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 Dear
Dr. Don,
I currently have $100,000 to invest short term. I want to
purchase a home in the next two years so I believe I should invest conservatively.
I am considering keeping the money in a money market or a jumbo CD. Are there
other alternatives? Thanks!
-- Gene Gravitate
 Dear
Gene,
I'm with you and agree that you should be investing conservatively
when you have an investment horizon of two years or less. CDs, money market accounts
(MMAs) and money market mutual funds (MMMFs) are all good choices. CDs typically
aren't as liquid as the other choices with penalties for early withdrawal. You
can shop rates
for all of these investments on Bankrate.
A few alternatives
would include investing in U.S. Treasury Securities through the Treasury Direct
program, buying municipal short-term debt or buying into a short-term bond fund
instead of a money market mutual fund. Buying into the municipals would depend
on your marginal federal income tax bracket. Treasury securities maturing inside
of two years can't really compete with the MMA, MMF or CD rates. The bond fund
has enough price risk that I can't recommend it for your situation.
From a yield perspective, the highest
yielding MMA, MMF and one- to two-year CDs are
all within a quarter percent of each other. There's
not much, if any, yield pickup for investing in
jumbo CDs or MMAs so I'd recommend that you stay
with FDIC-insured deposits. The table below shows
current rates at the time I wrote this reply.
 |
| Current rates | |
|
| Investment type: | Yield | Yield
convention |
Tax
equivalent
yield @ 28% |
| MMA (regular) |
| MMA (jumbo) |
| MMMF (taxable) |
| MMMF (tax-exempt) |
| 1-year CD (regular or jumbo) |
| 2-year CD (regular or jumbo) |
| 2-year AAA municipal debt |
|
Besides safety and yield, you should also consider convenience
when it comes to where you invest your money. Don't tie your money up in
a two-year CD if you're not sure when you're going to buy that new house.
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