Suggestions for mid term savings/investments?

I know the majority of the discussion in this group is about short term (emergency savings) or long term (retirement) investing. Are there any recommendations for investing on a mid term horizon, maybe 3
to 5 years? My wife and I both contribute well over matching to our 401ks. We've maxed out our roth for 2008. We have 40k which is our emergency/home improvement/car fund in a high interest savings account earning 4%.
After reading a few of Jim's posts, I started to wonder if I should consider moving a portion of that money into a moderate mutual fund of some type. Something that is relatively low volatility while still being worthwhile by beating my 4% rate. The added benefit is it still being liquid so that I could tap it "just in case". Would this be a viable strategy? If so, are there any funds that I should take a look at? I know that Jim was using PRPFX. Also, since the investment would be held in a non-retirement account, I assume there are some tax implications in play?
While I understand cds and savings accounts are safe investments, I feel like I might be leaving some money on the table. I like the idea of keeping enough for my actual emergency fund in the safe online investment while having the opportunity to earn a little bit more than the standard short term instruments. Your advice is appreciated.
Josh
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On May 9, 4:04 pm, snipped-for-privacy@gmail.com wrote:

Utility stocks or funds that specialize in them would probably have a lower risk of severe loss, but still have a reasonable return. Oil and gas pipeline stocks would also fall in that category.
-- Ron
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OP said 3-5 year time horizon.... I don't think equities, especially individual stocks, are an appropriate investment for that short of a period.
I suggest the OP look at muni bond funds, which are an exceptionally good deal right now. VMATX is currently yielding 4.19%; since that's exempt from both federal (28%) and state (5.3%) tax for me, that's equivalent to a 6.28% taxable yield.
-Sandra the cynic
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Thanks for the insight. Since I live in PA, I suppose I should look at something that would avoid state income tax. What's your thoughts on VPAIX? Also, these funds that we are discussing right now are not subject to AMT, correct?
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snipped-for-privacy@gmail.com writes:

Well, if I lived in PA, I'd have my bond allocation in VPAIX instead of VMATX. :-)
Re AMT, see Vanguard's web site:
https://personal.vanguard.com/us/planningeducation/taxcenter/PEdTaxAMTInfoContent.jsp
"Most Vanguard municipal bond fund managers sought to limit their funds' investment in private-activity bonds in 2006 and 2007. However, the funds are not, and likely will not, be completely AMT-free. By prospectus, Vanguard municipal funds may invest up to 20% of assets in private-activity bonds."
I know there are national muni bond funds that are AMT-free by prospectus but it may be harder to find one specific to a given state. The Vanguard funds have the advantage of very low fees, at least.
-Sandra the cynic
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This is a good suggestion. But we don't know the original poster's marginal rate. Assuming he pays enough taxes to benefit from the tax exemption, another investment that's more aggressive than cash but less so than equities is a closed end munibond fund. I own BYM, which yields more than five percent at its current price. Beware, however, that most closed end funds use leverage and that adds volatility that you don't get with an unleveraged, open-end munibond fund.
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Combined income for 2007 was 105k. Taxable income was 83k.
Thanks
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On May 9, 4:04 pm, snipped-for-privacy@gmail.com wrote:

Based on your posts, I would not consider most of your $40k to be "midterm". You could need the "emergency" fund tomorrow, right? Is it the same story for the "car" fund? Is there a risk that your transmission could go out 6 months from now and cost $1500? Are you under warranty for the next 5 years? It sounds like the only part of your fund that is truly "midterm" MIGHT be the home improvement portion.
I'm all for making my dollars work as hard as possible, but remember that emergency funds aren't about the highest return but rather the lowest volatility. Admittedly, I don't know the specifics of your situation, but I suggest you move no more than the amount you are POSITIVE you will not need in the near future. IMO, squeezing out an extra 1 or 2 percent just isn't worth the potential principal loss.
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Thanks, my intent was not to move the entire 40k. That's why in my initial post I said "consider moving a portion" of the 40k, perhaps 5-10k. Also when I mentioned car fund, I meant purchasing another car in the future which I do not anticipate for several years. Both of my vehicles right now are relatively new with one of them still under warranty. I agree with your assessment that it would be foolish to move a large majority of my "emergency fund" into a volatile investment. My thinking here though is I can afford to take some risk on a portion of those funds for the increased return. The fact that the entire 40k is sitting in a savings account is really because of convenience, not because I felt a need for 40k in an "emergency fund". But I'm open to the opinions of the group. Maybe I shouldn't try to get too greedy and just leave it all in the safe investment?
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Well, 1% of $10k is $100. I can't say that $100 is worth it to you to accept some greater risk (risk that you'll lose money just when you can ill afford it), but it wouldn't be to me.
Elizabeth Richardson
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On May 9, 2:04 pm, snipped-for-privacy@gmail.com wrote:

If you are certain you won't need the money for 5 years, you can look at buying I-bonds. The rate right now is not that great, but is probably better than CDs. As an added bonus the interest may be tax-deferred until the bonds are cashed and is not subject to state income tax. Also, there are some cases where the interest can be completely tax-free if the bonds are used for education and the AGI is within certain set limits for the year in which they are redeemed.

