bit of profits if this happens, but it should always be part of your investment plan and risk management how you will handle these situation. If you are not using stop losses, risk management and money management you are essentially gambling. If you say I am going to buy these stocks and ETFs hold them for 10 years and then sell them, then you are just hoping to make gains - which is essentially gambling. Its best to dollar cost average adding say 5%-10% a quarter into the fund. That's what Clark Howard would suggest.  Also make sure you do not need the money for 5 years, then you should be okay.   Its tough to lose money if you keep your money there for a long period of time. "Welcome to Money.SE. Please forgive what might sound like a cliche, ""How well do you sleep at night?"" I mean, specific to the mortgage. There are those who are in a group who consider debt, at any rate, to be inherently bad, and would not take on a 2% mortgage even if a different bank were offering 4% CDs. You just need to understand the risk.  Your mortgage cost after taxes may be 2.625% (if you are in the 25% bracket) therefore, your break even is 3.09% for long term investments. The recent ""lost decade"" had a return of -9.5% for the full 10 year period. This is just about the worst decade in modern history. The average 10 year return is a cumulative 183% gain, with a standard deviation of 138%. If a perfect bell curve, this means that 1 10 year in 6 will give you a return under 45%. In fact, of the last 100 10 year periods, 15 had returns less than 45%, and just 8 were less than 30%, right in line with the bell curve stats. We always need to say ""past performance is no guarantee of future results,"" yet, when it comes to the market (I use the S&P for my numbers, by the way) we do have history to give us an idea of the kind of volatility we might see over the years. In my opinion, your approach is sound, and your returns very skewed to the positive, the median 10 year return being 138%, vs your cost of money of 40% or so for a decade.  It's pretty easy to pull S&P data into a spreadsheet and analyze as you wish."