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Guest
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 Posted: Mon May 12, 2008 10:05 pm Post subject: Re: Suggestions for mid term savings/investments? |
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jdbst56@gmail.com writes:
[Vanguad Short-Term Investment Grade Bond fund]
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of +12.74% and +7.07%). That fund is VFSTX.
I assume that a fund like VFSTX would be exempt from federal tax but
not state tax (PA tax is 3.07%)?
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Nope. It's all (almost all) corporate debt - bond issued by
companies, not governments, and thereby the income is taxable
at both federal and state levels at your regular marginal
income tax rate.
Vanguard does have a short-term bond index fund which is
about half corporate and half government debt - some (but not all)
of that one's income would be exempt from state income taxes.
In both cases, cap gains are taxable regardless.
| Quote: |
It seems to me that the general consensus says that it is not worth it
to try to squeeze an additional 1-2% at the risk of principal loss.
For the sake of argument, at what point is it worth it? Maybe it
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At the point where you can say "well, I didn't really need all
that money that soon anyway, and can live with some short- to mid-
term losses along the way".
Suppose you had a "buy a new car fund" and you planned on buying
some particular car in 5 years. Unless you can either live with
waiting a few more years, or accepting the possibility that you'll
have to get a less expensive car, you need to invest that money
more conservatively. If you're willing to risk the Hyundai for
the chance that you'll get a Lexus instead of guaranteeing
yourself a Honda, it may be worth taking your chances. Only
you can decide.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
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jIM
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| Posted: Mon May 12, 2008 10:18 pm Post subject: Re: Suggestions for mid term savings/investments? |
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On May 9, 5:04 pm, jdbs...@gmail.com wrote:
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I know the majority of the discussion in this group is about short
term (emergency savings) or long term (retirement) investing. Are
there any recommendations for investing on a mid term horizon, maybe 3
to 5 years? My wife and I both contribute well over matching to our
401ks. We've maxed out our roth for 2008. We have 40k which is our
emergency/home improvement/car fund in a high interest savings account
earning 4%.
After reading a few of Jim's posts, I started to wonder if I should
consider moving a portion of that money into a moderate mutual fund of
some type. Something that is relatively low volatility while still
being worthwhile by beating my 4% rate.
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If I knew I needed money in 3-5 years, I would be mostly cash for that
need within 2 years. A formula to think about, for every 1 year the
money is invested, you can be 10% equities. So if you need money in 5
years, a 50-50 stock/bond split makes sense. 3 years is 30-70 stocks/
bonds, 10 years could be 100% equites, 0 years should be 100% cash or
bonds.
The key to this is sell 10% of equity position each year as the time
horizon reduces.
Here is the logic I use for my budget:
1) I have 3 months expenses in CDs (90 day CDs).
2) I have a months expenses in my checking accounts at any time (so
April 1 paycheck is paying bills for May 1).
3) Any deposit to an IRA is done around the 23rd of the month- so the
money is in the account most of the month if needed for an emergency.
This is close to 1/2 of months expenses.
I have extra money to save/invest each month/year (from a second
job). I also budget for large, non recurring expenses (like new HVAC,
new hot water heater, new car, kids education) even though those
expenses might only occur once every 10-15 years. There are two
issues with this:
1) I do not know when those expenses will occur in some respects.
2) If I did not budget for them, it might be a tough year if 3 of
those things occured within any 15 month period. Liquidity is
important, but not at expense (to me) of waiting for the expenses to
happen. Maybe time teaches me a lesson, my intent is to include these
large expenses in the budget so when they occur I have the money.
So each month I have around $150 I can contribute to these bills (and
it will increase once my current cars are paid off). I could put this
$1800 each year into cash, pay down the mortgage or do something else
with the $1800, but then if I look at the returns over a 5-10-15 year
period I would have probably lost purchasing power or reduced my
liquidity.
So I choose to invest in PRPFX in a taxable account. I can tap this
if I need to. It does fluctuate 1% per day sometimes, but overall
that fund is better than cash, and more stable than most stock/bond
portfolios (year over year).
If I knew I needed a new hot water heater, cost might be $2000 or
$700. Not sure. I budgeted $2000 every 15 years (so $2000/[15*12]=
$11/month). I would stop the $150 deposits and try to pay cash if I
saw the expense coming. If it was a new HVAC, might be $5000 every 20
years ($5000/240=$21/month). Again if I saw expense coming, I would
stop the deposits and raise cash.
In addition if these expenses do not occur, I am also using same
account for kids education funds. So my kids might be able to get
more for school if these random expenses do not occur as scheduled.
