Alternative to Money market Funds?


J

Jay

I have 60% of my money sitting in Money Market Funds that is yielding
probably 0.75%. What is a better alternative with similar risk-return
characteristics. May be, a little more risk than Money Market Funds but not
like the usual Equity and Bond Funds. I do not mind tying it in for 6 months
to a year.

Thanks,
Jay
 
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R

Rich Carreiro

Jay said:
I have 60% of my money sitting in Money Market Funds that is yielding
probably 0.75%. What is a better alternative with similar risk-return
characteristics.
ING Direct (http://www.ingdirect.com) pays 2.00% on its no-minimum,
no-fee, FDIC-insured savings account.
 
A

Anoop Ghanwani

Jay said:
I have 60% of my money sitting in Money Market Funds that is yielding
probably 0.75%. What is a better alternative with similar risk-return
characteristics. May be, a little more risk than Money Market Funds but not
like the usual Equity and Bond Funds. I do not mind tying it in for 6 months
to a year.

Thanks,
Jay
There are the following options:
- Go to money-rates.com and find a higher interest CD/savings account
(typically around 2% these days)
- Invest in i-bonds. Requires a 5 year holding period or you lose
3 months interest. Earnings are exempt from state and local
income tax, and federal income tax can be deferred until you sell.
Was a better deal until the beginning of this November when the
rate fell to 2.19%.
- Find a short-term bond fund. But with these, even though there
have historically been no years when they might have negative
returns, there is no guarantee that it will never happen.

Anoop
 
N

Nashville Pete

Look at World Currency Certificate of Deposit Accounts at everbank World
Markets www.everbank.com There are CD's in Euro's and AUS$ guaranteed by
the FDIC yielding 1.25% and 4%. You do have a currency risk but frankly I
believe the US$ is headed downward over the next 1-2 years at a minimum time
frame. You get an extra kicker if the dollar declines further.

Another choice is put your money in I-bonds. Buy them at your local bank
branch. They are inflation protected government bonds available in as small
denominations as $25 and up to $10,000. You can ladder them over time.
Yields change every quarter. I have some money in Euro and AUS$ CD's and
I-bonds.

Good luck.
 
T

Tad Borek

Jay said:
I have 60% of my money sitting in Money Market Funds that is yielding
probably 0.75%. What is a better alternative with similar risk-return
characteristics. May be, a little more risk than Money Market Funds but not
like the usual Equity and Bond Funds. I do not mind tying it in for 6 months
to a year.
Some of the most attractive aspects of MMF are that the $ is accessible
at any time by writing a check, interest rates are reset regularly to
reflect current rates, and there's an extremely low risk of losing
money. You usually need to give up one or all of these by going to CDs,
bond funds, or savings bonds.

One notch higher in interest rates, with little added risk, would be a
short-term, FDIC-insured CD with a bank. Something like 3 or 6 months
for example. You could even open several, at intervals, so there's one
coming due every month or two (if that's what you want). Current rates
for a bunch of banks are posted at www.money-rates.com

-Tad
 
D

darkness

Nashville Pete said:
Look at World Currency Certificate of Deposit Accounts at everbank World
Markets www.everbank.com There are CD's in Euro's and AUS$ guaranteed by
the FDIC yielding 1.25% and 4%. You do have a currency risk but frankly I
believe the US$ is headed downward over the next 1-2 years at a minimum time
frame. You get an extra kicker if the dollar declines further.
The key here is currency risk.

While I, too, believe the dollar will fall, no professional forecaster
has a better than random record of forecasting the dollar (ie throwing
darts at a board has the same chance of being right).

So I do not recommend taking on currency risk for the safest part of
your portfolio. Normally interest rates are higher in other countries
for a reason, which makes their currencies more vulnerable.

If you want to take on currency risk, a better place to do it is by
buying a diversified international equity fund that does not hedge
currency.
Another choice is put your money in I-bonds. Buy them at your local bank
branch. They are inflation protected government bonds available in as small
denominations as $25 and up to $10,000. You can ladder them over time.
Yields change every quarter. I have some money in Euro and AUS$ CD's and
I-bonds.

I think there is an early redemption charge on I Bonds?
 
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N

Nashville Pete

The key here is currency risk.
While I, too, believe the dollar will fall, no professional forecaster
has a better than random record of forecasting the dollar (ie throwing
darts at a board has the same chance of being right).

So I do not recommend taking on currency risk for the safest part of
your portfolio. Normally interest rates are higher in other countries
for a reason, which makes their currencies more vulnerable.