I don't think you're leaving money on the table. You are leaving the potential for greater reward along with the accompanying risk. There is nothing wrong with sitting in safe investments for money that you might need 5 years down the road if that is what helps you sleep better at night.
Anoop
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Only because inflation has kicked up for the moment.
US Treasury Series I bonds are paying the lowest fixed-rate since they were introduced. Since the first of this month, the fixed rate portion of I-bond interest is now ZERO percent.
The current overall earnings rate is an annualized 4.84% - a combination of the ZERO fixed rate and the inflation rate as measured by the CPI-U.
Six months from now, that inflation portion may go down, but any I bonds purchased now will keep their zero fixed rate.
By comparison, when they were first introduced, the fixed portion started at about 3%. Folks who bought them anytime from '98 to 2000 are earning as much as 8+% now, given the currently high inflation and fixed rate portions of 3.3 to 3.6%.
I'm not sure I'd want to lock in that zero percent fixed rate, even with the (temporary) nominal 4.84% rate. If one does want that inflation protection, it may be worth putting the I-bonds off until November (or later) when (hopefully) the gov't will give a more generous fixed rate. In the meantime, the money may be parked in 6-month CDs or in funds invested in short-term bonds.
Here's the info on historical rates on the I-bonds: <http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm
In fact, in general, in response to the OP's original question, a short or short-mid term investment grade bond fund might be just what he's looking for anyway.
By way of example, the Vanguard short-term investment grade bond fund is currently yielding 4.87%, is rated 5 stars by MStar, and hasn't had a negative year in at least 10 years, has only had two negative quarters in that time, and has had a 10 year annualized total return of nearly 5%. (in '94, it actually had a total return of -0.08%, the only down year since it started, and that was sandwiched between two years of +12.74% and +7.07%). That fund is VFSTX.
For a taxable account, there are very similarly good short to mid term muni bond fund worth looking at, too, especially for folks in high tax brackets and in high tax states.
These will all likely do better than CDs or I bonds, at least over periods of more than a couple of years, with vastly less risk than even the most conservative equity funds.
If anyone out there was lucky/smart enough to load up on I-bonds in 98-00, hang on to those! I bought some and wish I'd bought a lot more. Of course, it was very hard to convince people to buy such conservative things during that particular period of time, give what was happening in certain very well advertised parts of the stock market...
--
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snipped-for-privacy@fractious.net writes:

Of course, one can't really "load up" on savings bonds any more, even if the rates were favorable, now that the annual purchase limit was reduced from $30K to $5K.
-- Rich Carreiro snipped-for-privacy@rlcarr.com
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I assume that a fund like VFSTX would be exempt from federal tax but not state tax (PA tax is 3.07%)?
It seems to me that the general consensus says that it is not worth it to try to squeeze an additional 1-2% at the risk of principal loss. For the sake of argument, at what point is it worth it? Maybe it never is? If one had 100k in liquid savings, would the risk be warranted to invest the "non-emergency" portion of those savings in an effort beat the normal CD/savings return by using a bond fund or similar? Obviously there is a price to be paid for liquidity, and a true emergency should be kept in a low risk, liquid savings account. There is also a risk in trying to increase yield. But, is there not a risk in failing to capitalize on your non-emergency cash flow? For example, if inflation is at 4%, and one invests non-emergency cash in a CD or savings account that is earning around the same minus taxes, that person is losing money, no? I suppose the answer to this would be to invest in long term instruments like 401ks, IRAs, etc. However, maybe the point of this cash is for a rainy day type fund that isn't necessarily emergency but not retirement either. I suppose the cost to benefit ratio really isn't in favor of a mid term investment of this type, and probably accounts for the fact that many people only view investments in terms of short term emergency savings and retirement.
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snipped-for-privacy@gmail.com writes:

No, it's the other way around: US government bonds are exempt from state tax, but you still have to pay the feds. (A national short muni bond fund would be exempt from federal tax but you'd still pay state tax.)

I think a large part of it is how much you have in the way of other assets. If your $25K emergency fund is all you have, you probably don't want to take any chances with it. If you have $250K in your taxable investment account and your mortgage is paid off, losing perhaps a few hundred dollars of pricipal if you have to tap into your bond fund in an emergency seems like not such a big deal. If you're a multimillionaire, you may figure, why take risks at all? and swing back to keeping all your money in only the safest of investments.
-Sandra the cynic
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snipped-for-privacy@gmail.com writes:
[Vanguad Short-Term Investment Grade Bond fund]

Nope. It's all (almost all) corporate debt - bond issued by companies, not governments, and thereby the income is taxable at both federal and state levels at your regular marginal income tax rate.
Vanguard does have a short-term bond index fund which is about half corporate and half government debt - some (but not all) of that one's income would be exempt from state income taxes.
In both cases, cap gains are taxable regardless.

