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Subject:  Re: Is my analysis flawed? Date:  9/25/2001  4:35 PM
Author:  ortman Number:  2106 of 36693

I've put $10k in VBMFX. My reasoning? :-

Although the NAV of the index fluctuates it only appears to do so within a few percent (I think the difference between the highest and lowest in 5 years is around 12% and over 10 years is <20%). Ignoring capital movement the yield seems to be 6%-7% which is 2%-4% better than I can get at the bank or money market. As I intend to leave the money as a permanent emergency fund (until I retire in 20 years) it would seem after 3 or 4 years the extra yield will have compensated for any future capital risk (and that includes me buying at the top of the market). I can get immediate access to short term use of part of the fund and replace it as needed.

As you noticed, the NAV is likely to fluctuate with interest rates. The last 18 months have tacked on around 10% to the NAV. Similar movement the other way would have the opposite effect. If the NAV dropped, and you needed the money for a legitemate emergency, you might face having to liquidate the fund at a loss. While it's intended that the emergency fund will be permanent, it doesn't always work out that way.

When I setup the emergency fund, I looked at VCITX and I-Bonds.

Given that I inteneded the fund to be as permanent as possible, I didn't want to pay income taxes on the interest every year. So, you may want to consider a bond fun like VCITX. Depending on your tax rate, the effective yield may be higher then the same in VBMFX.

However, investing in a muni bond fund still has the issue of a fluctuating NAV. So I purchased I-Bonds. Good rate of return, deferred taxation, safe, and they're easy to cash. They are my personal favorite vehicle for "emergency" savings.

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