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Old 12-11-2010, 08:56 PM   #1
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Safe Investment

I have a certain amount invested in retirement accounts as well as a separate stock market account. I decided to have a reserve of maybe $5000 to keep in a money market savings account. Where should I put the rest of the money so that I'll get the highest return, in a safe investment? I don't want to put any more into stocks than what I already have invested.

Thanks!
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Old 12-11-2010, 09:07 PM   #2
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Buy some magic beans.





Seriously, if you do not want more equities and you want low risk, you choices and returns are more limited. CDs would be safest, but returns are pretty low. Bonds could be OK if you stay short and high quality, but your returns might actually be lower than CDs. Then there are a bunch of things that might qualify as low risk for a given definition thereof, stuff like MERFX, LCMAX, etc.
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Old 12-12-2010, 12:10 AM   #3
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in a safe investment? I don't want to put any more into stocks than what I already have invested.
When you use words like "safe", people have to assume that you're talking about FDIC-insured CDs.

They're not actually safe either, but they yield more than Treasuries and they have some sort of insurance on their principal that would eventually get it back to you.

Everything else you're thinking of in bonds & equities is riskier. They're not necessarily "unsafe", but they're certainly not "safe" in the sense that you'd be able to recover your principal.
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Old 12-12-2010, 12:22 AM   #4
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Start investigating your local credit unions.
I'm currently a member of 3 very good ones.
One is tied to a municipality I worked for.
One is a U.S. postal service a family member worked for.
The other is PenFed which anyone can join.
I'm currently getting 3% on a money market fund in 2 of these.
My money is not tied up so I can go get it tomorrow if a better investment comes along.
They are as safe as the U.S. government and the green back as best I can tell.
Hope that gives you some help and thoughts.
Its all about who you know sometimes.
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Old 12-12-2010, 12:28 AM   #5
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Where should I put the rest of the money so that I'll get the highest return, in a safe investment?
I keep the year's spending money in Vanguard Short-Term Bond Index Fund (VBISX).
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Old 12-12-2010, 10:20 AM   #6
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My credit union pays 4% on a checking account, but you have to have direct deposit going into the account so its not of much use if you are retired.
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Old 12-12-2010, 01:06 PM   #7
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My credit union pays 4% on a checking account, but you have to have direct deposit going into the account so its not of much use if you are retired.
What is the upper limit on which they will pay this?

Sometimes other direct deposits can be set up, including but not limited to SS payments.

Ha
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Old 12-12-2010, 03:05 PM   #8
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Brewer, Can you please expound on LCMAX, What is this animal and how does it generate that much yield? Thanks
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Old 12-12-2010, 03:52 PM   #9
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Buy some magic beans.
I'm stealing that for use in the spousal personal finance education tribulations series. The word safe has been almost completely eliminated from her vocabulary.

Brewer, what would you say is the relative definition of low risk for alternatives like MERFX et. al.?
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Old 12-12-2010, 05:00 PM   #10
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Leonidas, you are welcome to all the magic beans your DW can handle.

MERFX: This is a merger arbitrage fund. Basically, company X offers to buy company Y for $50 in stock, but company Y is trading at $47. So MERFX evaluates the likelihood the deal will close and the likely timing and if they like the deal they go long X and short Y. When the deal closes, they net $3. Rinse and repeat. It can get a lot more complicated, but that is the basic idea. This strategy is known in the trade as "picking up nickels in front of an oncoming bulldozer," but if you do it diversified enough and you do not leverage, it is usually a low risk, low volatility strategy. Since the fundametal construction of the fund is long one stock, short another, exposure to the overall market is limited. The risk is that the manager loses their touch or their mind (see Bill Miller and maybe Bill Gross).

LCMAX: This is somewhat similar to a hedge fund. It is a long-short bond fund that puts on a lot of its positions via derivatives. The fund intentionally maintains little or no net exposure to bonds, but makes directional bets as the managers attempt to generate an idiosyncratic return. Ignore the yield: focus on total return.

I would never put more than 10% of a portfolio in an individual diversifier fund like MERFX or LCMAX, but they make nice, market neutral diversifiers that I would expect to generate high single digit returns over the long haul.

FWIW, MERFX has a direct competitor (ARBFX) that is currently closed. Given the choice, I would split money between the two.
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Old 12-12-2010, 05:35 PM   #11
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What is the upper limit on which they will pay this?

Sometimes other direct deposits can be set up, including but not limited to SS payments.

Ha
$50K
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Old 12-12-2010, 07:18 PM   #12
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Leonidas, you are welcome to all the magic beans your DW can handle.
Thanks, but it was more a case of needing to be persuaded that there is no such thing as safe. The next time she talks about a safe investment I'll use the magic bean comment.

Thanks for the intro on LCMAX and MERFX.
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Old 12-12-2010, 07:30 PM   #13
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I keep the year's spending money in Vanguard Short-Term Bond Index Fund (VBISX).
What has been the average return of this? Is it more than 3-4% that people are getting in credit unions?

Will definitely check out my local credit unions as I am getting about 1% from my bank right now, as well as MERFX.
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Old 12-12-2010, 10:06 PM   #14
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Thanks Brewer for LCMAX explaination.
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Old 12-12-2010, 11:01 PM   #15
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3% at a credit union? i looked at local cu online and they were paying a whopping 10 basis points up to (are you sitting down?) 50 bp. ally and ing are far better than this, where are these cu?
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Old 12-12-2010, 11:34 PM   #16
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What has been the average return of this?
Performance numbers for VBISX are here.
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Old 12-13-2010, 12:08 PM   #17
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I keep a 45/45/10 (equity/bonds/cash) allocation in retirement. Cash is in a mix of bank account and CD ladder. Bonds are in VBISX and VBMFX and equities are in VTSMX and VGTSX. A KISS approach.
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Old 12-13-2010, 12:30 PM   #18
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3% at a credit union? i looked at local cu online and they were paying a whopping 10 basis points up to (are you sitting down?) 50 bp. ally and ing are far better than this, where are these cu?
Exactly....
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Old 12-13-2010, 05:41 PM   #19
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I have a certain amount invested in retirement accounts as well as a separate stock market account. I decided to have a reserve of maybe $5000 to keep in a money market savings account. Where should I put the rest of the money so that I'll get the highest return, in a safe investment? I don't want to put any more into stocks than what I already have invested.

Thanks!
Highest return, safe investment or kind of an oxymoron.

Of safe from what? For example, money in a money market may be safe from stock market decline, but not safe from inflation. Likewise, money in stocks might stay ahead of inflation, but has the market decline risk.

Rather than have a set amount (as in your case, $5000), would break that down into percentages (asset allocation). So much held back in a money market as "chicken money", i.e., emergency fund. So much in fixed income, so much in equities, etc. All at levels you feel comfortable with.
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Old 12-13-2010, 06:07 PM   #20
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Highest return, safe investment or kind of an oxymoron.

Of safe from what? For example, money in a money market may be safe from stock market decline, but not safe from inflation. Likewise, money in stocks might stay ahead of inflation, but has the market decline risk.
Intersting hypothesis, but in the last bigtime inflation that we experienced in the USA(1970s), money market funds and t-bills fared much better than either stocks or bonds.

Ha
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