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Subject:  Re: Which "bonds" for retirement accou Date:  9/23/2007  11:13 AM
Author:  WendyBG Number:  21702 of 36686

<does it make sense to keep the 40% in an intermediate bond index fund, or would it be better to have some or all of the 40% in a short-term bond index fund or a money-market fund? If so, what proportion should be in (a) a money market fund, (b) a short-term bond index fund, and (c) an intermediate-term bond index fund?>

The Federal Reserve has just cut the fed funds and discount rates by 0.5%. It's possible (indeed, probable) that the deep-seated problems in the debt market will continue. There may be further cuts.

The last time the Fed did an extended rate-cutting campaign, in 2001-2004, the interest rates on short-term and money market funds dropped with them. Rates were cut until the real rate was negative (lower than inflation).

If your only choice is a fund, the intermediate fund would be better. Its net asset value (NAV) will rise, as the rates are cut.

A better alternative would be a ladder of medium-to-long term bonds and CDs. Since you will need the money starting in 5 years, you might want to start with 5 year bonds, and extend from there.

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