At the point where you can say "well, I didn't really need all that money that soon anyway, and can live with some short- to mid- term losses along the way".
Suppose you had a "buy a new car fund" and you planned on buying some particular car in 5 years. Unless you can either live with waiting a few more years, or accepting the possibility that you'll have to get a less expensive car, you need to invest that money more conservatively. If you're willing to risk the Hyundai for the chance that you'll get a Lexus instead of guaranteeing yourself a Honda, it may be worth taking your chances. Only you can decide.
--
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This depends on the person.
My logic is how many intermediate term financial issues does one fund each month. Intermediate term being any period which is less than 15 years.
Think of all the expenses you occur once every 15 years:
1) 1-2 cars (estimate $4000/year??) 2) house repairs (estimate $1000-$5000/year??)- roof, HVAC, driveway, landscaping, additions, remodels... 3) college education for kids ($60,000) 4) wedding for daughter ($20,000) 5) large family vacation ($20,000) 6) whatever else for personal needs
My premise was if I funded only 1-2 of these per year, it would take forever to get the cash needed for some of the larger items. But if I created a "general fund" and budgeted that, the big things which occur less often (cars, wedding, college) would clearly be a bigger chunk of the general fund than the house repairs. If all money is in same spot, and investment is relatively moderate in risk, the biggest risk is the 2-4 years it takes to START this. Once started, this general fund should have enough to a) compound and get the big items with less cash put up by me b) have a place in budget for smaller expenses- just stop the deposits the month the house needs repair, or the year the landscaping gets done (and pay cash for it).
All this money has same time horizon (more or less). The difference is the magnitude of the amounts needed to fund the goal.
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On May 12, 4:15 am, snipped-for-privacy@gmail.com wrote:

I feel that it can worth it to increase your risk to get a higher yield. But, the odds should be in your favor.

If you only need $80,000 for emergencies, then you can put $20,000 in whatever investment vehicle you want.
Or, you can invest the $100,000 in an investment vehicle that is extremely unlikely to go below $80,000.

Your emergency fund only needs to be in liquid investments as long as the risk is limited.

Yes to your comments. And, people should be able to tolerate more risk as they become wealthier.
Financial planners are first going to examine the needs of clients that can't tolerate risk because a tragic investment can ruin a person's life.
-- Ron
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On May 9, 5:04 pm, snipped-for-privacy@gmail.com wrote:

If I knew I needed money in 3-5 years, I would be mostly cash for that need within 2 years. A formula to think about, for every 1 year the money is invested, you can be 10% equities. So if you need money in 5 years, a 50-50 stock/bond split makes sense. 3 years is 30-70 stocks/ bonds, 10 years could be 100% equites, 0 years should be 100% cash or bonds.
The key to this is sell 10% of equity position each year as the time horizon reduces.
Here is the logic I use for my budget: 1) I have 3 months expenses in CDs (90 day CDs). 2) I have a months expenses in my checking accounts at any time (so April 1 paycheck is paying bills for May 1). 3) Any deposit to an IRA is done around the 23rd of the month- so the money is in the account most of the month if needed for an emergency. This is close to 1/2 of months expenses.
I have extra money to save/invest each month/year (from a second job). I also budget for large, non recurring expenses (like new HVAC, new hot water heater, new car, kids education) even though those expenses might only occur once every 10-15 years. There are two issues with this: 1) I do not know when those expenses will occur in some respects. 2) If I did not budget for them, it might be a tough year if 3 of those things occured within any 15 month period. Liquidity is important, but not at expense (to me) of waiting for the expenses to happen. Maybe time teaches me a lesson, my intent is to include these large expenses in the budget so when they occur I have the money.
So each month I have around $150 I can contribute to these bills (and it will increase once my current cars are paid off). I could put this $1800 each year into cash, pay down the mortgage or do something else with the $1800, but then if I look at the returns over a 5-10-15 year period I would have probably lost purchasing power or reduced my liquidity.
So I choose to invest in PRPFX in a taxable account. I can tap this if I need to. It does fluctuate 1% per day sometimes, but overall that fund is better than cash, and more stable than most stock/bond portfolios (year over year).
If I knew I needed a new hot water heater, cost might be $2000 or $700. Not sure. I budgeted $2000 every 15 years (so $2000/[15*12]$11/month). I would stop the $150 deposits and try to pay cash if I saw the expense coming. If it was a new HVAC, might be $5000 every 20 years ($5000/240=$21/month). Again if I saw expense coming, I would stop the deposits and raise cash.
In addition if these expenses do not occur, I am also using same account for kids education funds. So my kids might be able to get more for school if these random expenses do not occur as scheduled.
Then at right time I would sell shares of PRPFX to replenish the cash. Maybe not reinvest dividends for a year or two and use that to replenish in addition to skipping deposits.
I want 1) flexibility 2) low taxes on investment 3) liquidity
If I had to think of 3 funds which fit the category, I would look at PRPFX, RPSIX or Vanguard Wellesley (not sure of ticker) as a stable/ moderate risk fund for expenses with a time horizon of longer than 7 years.
The tax consequences of the last two are much worse than PRPFX though.
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