Where should I park mid-term savings?

**jIM_Ohio** · 03-20-2009, 09:59 AM

I would go with no more than 30% equities for a fund like this. I use PRPFX for my mid term money. Mid term for me is a large vacation, secondary emergency fund, new car or kids college.

I also am looking at treasury direct for more of a bond allocation than a bond fund. I would also consider a muni bond fund.

Individual bonds have less interest rate risk than bond funds (its possible and probable a bond fund will lose value when rates go up. Buying individual bonds prevents that risk (assuming I hold the bond to maturity).

Municipal bond funds are less volatile relative to interest rate risks.

**noppenbd** · 03-20-2009, 11:02 AM

Originally posted by jIM_Ohio View Post

Individual bonds have less interest rate risk than bond funds (its possible and probable a bond fund will lose value when rates go up. Buying individual bonds prevents that risk (assuming I hold the bond to maturity).

It seems to me you have interest rate risk with individual bonds, it just decreases as you approach maturity. Let's say you buy a $1K bond that returns 3% a year for 10 years. That means in 10 years you will have earned $300 in interest, plus your original principal of $1K. But say the day after you buy the bond interest rates jump to 10%. Your bond has dropped in value, whether you hold it to maturity or not. If you bought a 10% bond the next day for $650, it would be worth the same as the original 3% $1K bond in ten years (650 + 650*10%*10 = 1000 + 1000*3%*10). So your bond can lose value, even if you hold it to maturity, if only in opportunity cost.

It seems the same thing is going on in bond funds, just averaged over a bunch of different bonds, so that some are maturing as new ones are bought. This would seem to keep the interest rate risk constant as long as you hold the fund.

Am I wrong in my understanding?

**jIM_Ohio** · 03-20-2009, 11:12 AM

Originally posted by noppenbd View Post

It seems to me you have interest rate risk with individual bonds, it just decreases as you approach maturity. Let's say you buy a $1K bond that returns 3% a year for 10 years. That means in 10 years you will have earned $300 in interest, plus your original principal of $1K. But say the day after you buy the bond interest rates jump to 10%. Your bond has dropped in value, whether you hold it to maturity or not. If you bought a 10% bond the next day for $650, it would be worth the same as the original 3% $1K bond in ten years (650 + 650*10%*10 = 1000 + 1000*3%*10). So your bond can lose value, even if you hold it to maturity, if only in opportunity cost.

It seems the same thing is going on in bond funds, just averaged over a bunch of different bonds, so that some are maturing as new ones are bought. This would seem to keep the interest rate risk constant as long as you hold the fund.

Am I wrong in my understanding?

You were not wrong, but you are equating opportunity cost, which is "intangible" to "bonds I bought losing value".

If you buy the $1000 bond and walk away with $1300 at the end of the term. You are guaranteed this return with little risk- only risk is the government defaulting on the loan.

If you put the same $1000 into a bond fund, when rates went up, you would own less than $1000 of the bond fund. If you wanted your $1000 the market forces would have taken some of it away. Expenses of the fund would also take some of the $1000 away too.

My suggestion is if you hold a bond fund to preserve principal, hold an equal amount in cash too.

Most people hold bonds to preserve principal, and possibly also diversify, but IMO primarily to preserve money which was already there.

If you hold a bond fund, its possible expenses and interest rate movements change the NAV of the fund. This is almost guaranteed- so preservation of principal- the goal- is not achieved until the fund pays you some interest and buys you more shares.

If you buy the individual bond, you are guaranteed to get your principal back. regardless of what happened to rates in the 10 years you owned the bond, you get all $1000 back. Mutual funds do not offer the same guarantee.

**noppenbd** · 03-20-2009, 11:17 AM

Originally posted by jIM_Ohio View Post

You were not wrong, but you are equating opportunity cost, which is "intangible" to "bonds I bought losing value".

If you buy the $1000 bond and walk away with $1300 at the end of the term. You are guaranteed this return with little risk- only risk is the government defaulting on the loan.

