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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35365  
Subject: Re: short term savings strategy Date: 4/13/2008 9:15 AM
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Then, if I need that short term money, I can sell my shares and cash out the needed funds. I ran a few screens of funds that are no-load, no transaction fee funds, so no money would be wasted in commissions. A number of funds came out- I'm looking at those with a positive 1, 3 and 5 year track record with yields exceeding 3%.

Is this a solid strategy? Or am I researching in the wrong direction. I'm OK with some increased risk for this money, but not wild volatility, and I'm not sure if putting this in a taxable account makes sense, but this isn't retirement or long term money.


Screening bond funds for past returns is even more of a no-no than screening stock funds for past returns. Bond fund returns are based on changes in interest rate and, for some, taking higher risks that may have paid off but probably won't now.

If you do want to take on more risk in the hope of getting a somewhat higher return for cash (usually a very bad idea—if you don't need the money short term, do something for the long term) you need to understand the principles not rely on screening funds for past returns.

You basically would be looking for bonds that are of higher risk than Treasuries or high grade corporates (what a standard money market would use). Of course, those who pursued higher money market returns for what were sold as "safe" bonds with higher yields (a.k.a., disguised mortgage junk) are now suffering big time.

You can buy individual short term low investment grade or junk bonds are get a higher yield. There are funds that invest in these type bonds. Buying several of these will cost a lot in commissions, as will selling them, so if you want diversification, unless you have a bundle of money, you would need to go with a fund, with the added interest rate risk concern funds have that can be avoided with individual bonds.

You could go with a short term corporate fund and hope interest rates stay low for a while and there isn't a lot more default risk fear to drive down corporate bond prices. Vanguard's has a yield of a little over 4%. You want better than that, you need to go for junk.

A simple alternative is to ask yourself how much extra money you are hoping to generate by and increased yield. 2% on $50,000 for a year is $1000. Most people with that kind of money in liquid savings can easily save $1000 in living expenses without any meaningful impact on lifestyle. My usual advice to people who are trying to take on more risk is to consider whether effort is better spend cutting expenses than in trying to increase returns.
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