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By Bob Moeller
WEAC Member Benefits
November 2006
Financial
Planning Seminars
Achieving
Financial Independence
I met with lots of members this past summer and noticed many of them had sizable amounts in savings, money market funds, CDs, and similar cash investments. Many expressed that they “knew” they should probably be investing more in stock mutual funds but with the Iraq war, terrorist threats and other societal worries they just didn’t want to carry a lot of risk. I told many of them to remember one important investment rule: Don’t forget you have to sleep with your investments every night.
To give you an indication of teacher investment sentiment, the WEA Trust has well over $1 billion in its tax-sheltered annuity, which offers many excellent stock mutual funds, and I’m told about 70% of the money is invested in the guaranteed fixed interest account.
Is that wrong? Well over time the stock market does better than cash type investments. But there is nothing wrong with seriously considering cash as part of your investment world. This is especially true now that the government has raised short-term interest rates dramatically over the past two years.
But you must consider cash as an investment and not just a parking place for your money. It is important that you work at cash investing a little in order to get the best returns. Over the summer I probably talked to members who in total had way more than $1 million in cash accounts earning less than 3% when it is easy to earn 5% or more. So what are the options now?
First, a good insured bank money market fund will be paying close to 5%.Your bank or credit union has money market funds available. Check out the deal in terms of minimum investment required etc. If it’s not paying 5% or close to it with reasonable balance requirements ($2,000 or less), look elsewhere. The general money market fund rules are that you get to write three checks a month and make three “other” withdrawals a month.
Using the program I outline below, three checks a month is more than enough. Similarly, a good money market mutual fund will have equally high returns. Although these mutual funds are not insured, no one has ever lost money in them. I recommend you check out Vanguard at 1-800-662-7447 or other no-load mutual funds. Vanguard will generally yield a little more because its fees are somewhat smaller.
Second, CDs are a good investment if you shop carefully. I prefer them to bond mutual funds now because if interest rates rise bonds will go down in value, and over the past couple of years this fact has severely reduced the return in a lot of bond funds. Get a good idea of CD rates nationwide by going to www.BankRate.com. Then shop locally to see if any local banks have higher rates. I met one member this summer who somehow managed to get 6% locally for a one-year CD when general competitive rates were about 5.6% maximum. Until rates seem to be stabilizing, don’t buy long-term five-year CDs. Currently, your return on a five-year CD might even be lower than on a one-year CD because we have an inverted interest rate curve. If you happen to believe that interest rates will start going down again, then tying up your money for longer periods works, but most experts seem to think rates will stabilize or go up some more.
I suggest the following to maximize your earnings on funds you will use for expense fairly soon. This is how you want to manage your short-term immediately available funds for the rest of your life.
Once you set this up you will be automatically earning top dollar on your liquid cash investments.
Combining that with carefully chosen CDs will result in a well-managed cash portion of your investments.
Posted November 1, 2006