If you put the same $1000 into a bond fund, when rates went up, you would own less than $1000 of the bond fund. If you wanted your $1000 the market forces would have taken some of it away.

True, but if you waited the same 10 years, all other things being equal you would have the same amount whether in individual bonds or in a fund (minus expenses). The only difference is, in the fund you know about it (you can look up the NAV daily), in the individual fund you are innocently unaware that it has lost value.

**jIM_Ohio** · 03-20-2009, 11:22 AM

Originally posted by noppenbd View Post

True, but if you waited the same 10 years, all other things being equal you would have the same amount whether in individual bonds or in a fund (minus expenses). The only difference is, in the fund you know about it (you can look up the NAV daily), in the individual fund you are innocently unaware that it has lost value.

I don't agree with this. Maybe because I edited the above post and added the last 2 paragraphs while this was typed...

I will use my situation as an example. I plan to retire in 2026 or 2027. When I retire I want 50k in a conservative investment.

I could put 50k into a bond fund. That bond fund will fluctuate in NAV and also take some of the 50k away because of fund expenses. In order for my 50k to be there in 16 years I would need to
a) reinvest dividends/interest
b) see interest rates drop between now and then (so the value of the bond goes up)

If I bought an individual bond, I know the 50k would be there in 16 years. Plus whatever interest I receive in the mean time. Not sure if there are 15 year bonds, but I know I could get a 10 year note then a 5 year note... but guaranteed the 50k I want will be there- no expenses taken out.

You are looking at the "opportunity" a change in rates presents, but I am not investing based on a given opportunity- I am investing to preserve a given amount of money.

**Phatphoeater** · 03-20-2009, 11:24 AM

I'm curious to know what the folks here think of an inflation indexed fund like VIPSX for a mid-term horizon taxable account vs. a short/interm national muni fund. (with regard to preservation of principal and interest rate risk)

**jIM_Ohio** · 03-20-2009, 11:31 AM

muni bond would be chosen for tax reasons where as the inflation protected fund would be chosen if a person anticipates high inflation.

Both would work for mid term funds, but the funds would be chosen for different ways of preserving money. I own the inflation protected fund in my kids 529 right now.

**Bryan Anderson** · 03-24-2009, 09:19 PM

Buy silver and put it in a safety deposit box. It's not nearly as inflated as gold and the worst is yet to come!

**robsrdd** · 03-30-2009, 07:59 AM

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Via Stock Research Portal .com

With gold supplies running out, I'm looking to gold.

**atomicrc11** · 04-03-2009, 05:39 AM

I have my mid-terms savings in Fidelity Asset Manager 20% (FASIX). It is 20% stocks, 50% bonds and 30% money market funds. It has treated me well, is currently earning around a 4% yield and is only 20% stocks which limits your losses should the markets tank. But also for me this is money that could go down and I wouldn't be forced to sell anytime soon. If you can't handle any kind of fluctuation you shouldn't be in any kinds of stock or bond mutual funds.

**ukey** · 04-05-2009, 08:35 AM

12 years goal as mid term savings huh. Do you anticipate the use of the money anytime before this? If not, have a look at how comfortable you are with investing, and what you would like to invest in. Only go for those investment which you are comfortable with.

While people are not comfortable with stocks at the moment, I've been putting some of my longer term investment into mutual funds, but thats me.
Good luck in your choice.

**DFrancis** · 04-15-2009, 07:59 AM

Mid Term Savings

I keep most of my mid term savings in the Vanguard Int-Term tax exempt fund. Vanguard also offers State tax exempt funds that are free from both state and federal taxes.

**atomicrc11** · 04-16-2009, 08:17 AM

Only problem with the Tax Exempt Muni Money Markets are they are essentially earning 0% interest.

I'm with Fidelity and they have similar funds. Vanguard has them except not in my state. The Muni bond funds are doing much better, but then again there is a greater risk as the price of the fund can fluctuate. It will certainly once the interest rates start going up.

**scoutdjackson** · 04-16-2009, 08:38 PM

I think Bryan Anderson hit it spot on. The worst is yet to come.

Where should I park mid-term savings?