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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35351  
Subject: Re: BONDS VS MONEY MARKETS Date: 2/16/2000 12:51 PM
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Much depends on how much cash you have in your self directed IRA brokerage account. If the amounts are small, money market yields may be as good as you can do. If large, then you have more options.

The good thing about money markets is most of the time your risk of losing principal is minimal. You can always get your money back. However, yields tend to be low as you point out.

Next step up from money markets are fixed maturity investments. CDs and bonds are of this type. I don't understand your calculation of 5.50% and 7.5%. If the 7.5% is the taxable equivalent of the 5.50% money market considering the tax deferred nature of IRAs, that doesn't matter. You should be seeking higher yield.

Investment grade corporate bonds can be had with yields better than 8% these days. By choosing intermediate term bonds, you get pretty good yield and don't take much exposure to interest rate increases. Usually these are $5K minimum, preferably $25K if you think you may want to sell them before maturity and still more if you need diversification. Ie, is liquidity a concern to you?

If your $$ to invest is smaller than that, then CDs become attractive. Their yields are usually somewhat lower but still better than money markets. Most brokerage firms will allow you to purchase CDs for your IRA account. Again because they have a fixed maturity, CDs reduce your exposure to capital losses if interest rates rise some more.

I presume the FNMA you mention is a mutual fund. The problem with these as well as bond mutual funds and preferred stocks is that they lack a fixed maturity. This means that if interest rates rise, you will lose principal. They are fine when interest rates are steady or falling, but not a good choice when interest rates are rising.

As marcbank pointed out, stocks are really your best opportunity to keep up with inflation in the long term. So Fools would urge you to put at least a portion of your funds in stocks. An S&P Index fund is a good place to begin, but Fooldom has numerous other stock recommendations like Foolish Four. For more on this aspect, start with Fool School from the fool.com home page.

Best of luck to you. Ask again if any of this needs clarification.
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