If you want to take on currency risk, a better place to do it is by
buying a diversified international equity fund that does not hedge
currency.
Sorry, but that's Buggy whip thinking.

The US$ no longer dominates. Argentina has told the IMF and World Bank to
"go the Hell" since it no longer needs the Petrodollar to buy Venezuelan oil
under recent bilateral agreements. The exclusive Petrodollar is soon doomed
to extinction as Oil will be bartered or bought for Euro's as well as US $.
That will end the domination of the US dollar as the sole international
trade currency. You can see it in the rise of Gold and the continuous drop
of the dollar. The IMF and World Bank will see it's power reduced.

The real risk is not to diversify the cash part of a portfolio beyond the US
dollar as the dollar declines and we get hit with the upcoming inflation
that the FED has guaranteed us with their past money supply policy. Why
concentrate too much in risky equity funds, especially foreign funds where
the managers find it easy the screw and rob the shareholders? There is no
reason to risk money in a stock fund when one can place one's holdings in
various CD's guaranteed by the FDIC and diversified in various currencies
i.e. Sterling, Euro, AUS$, CAN$, etc. Some CD's at everbank World Markets
are indexed to a package of currencies with a unique exchange and interest
rate.
 
B

Brent D. Gardner, ChFC

Jay said:
I have 60% of my money sitting in Money Market Funds that is yielding
probably 0.75%. What is a better alternative with similar risk-return
characteristics. May be, a little more risk than Money Market Funds but not
like the usual Equity and Bond Funds. I do not mind tying it in for 6 months
to a year.
Do you own any personal life insurance?

Many of the better companies have a Premium Deposit Fund, some of which
pay as much as 4.00% and even 5.50%, while remaining completely liquid.
State laws vary, but as an example, in my state you can pre-pay up to 20
years worth of premiums and earn current interest on this fund. When I need
money, I call the company and they send me a check. Current interest is
based on the general account returns of the company, and since the company
'expects' these funds to become premiums in the future, they credit them
with interest that just happens to be pretty good right now, comparatively
speaking. Most funds interest rates change periodically, but some guarantee
their interest rate for longer than one year.

Some companies use a Pre-Paid Discount Pool. It allows you to pre-pay
future years premiums, with imputed taxable income in the year the discount
is applied, but doesn't really pay interest you can spend and while liquid,
probably isn't what you're looking for.

Agents learn of these funds early in their career, but soon forget about
them, because they do not pay any commission. I use them in my practice as
an emergency fund or savings account, becaue they are paying better than all
the alternatives I can find, with little risk.

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships
 
D

darkness

Nashville Pete said:
Sorry, but that's Buggy whip thinking.

The US$ no longer dominates. Argentina has told the IMF and World Bank to
"go the Hell" since it no longer needs the Petrodollar to buy Venezuelan oil
under recent bilateral agreements. The exclusive Petrodollar is soon doomed
to extinction as Oil will be bartered or bought for Euro's as well as US $.
That will end the domination of the US dollar as the sole international
trade currency. You can see it in the rise of Gold and the continuous drop
of the dollar. The IMF and World Bank will see it's power reduced.
1. the US is the number 1 financier of the IMF and World Bank: largely
they do what is in the US' best interest (see Stiglitz for a very good
explanation). They don't call it the 'Washington Consensus' for no
reason.

Suffice it to say that I believe the rumours of the dollar's demise as
the international currency of reserve and trade are much exaggerated.
Maybe it is living so close to the clowns in euro-land, you can bet
that there is no obvious replacement to the dollar. At the very
least, no one else is going to export so many dollars (run a current
account deficit) of that scale.

The dollar fell by more in the late 80s, but remained the
international currency then.

Unless, of course, you believe that the Bush II deficit is so large
that the US is heading towards an Argentina-like collapse of
confidence in its currency...
The real risk is not to diversify the cash part of a portfolio beyond the US
dollar as the dollar declines and we get hit with the upcoming inflation
that the FED has guaranteed us with their past money supply policy.
In which case, shouldn't you be holding real return bonds (ie TIPS)?
Partial inflation hedge replaced by a perfect inflation hedge?


Why
concentrate too much in risky equity funds, especially foreign funds where
the managers find it easy the screw and rob the shareholders?
You mean like Enron, Tyco and Worldcom? Oops, they were American
companies ;-).

The fact is, the PEs on many markets discount the governance issues,
at least relative to the PEs on the American market. No markets look
cheap, but the US looks very expensive.


