Brewer-
Here's the thing. For several years we have kept a portion of our $ in CD's because my DW thinks that a portion should be extremely low risk and I didn't mind as long as we were getting a fairly decent yield but rates are so low now that even she agrees that perhaps there is something better. No we don't expect to need this money for quite some time. She would still like to put it back into CD's in the near future if rates were to go back to a reasonable level (over 4 1/2 - 5%). With this money I would just like to see some medium term growth, but she doesn't like the idea of opening another brokerage account, and then if CD interests rates return to higher level, moving it again. I would call our combined risk tolerance low to medium. BTW, any guesses as to when rates are likely to go up? Good chance I will buy a bond index fund being as how we have no bonds at all right now. Do you have any recommendations? Vanguard? Fidelity? Are there any taxes on bond funds before the shares are sold? Sorry to be so naive. Thank you for your help.
OK, so your risk tolerance is relatively low. Fair enough.
Bonds are pretty simple. You buy bonds or a portfolio of bonds (AKA a bond fund). Interest payments are taxable (unless you bought munis), and if you sell bonds you may realize a taxable gain or loss (or the bond fund may do so). If you buy fixed rate bonds, you make money if rates subsequently drop, and you lose money if rates subsequently rise. The longer the maturity of the bonds, the greater the potential gain/loss. You can also buy bonds that range from extremely safe (treasuries) to highly speculative.
In the current environment, I would suggest that you not pick a bond or bond fund with an average maturity over 5 years. There is a significant risk that treasury and low risk bond rates may rise in the next few years (inflation-driven), so you don't want to be locked into long maturities with what may turn out to be a low yield.
I can think of a few viable alternatives, in order of increasing risk:
- Pen Fed is currently offering a 5 year CD with a 4.5% APY. If rates rise, you can pull the money out with a penalty of 6 months' worth of interest.
- VMLUX is the Admiral shares version of a Vanguard muni fund that invests in limited duration muni bonds. Currently yields just over 3%, tax free, and relatively safe.
- VWINX is Vanguard Welllesley fund, which is roughly 60% bonds, 40% stocks. It has been around a long time and if you hold it for any length of time it is pretty hard to lose money on it, but it will flop around more than the other two possibilities. Currently yields a bit over 4%.
Conseidering your risk tolerance, I probably wouldn't try to get any sexier than the likes of the above. Having said that, you could also opt to do something like 50% CD, 25% of VWINX, and 25% of Vanguard's high yield fund.
