Investing Short Term
 

Let's say someone gave you 4 to 5 thousand dollars and told you to invest it anyway you wanted to, but that the investment period would be short term (2-3 years).

What would be the best way to invest that money to gain the most return?

Wire it to me before my trip to Vegas and I will photo document the entire weekend and post the pics in CP. Trust me it will be worth it. ;)

Perfect!

investment
 

"Gain the most return" is a bit nebulous.
It might be better to state what is the worst result you could swallow and then use that to define your level of risk.

Assuming you would not be happy with loss of capital in that time frame, for that short of time I would say buy a dividend-paying stock or a CD. If you want to take a bit more risk, I've always had good success with relatively low volatility in regional bank stocks. The interest rate environment at the moment is not real good for them but could improve by your 2-3 yr time frame. One I like is IBOC in Texas. Stay away from the housing bubble states where defaults may rise. Your mileage may vary.

I think people's biggest mistakes are not being aggressive enough with their investments.

It depends on what you need the money for in 2-3 years and how bad you'd feel if your 4K went to 3K compared to how happy you'd feel if your 4K went to 6K.

I'd open a brokerage account and put it all in one index mutual fund, that way you lose very little on transaction costs.

I would definitely not put all my money for a three year investment in one stock. That's just way too much unnecessary risk.

Actually, the biggest mistake I have made is being too aggressive with my investments. Oh, the money I have lost....

So what kind of index mutal fund exactly?

Mrs. tooblue is very interested in this thread and was even tempted to register to ask questions as she handles our money and we in fact have some money that currently is just sitting in a retirement savings account that we cannot touch but can invest.

I should qualify my statement.

Biggest mistake meaning too much money in fixed income (T-bills, bonds, etc.).

With age expectancy into the 80's and probably into the 90's for people of my age, even at retirement age, people are still on a long horizon.

The typical advice of a guy like me in my 30's putting 30% into fixed income is totally nuts, IMHO. Or someone in their 50's moving to 50%+ in fixed income--too conservative.

But once you determine your portfolio allocation, i.e. x% in fixed income, x% in stocks, x% in real estate, whatever, then you diversify to fullest extent to lower risk within your asset class and crosswise across other asset classes.

So when I say be aggressive, I mean put more money into stocks than bonds.

Buying one stock is order of magnitude more risky than buying an index fund (which I would call high risk). Leveraging a real estate purchase is order of magnitude more risky than buying one stock. And giving money to your brother-in-law as his financial partner for his business idea is order of magnitude more risky than the real estate purchase. This kind of aggressiveness is not what I'm talking about.

If you want more education on this kind of stuff, I'd read this forum.

http://www.diehards.org/

I'm a Bogle-head.

I think these guys are generally too conservative, but the principles of investing are correct. I think it's the way to go. And the people I respect in business academia go for this way of thinking.

I'd like to hear Pelagius' take on Bogle and indexing.