There is no
reason to risk money in a stock fund when one can place one's holdings in
various CD's guaranteed by the FDIC and diversified in various currencies
i.e. Sterling, Euro, AUS$, CAN$, etc. Some CD's at everbank World Markets
are indexed to a package of currencies with a unique exchange and interest
rate.
Nice hedge as long as you know that you can take the losses if it goes
wrong. Holding your own currency, you cannot (directly) take a hit on
exchange rates.

If I had a major liability or expense upcoming in Canadian dollars,
say, I would hold C$. If I was trying to diversify my equity
portfolio globally, I would add a global equity fund.

But cash? Cash is supposed to be *safe*. Why speculate with it?
 
N

Nashville Pete

But cash? Cash is supposed to be *safe*. Why speculate with it?
It all gets down to how one feels about the future. I believe the US is in
Iraq (and Germany and France opposed our actions) because in 2000 the UN
allowed Iraq to sell it's oil for Euro's thus threatening the US Petrodollar
dominance of the world financial system. Venezuela is already bartering for
it's oil throughout South and Central America and threatens US influence in
the area and is an additional threat to the petrodollar monopoly.

The political/economic situation in Iraq looks bleak and I believe we are in
for a sea change which threatens the Global position of the US $. Should
China look to Europe as it's next source of growth and investment diversity
it might decide to index it's currency to both US$ and Euro, or at a
minimum, diversify it's investments toward Europe..

Europe has been reducing it's US debt and equity holdings, should Japan and
China choose to rebalance holdings to include Euro denominated investments
we will surely see a further drop in the stock markets, an increase in
interest rates, inflation, and an erosion of the dollar vs other currencies.

I think it is only prudent to diversify. Diversification is not speculation
but rather the foundation of portfolio management. And why not diversify
your cash position?
 
J

John A. Weeks III

Actually, cash is a garanteed loser. The problem is that goods
and services continue to cost more and more each year. Cash
stays the same, or if you have it in a money market, it gains
very little. For example, the CPI is up 2.3% already in 2003,
with energy costs being up almost 15%. Anyone holding cash
has lost purchasing value. If you look back in history, this
is almost always the case, holding cash or cash equivalents
is a sure loser.

To make matters worse, we are now in a global economy, competing
with people across the world. With so much of our goods (and more
recently, services) coming from across the globe, we also have
to consider currency risk. When the US dollar goes down in value,
it takes more of our dollars to by the things that we need from
Target or Wal-Mart. In the recent past, the US Dollar is down
quite significantly.

The result is that in order to be "save", you cannot be in cash.
You have to be in stocks, bonds, or other instruments that have
a higher rate of return, and you need foriegn exposure at some
level to keep up with the Jose and Rojesh's of the world.

-john-
 
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E

Elizabeth Richardson

John A. Weeks III said:
The result is that in order to be "save", you cannot be in cash.
You have to be in stocks, bonds, or other instruments that have
a higher rate of return, and you need foriegn exposure at some
level to keep up with the Jose and Rojesh's of the world.
Does this mean that you think one should have zero cash?

Elizabeth Richardson
 
J

John A. Weeks III

Note, I fixed a typo above, I meant "safe", whereas I typed "save"
in the original posting.
Does this mean that you think one should have zero cash?
Not at all. Cash is handy to have for emergencies and buying
opportunities. But don't keep the majority of your nest egg
in cash because you think it is 100% safe. Rather, it is just
the opposite, cash is the only common investment that is going
to for sure be a loser. Keeping cash has a cost...don't have
any more in your account than what is prudent to pay for.

-john-
 
D

darkness

John A. Weeks III said:
Actually, cash is a garanteed loser. The problem is that goods
and services continue to cost more and more each year.
Well there is at least some risk of deflation. Services tend to cost
more, but goods (adjusted for hedonic pricing ie for quality
improvements) on average cost a bit less.

Japan appears to be coming out of a period of effective deflation
which has lasted 4-5 years. Germany is very close to deflation. I
agree that the US looks like it will escape such.
 
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R

Ron Peterson

Not at all. Cash is handy to have for emergencies and buying
opportunities. But don't keep the majority of your nest egg
in cash because you think it is 100% safe. Rather, it is just
the opposite, cash is the only common investment that is going
to for sure be a loser. Keeping cash has a cost...don't have
any more in your account than what is prudent to pay for.
A person can also reduce the need for cash by improving cash flow
through staggering CDs and bonds so that they become due on a regular
basis.

As your interest income goes up, you will have less of a need for cash
on hand.

Many brokers will give low cost loans against your stock holdings
reducing your need for cash.
 

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