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Hello, We're saving for next year's vacation. Will be putting aside money each month. Instead of putting it in a bank with very low yield, we're thinking about putting it in some mutual funds. Do you have any suggestions for funds that: (1) have a decent yield (2) capital preservation (3) accept systematic investment plan - cannot come up with the initial $2000-$3000 investment Thanks. Yeti.
My own cash management accounts are RiverPark Short Term High Yield (RPHYX) and T. Rowe Price Spectrum Income (RPSIX). Price is, by far, the riskier of the two (it dropped 10% in 2008, its only losing year) but conservative and well-diversified. RiverPark might average 3.5% per year and Price 7%. The minimum on RiverPark is $1000.
You might consider PIMCO Short Asset (PAIUX), which is the retail version of the strategy used by PIMCO's mutual fund managers for the "cash" in their funds. The minimum is $1000.
I'm working on profiles of Azzad Wise Capital (WISEX), Payden Global Low Duration (PYGSX) and Scout Low Duration Bond (SCLDX). The first two invest globally in short-term bonds and bond-like securities with an emphasis on capital preservation and inflation protection. Payden has the stronger case, so far but Azzad ($300/AIP) has the lower minimum. The profiles would be further along, but I'm being ignored by "publicists" for both funds. Scout is a new fund but it's managed by an absolutely first-rate team (the folks behind Scout Unconstrained Bond and nominees for Morningstar's fixed-income manager of the year) and sports a $100 minimum for AIP accounts.
Finally, Northern Short Bond (BSBAX) would offer conservative management, low expenses and a $250 AIP minimum. There's absolutely nothing flashy about it but it's also unlikely to ever do anything silly with your money (Northern specializes in keeping the ultra-rich, ultra-rich). Their average return is something like 3%/year.
Remember: none of this is insured. All of it puts your capital at risk. Given my circumstances, the risk seems entirely reasonable but your situation might be different.
"Mutual fund investing involves risk including loss of principal. ... Bonds and bond funds are subject to interest rate risk and will decline in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. ..." Took this from the prospectus for RPHYX (available online) just to show that even a pretty safe fund like this one can't guarantee the safety of your money. So, I'll grudgingly admit Ted has a point here.
But heck. Vacation money ain't the same as money for food or medical. So, I'd be more inclined to roll the dice a bit using any one of David's suggestions. In the unlikely event the investment doesn't work out: here's some low-cost vacation alternatives. http://brilliantfinances.com/top-ten-budget-vacation-ideas
Reply to @Soupkitchen: I add $100/month to each but because I've held RPSIX for a long time, it held almost three times as much as RiverPark. Last month I bought a 2010 Toyota Corolla and pulled $6k or so from RPSIX, so now it's around 1:1. The nature of a cash management account is that it's not really designed to be a long-term fund any more than a collection of CDs would be so once the combined total is back in the $12-14k range I'll shift more of that money toward longer-term funds.
Reply to @Ted: A 1-yr CD won't work because they want to add to it incrementally (even though some institutions allow you to do this) and they don't have a big deposit going in. A better option might be just an ordinary old online savings account at ALLY, Barclays, Capital One, etc and the rates are pretty similar to a 1-yr CD anyway.
FWIW, for short term stuff like this I use the Capital One account but only because it used to be ING Direct (0.75%).
David I have been using Fidelity Tax Exempt Money Market for cash management. I would like to use RPHYX but at Fidelity where I keep most of my assets there are consequences for using a mutual fund that one may trade in less than 60 days other than a money market fund. I would assume that one thinks of a cash management fund as liquid enough to trade in less than 60 days. Would you mention other options where one can avoid this inconvenience.
Reply to @johnN: David was prudent in his vehicle purchase and attuned to accumulating wealth. He must have read The Millionaire Next Door and The Millionaire Mind.
Reply to @prinx: Check their trading policy as a first step. Funds discourage you from selling shares purchased within the last 60-90-120 days. If you have a $3000 account of which the last $200 was purchased recently, that would be the only part subject to a redemption/trading fee.
Other folks might have more experience with the issue. Otherwise I'll look into it once the April issue is done and live.
Reply to @prinx: David is correct that as far as the 60 day restriction is concerned, Fidelity and the other brokers use FIFO. That means that so long as you've got some shares that were purchased more than 60 days ago, the Fidelity won't charge you a short-term trading fee. (For tax purposes, you can still designate more recent shares, use average cost, etc. This is completely independent of the short term trading fee calculation.)