Then at right time I would sell shares of PRPFX to replenish the
cash. Maybe not reinvest dividends for a year or two and use that to
replenish in addition to skipping deposits.
I want
1) flexibility
2) low taxes on investment
3) liquidity
If I had to think of 3 funds which fit the category, I would look at
PRPFX, RPSIX or Vanguard Wellesley (not sure of ticker) as a stable/
moderate risk fund for expenses with a time horizon of longer than 7
years.
The tax consequences of the last two are much worse than PRPFX though.
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
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which we respond. For all of the other tips and suggestions, see "FROM THE
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Ron Peterson
Guest
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| Posted: Tue May 13, 2008 1:15 am Post subject: Re: Suggestions for mid term savings/investments? |
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On May 12, 4:15 am, jdbs...@gmail.com wrote:
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It seems to me that the general consensus says that it is not worth it
to try to squeeze an additional 1-2% at the risk of principal loss.
For the sake of argument, at what point is it worth it? Maybe it
never is?
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I feel that it can worth it to increase your risk to get a higher
yield. But, the odds should be in your favor.
| Quote: |
If one had 100k in liquid savings, would the risk be
warranted to invest the "non-emergency" portion of those savings in an
effort beat the normal CD/savings return by using a bond fund or
similar?
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If you only need $80,000 for emergencies, then you can put $20,000 in
whatever investment vehicle you want.
Or, you can invest the $100,000 in an investment vehicle that is
extremely unlikely to go below $80,000.
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Obviously there is a price to be paid for liquidity, and a
true emergency should be kept in a low risk, liquid savings account.
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Your emergency fund only needs to be in liquid investments as long as
the risk is limited.
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There is also a risk in trying to increase yield. But, is there not a
risk in failing to capitalize on your non-emergency cash flow? For
example, if inflation is at 4%, and one invests non-emergency cash in
a CD or savings account that is earning around the same minus taxes,
that person is losing money, no? I suppose the answer to this would
be to invest in long term instruments like 401ks, IRAs, etc. However,
maybe the point of this cash is for a rainy day type fund that isn't
necessarily emergency but not retirement either. I suppose the cost
to benefit ratio really isn't in favor of a mid term investment of
this type, and probably accounts for the fact that many people only
view investments in terms of short term emergency savings and
retirement.
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Yes to your comments. And, people should be able to tolerate more risk
as they become wealthier.
Financial planners are first going to examine the needs of clients
that can't tolerate risk because a tragic investment can ruin a
person's life.
--
Ron
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
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which we respond. For all of the other tips and suggestions, see "FROM THE
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jIM
Guest
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| Posted: Tue May 13, 2008 5:52 pm Post subject: Re: Suggestions for mid term savings/investments? |
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| Quote: |
It seems to me that the general consensus says that it is not worth it
to try to squeeze an additional 1-2% at the risk of principal loss.
For the sake of argument, at what point is it worth it? Maybe it
At the point where you can say "well, I didn't really need all
that money that soon anyway, and can live with some short- to mid-
term losses along the way".
Suppose you had a "buy a new car fund" and you planned on buying
some particular car in 5 years. Unless you can either live with
waiting a few more years, or accepting the possibility that you'll
have to get a less expensive car, you need to invest that money
more conservatively. If you're willing to risk the Hyundai for
the chance that you'll get a Lexus instead of guaranteeing
yourself a Honda, it may be worth taking your chances. Only
you can decide.
|
This depends on the person.
My logic is how many intermediate term financial issues does one fund
each month. Intermediate term being any period which is less than 15
years.
Think of all the expenses you occur once every 15 years:
1) 1-2 cars (estimate $4000/year??)
2) house repairs (estimate $1000-$5000/year??)- roof, HVAC, driveway,
landscaping, additions, remodels...
3) college education for kids ($60,000)
4) wedding for daughter ($20,000)
5) large family vacation ($20,000)
6) whatever else for personal needs
My premise was if I funded only 1-2 of these per year, it would take
forever to get the cash needed for some of the larger items. But if I
created a "general fund" and budgeted that, the big things which occur
less often (cars, wedding, college) would clearly be a bigger chunk of
the general fund than the house repairs. If all money is in same
spot, and investment is relatively moderate in risk, the biggest risk
is the 2-4 years it takes to START this. Once started, this general
fund should have enough to
a) compound and get the big items with less cash put up by me
b) have a place in budget for smaller expenses- just stop the deposits
the month the house needs repair, or the year the landscaping gets
done (and pay cash for it).
All this money has same time horizon (more or less). The difference
is the magnitude of the amounts needed to fund the goal.
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup. |
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