Short-term investing? Stick
with money markets
Dear Money Matters,
I need to roll over my 401(k) from a
prior employer into a retirement IRA and then withdraw the entire
balance before year's end. The reason I need to do this is due to
a medical hardship; these funds are the last resort. The transfer
from the 401(k) to an IRA will allow me to have no tax withholding
taken out as I expect minimal or no tax obligation for 2001. Given
this, what would you suggest is a good no-load investment fund where
this money could potentially gain over the next two months? Or is
there a better strategy altogether?
Your question is akin to trying to catch lightning in a
bottle. I wouldn't recommend putting any significant amount of money
into a mutual fund for as short a time as a couple of months.
The reasons are plentiful. For one thing, the market
of late has been exceedingly volatile. A two-month investment period
isn't nearly long enough for most funds to ride out the ups and
downs of the market and turn a profit. Additionally, even no-loads
have fees and expenses you may incur.
Choosing a fund suitable for a two-month run boils
down to something of a crapshoot. You do your homework, you pick
a fund and just pray that you caught it in a short-term uptick.
However, if you look at some of the best short-term
performing mutual funds, you'll see that Lady Luck doesn't smile
on them all that often. For instance, the American Heritage Fund
was up a stunning 87 percent for the year as of the end of February.
However, that likely is a short-term blip. The fund dropped some
37 percent the prior year. Even more telling, a $10,000 investment
in the fund in 1990 would have withered to $2,492 by now -- over
the same time frame where quality funds performed far better.
Other top performers for early 2002 aren't as bad,
but neither do they warrant any confidence, particularly over the
short term. Most, in fact, have heavy holdings in gold, gold-related
companies and precious metals. Those do well when precious metal
prices are rising but, again, that's no sure thing over the course
of only two months.
That leaves more conventional stock funds -- take
a gander at them over the past couple months and you'll see that
they, too, have bounced up and down in a jumpy market and economy.
All that taken into consideration, unless making a
meaningful profit with your money is an absolute must, I would urge
you to stay away from the stock market with such a short-term investment
horizon. Instead, play it safe and go with a money market account.
Unfortunately, those returns aren't going to set the world on fire
-- the going
rate right now is about 2.61 -- but it beats the heck out of
risking your money in hopes that a two-month ride will somehow work
out to be profitable. Chances are that just isn't going to happen.
-- Posted: March 19, 2002