From a tax perspective, the problem I have using any bond fund as a CMA is that you're always trading in and out, plus reinvesting dividends. This may create many wash sales, lots of tiny transactions showing up on your 1099-B (and from there to your Schedule D). Sure, the broker is required to track this for you now, but for true optimization of taxes, one needs to specify shares and this becomes a lot of bookkeeping.
On the other hand, for what the OP requested (essentially a "Christmas savings account"), RPHYX works fine - lots of buys, few sells. Not a CMA.
FWIW, Fidelity provides an explicit CMA account with (taxable) interest 7x the rate on FMOXX (a whopping 0.07% vs 0.01%), and it's FDIC-insured. Here are some of Fidelity's rates.
I tend to think of a CMA account as a glorified checking account, for day-to-day expenditures (with a limited balance), as opposed to an investment account. If that's what you have in mind, you might consider a reward checking account. High interest, but requiring frequent transactions (bill pay, automatic depost, etc., depending on the particular account). From depositaccounts.com (the best site I've found for bank rates and info), here's a background article on reward checking accounts, and their page of top rates.
Comments
You might consider PIMCO Short Asset (PAIUX), which is the retail version of the strategy used by PIMCO's mutual fund managers for the "cash" in their funds. The minimum is $1000.
I'm working on profiles of Azzad Wise Capital (WISEX), Payden Global Low Duration (PYGSX) and Scout Low Duration Bond (SCLDX). The first two invest globally in short-term bonds and bond-like securities with an emphasis on capital preservation and inflation protection. Payden has the stronger case, so far but Azzad ($300/AIP) has the lower minimum. The profiles would be further along, but I'm being ignored by "publicists" for both funds. Scout is a new fund but it's managed by an absolutely first-rate team (the folks behind Scout Unconstrained Bond and nominees for Morningstar's fixed-income manager of the year) and sports a $100 minimum for AIP accounts.
Finally, Northern Short Bond (BSBAX) would offer conservative management, low expenses and a $250 AIP minimum. There's absolutely nothing flashy about it but it's also unlikely to ever do anything silly with your money (Northern specializes in keeping the ultra-rich, ultra-rich). Their average return is something like 3%/year.
Remember: none of this is insured. All of it puts your capital at risk. Given my circumstances, the risk seems entirely reasonable but your situation might be different.
For what it's worth,
David
Regards,
Ted
http://www.bankrate.com/funnel/cd-investments/cd-investment-results.aspx?local=false&tab=CD&prods=15&ic_id=CR_SearchCDMMAByLocation_default_CD_V1
But heck. Vacation money ain't the same as money for food or medical. So, I'd be more inclined to roll the dice a bit using any one of David's suggestions. In the unlikely event the investment doesn't work out: here's some low-cost vacation alternatives. http://brilliantfinances.com/top-ten-budget-vacation-ideas
David
FWIW, for short term stuff like this I use the Capital One account but only because it used to be ING Direct (0.75%).
I would assume that one thinks of a cash management fund as liquid enough to trade in less than 60 days. Would you mention other options where one can avoid this inconvenience.
prinx
Other folks might have more experience with the issue. Otherwise I'll look into it once the April issue is done and live.
Take care,
David
David is correct that as far as the 60 day restriction is concerned, Fidelity and the other brokers use FIFO. That means that so long as you've got some shares that were purchased more than 60 days ago, the Fidelity won't charge you a short-term trading fee. (For tax purposes, you can still designate more recent shares, use average cost, etc. This is completely independent of the short term trading fee calculation.)
From a tax perspective, the problem I have using any bond fund as a CMA is that you're always trading in and out, plus reinvesting dividends. This may create many wash sales, lots of tiny transactions showing up on your 1099-B (and from there to your Schedule D). Sure, the broker is required to track this for you now, but for true optimization of taxes, one needs to specify shares and this becomes a lot of bookkeeping.
On the other hand, for what the OP requested (essentially a "Christmas savings account"), RPHYX works fine - lots of buys, few sells. Not a CMA.
FWIW, Fidelity provides an explicit CMA account with (taxable) interest 7x the rate on FMOXX (a whopping 0.07% vs 0.01%), and it's FDIC-insured. Here are some of Fidelity's rates.
I tend to think of a CMA account as a glorified checking account, for day-to-day expenditures (with a limited balance), as opposed to an investment account. If that's what you have in mind, you might consider a reward checking account. High interest, but requiring frequent transactions (bill pay, automatic depost, etc., depending on the particular account). From depositaccounts.com (the best site I've found for bank rates and info), here's a background article on reward checking accounts, and their page of top rates.