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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?

Dear Paul,
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.

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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

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See Also
Building your emergency fund
The case for money market funds

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