On May 9, 5:04 pm, jdbs...@[EMAIL PROTECTED]
wrote:
> I know the majority of the discussion in this group is about short
> term (emergency savings) or long term (retirement) investing. Are
> there any recommendations for investing on a mid term horizon, maybe 3
> to 5 years? My wife and I both contribute well over matching to our
> 401ks. We've maxed out our roth for 2008. We have 40k which is our
> emergency/home improvement/car fund in a high interest savings account
> earning 4%.
>
> After reading a few of Jim's posts, I started to wonder if I should
> consider moving a ****tion of that money into a moderate mutual fund of
> some type. Something that is relatively low volatility while still
> being worthwhile by beating my 4% rate.
If I knew I needed money in 3-5 years, I would be mostly cash for that
need within 2 years. A formula to think about, for every 1 year the
money is invested, you can be 10% equities. So if you need money in 5
years, a 50-50 stock/bond split makes sense. 3 years is 30-70 stocks/
bonds, 10 years could be 100% equites, 0 years should be 100% cash or
bonds.
The key to this is sell 10% of equity position each year as the time
horizon reduces.
Here is the logic I use for my budget:
1) I have 3 months expenses in CDs (90 day CDs).
2) I have a months expenses in my checking accounts at any time (so
April 1 paycheck is paying bills for May 1).
3) Any deposit to an IRA is done around the 23rd of the month- so the
money is in the account most of the month if needed for an emergency.
This is close to 1/2 of months expenses.
I have extra money to save/invest each month/year (from a second
job). I also budget for large, non recurring expenses (like new HVAC,
new hot water heater, new car, kids education) even though those
expenses might only occur once every 10-15 years. There are two
issues with this:
1) I do not know when those expenses will occur in some respects.
2) If I did not budget for them, it might be a tough year if 3 of
those things occured within any 15 month period. Liquidity is
im****tant, but not at expense (to me) of waiting for the expenses to
happen. Maybe time teaches me a lesson, my intent is to include these
large expenses in the budget so when they occur I have the money.
So each month I have around $150 I can contribute to these bills (and
it will increase once my current cars are paid off). I could put this
$1800 each year into cash, pay down the mortgage or do something else
with the $1800, but then if I look at the returns over a 5-10-15 year
period I would have probably lost purchasing power or reduced my
liquidity.
So I choose to invest in PRPFX in a taxable account. I can tap this
if I need to. It does fluctuate 1% per day sometimes, but overall
that fund is better than cash, and more stable than most stock/bond
****tfolios (year over year).
If I knew I needed a new hot water heater, cost might be $2000 or
$700. Not sure. I budgeted $2000 every 15 years (so $2000/[15*12]=
$11/month). I would stop the $150 deposits and try to pay cash if I
saw the expense coming. If it was a new HVAC, might be $5000 every 20
years ($5000/240=$21/month). Again if I saw expense coming, I would
stop the deposits and raise cash.
In addition if these expenses do not occur, I am also using same
account for kids education funds. So my kids might be able to get
more for school if these random expenses do not occur as scheduled.
Then at right time I would sell shares of PRPFX to replenish the
cash. Maybe not reinvest dividends for a year or two and use that to
replenish in addition to skipping deposits.
I want
1) flexibility
2) low taxes on investment
3) liquidity
If I had to think of 3 funds which fit the category, I would look at
PRPFX, RPSIX or Vanguard Wellesley (not sure of ticker) as a stable/
moderate risk fund for expenses with a time horizon of longer than 7
years.
The tax consequences of the last two are much worse than PRPFX though.
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