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I have a question regarding a fairly safe investment for funds which I will need within the next 3-5 years. I started saving for a remodel project about 6 months ago with $5k initially, and now plan to add about $500 per month. My goal is to preserve the principal, but earn enough return to guard against inflation.

Initially, I opened a Vanguard account with the beginning invested in VIPSX (Vanguard inflation-protected securities). I anticipated the account may yield between 2-3%, but to my surprise it's yielded around 8-10% (haven't figure exactly because the account actually started at $8k, then I withdrew $3k 3 mos. later, now its worth about $5.4.)

My plan was to keep adding the $500 or so per month into that account. However, I've been hearing about this "treasury bubble" and now wonder if I should be diversifying in bonds a bit.

I read through the FAQs on this board - they were GREAT! Thank you so much "Loki?" for posting them. From all that reading, it seems as though I am relatively safe from catastrophe investing in bond funds - as yields go up, the NAV goes down, BUT yield and NAV seem will probably compensate enough to at least preserve principal. I am sure this is over-simplifying, but I don't want to do Master's-level research on this sum of money.

OK, my questions (thanks for reading if you are this far):

1) Would it make sense to use VIPSX and VFSTX (short-term bond fund) to adequately protect principal and protect against interst for the short-term (3-5 years)?
2) Is there a better plan? I looked at CD rates, but ~1% yields don't guard against inflation IMHO.
3) Is it possible that there is a bubble in bonds that would cause my principal to deteriorate, specifically I worry about that when my supposedly safe and boring investment into VIPSX has yielded 2-3 times what I would expect for a slightly riskier savings accounts.

Any thoughts, questions, or suggested links for more info would be greatly appreciated.


John (cheezyches)
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