Several ideas for the stoozer in you.
In my previous blog post, I wrote about and introduced you to stoozing. A colloquial phrase (first coined in Great Britain) for an idea that is as old as borrowing money is. Ever since the first borrower borrowed money from the nearest lender, in hopes of paying it back in due course with interest and enough left over that he or she could earn a living, people have been stoozing in one form or another.
Major investment and banking houses engage in arbitrage in one form or another. Sir John Templeton was the first to introduce me to this concept when he was borrowing money from the anemic Japan banking houses at near zero interest rates and investing that money into US Treasuries. Pure genius.
Stoozing, however, is a more defined arbitrage position in which we borrow money from a credit card company, at an introductory rate of 0% and then invest it in an investment vehicle earning more than 0% so that we can earn money from our investment. This is also arbitrage in its purest form, hence the name, Average Joe Arbitrage.
We then return the borrowed money to the original lender at the end of our introductory period, and keep or profit from the interest earned. Simple right?
Let’s look at several scenarios and consider the possible outcomes. We will assume you have already gotten your credit card and credit card checks in the mail. Or, you have gone and done some manufactured spending and now are sitting on a stack of money orders worth about $5,000.00 that you need to deposit into an investment vehicle. You have this money free for one year, after which you must pay it back to avoid a crazy high interest rate. Let’s look at several scenarios:
Safest Scenario – You park your money into a passbook savings account at your local bank. These are the safest investment vehicles (they are insured thanks to the FDIC), however, they offer the lowest rate. Here are three such banks and the rates they offer as of this writing:
- Ally Bank, .085% APY
- Barclays Bank, .090% APY
- Community National Bank, 1.40% APY.
Your interest after one year, ranges from $4.25 to $69.99 on your $5,000.00. As you can see, the percentage rate variable will make all the difference in the world as to whether or not this is viable on a small scale.
Safe Scenario – Not happy with the safest venue, you opt for something with a little more risk. You go with CD’s, certificates of deposit. Still very safe, with just a mild splash of risk (the lending institution could go out of business):
- Ally Bank, 1.3% APY
- Sallie Mae, 1.4% APY
Your interest on you $5,000.00 would be in the neighborhood of $67.50 on $5,000.00.
Riskier Scenario – Okay, you decide you want to push the stoozing envelope. You decide to go with a riskier investment vehicle accepting and acknowledging the fact there is a degree of risk that you are willing to accept. You decide to park your money into a government bond fund. Governments are safe right? Here are several options-
- PIMCO Extended Duration Fund, -7.15% APY
- Vanguard Long Term Treasury Fund, – 5.05% APY
- T. Rowe Price U.S. Treasury Long Term Fund, -5.29% APY
“Hey, wait a minute Average Joe, those are all negative returns. I would have lost money here,” you think with confusion. Yes, that is right! With investment vehicles, whether it be passbook savings accounts, stock funds, or even bond funds, there is always a risk of losing your money. You have to understand that aspect of investing. This Average Joe has been burned a few times.
High Yield/High Risk Scenario – You, decide to go full on high risk stoozing. You are pushing the envelope; living life on the edge. Here are three potential high yield bond funds (read, high risk) accounts you could park your $5,000.00 into:
- T.Rowe Price High Yield, 14.25%
- TIAA-CREF High Yield, 15.24%
- Fidelity High Income Fund, 16.47%
Your yield, for one year would be in the neighborhood of $762.00. Before you factor in any expenses to the fund company. Not a bad yield! However, look at the difference between these yields and the long government yields. This demonstrates how you may think your investment is safe, may in fact not be safe, depending on micro and macro-economic conditions of the moment.
The point of this blog article is too make you think about the options and to way the risks. Stoozing is risky. There are pitfalls. And, there are rewards. But, if you do not understand yourself, your investment acumen, and your tolerance for risk, stoozing is an arbitrage best left for another Average Joe.
Now, the rates I have noted above are as of this blog date. I am sure as your read this article, those rates have adjusted; make sure you shop around and compare offerings before you do anything!
This is a multiple part blog:
Stoozing: The Greatest Arbitrage Opportunity Since Slice Bread, Part 1, is our introduction.
Stoozing: Growing Money from Nothing, Part 2, examines different scenarios.
If you have some stoozing experiences, I would like to hear from you!