need recommandation on short term investment

hi,

I've some ideling cash(about $10k to 15K) which I probably won't need to tab into in 2 or 3 years, right now it's sitting in a approx. 5.1%

6-month CD that renews automatically. is this the best I can do? Can soemone recommand some funds(bond funds, I guess)? thanks in advance.

PS, all my tax deferred accts have been maxed out already.

s o

Reply to
s o
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If you think you are probably going to need the money in 2-3 years for some particular purpose, it's probably best to leave it where it is. OTOH, if this is general savings you probably are *not* going to need anytime soon, a bond fund might be reasonable provided that you can deal with the risk of loss of principal. I say "might" because nowadays interest rates are in a funny cycle where bank savings accounts and CDs are paying as much as, or more than, bonds.

If this is in a taxable account, though, you may find that the best deal is to invest in a state-specific muni bond fund. It depends on your state taxes as well as your federal tax bracket. I personally have found that holding CDs in my E-Trade bank account doesn't pay because the interest has such lousy tax treatment in MA (taxed at 12% as opposed to 5.3% for every other kind of income, on top of the 28% federal tax). I have about $10K of "emergency fund" in a money market account, but I now keep my general savings and "cash" reserves in VMATX instead.

-Sandra

Reply to
Sandra Loosemore

VMATX has a YTD return of .26% (as of 5/31). So your warning about the holding period is well taken. It has a 'duration' of 5.54 years, which means that if rates notched up .10%, the fund would drop about .55% in value. With a current yield of 4.23%, it's nearly equal to a 7% taxable return.

JOE

Reply to
joetaxpayer

Take a look at Vanguard's Prime Money Market Fund

Lon

Reply to
Lon

Best you can do unless you want to take on more risk.

Reply to
PeterL

You can also sell a bond fund like VMATX at any time. What are the stipulations on the CD's? It is not uncommon to find premature withdrawal and/or interest penalites if not held to maturity. If this is the case for you also, a bond fund would eliminate that specific risk factor.

Reply to
kastnna

I think you might be mistaken. In MA, 5.3% applies to wages, interest, dividends and long-term capital gains. The 12% rate applies only to short-term cap-gains, and all cap-gains on collectibles.

MA's taxes used to be vastly more complicated (5 or 6 different cap-gains holding periods, plus higher income tax rates on interest from out-of-state banks, but that stuff's gone away).

See:

That all said, yes, the OP should certainly consider muni bond and/or muni money-market funds (and take into account which state and state income taxes as well as federal). By way of continuing example, Fidelity's Mass Muni MMF is currently yielding approx 3.3% while, their fully taxable "cash reserves" MMF is yielding just about 5%. An average taxpayer in the 25% federal bracket thus gets 3.75% on the taxable fund after federal taxes and after state taxes, it's down to roughly 3.5% - (ignoring potential deductibility of state taxes on federal return) - so 3.5% vs. 3.3% - for the

25% bracket taxpayer, it's too close to worry about. For the 28% taxpayer, the end result is almost precisely identical. It isn't until the 33% and 35% brackets where the muni fund is a clear win.

Now, whether a money-market fund is the right place in the first place is a different question, but given where CD yields are now (ie. as low - or lower! than money market rates), I don't know that there's any reason to lock the money up that way at the moment.

There's nothing wrong with cash (or money-market funds). Folks often feel a need to do something more exciting or interesting than that, but, especially given the current yields on cash, there's nothing whatsoever wrong with it.

(food for further thought: ETrade Complete Savings is currently paying 5.05%; ING Direct: 4.5%; HSBC Direct: 5.05%; etc etc.)

Reply to
BreadWithSpam

Hmmm, yes, I think you are right, and I was going on my memory of the way things used to be. :-P Well, I have no interest-bearing out-of-state bank accounts any more anyway; as I said, I've got my cash in a money market fund, and use my muni bond holding as a backup to that in case of some dire need for money.

-Sandra

Reply to
Sandra Loosemore

Risk tolerance applies even to this situation. A one year CD holder will still have a risk of needing the money sooner, and the usual penalty is

3 months' forfeited interest. this is easy to understand.

The concept of bond fund having a 'duration' yet no 'maturity' as compared to individual bonds is less understood. When I held "short term bond fund" as my cash position in my 401(k), I couldn't get the investment firm to give me the duration, only a vague description including the word 'safety'. Rates went up enough that year that the fund's return was exactly zero. This was long enough ago that the dollars were minimal, but I learned a lesson. Anyone looking to invest in a fund such as VMATX should understand what they are buying and how the value can fluctuate with rate movement. (kind of like how home buyers should have understood this for the ARMs they got into). Please don't misinterpret or read further into my remarks, the fund looks great for MASS residents, it's just not for 1 year money. (And Sandra didn't represent it as such).

JOE

Reply to
joetaxpayer

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