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Money Matters

No-risk, big-return investment? Dream on

Dear Money Matters,
I'm looking for an investment to generate a return of a minimum 7 percent interest. I have $180,000, and I am looking to protect my principal as much as possible. I have 10 more years to work before I can retire. I'm looking for a short-term investment until the market returns to normal.

Dear Judy,
Looking for an investment that's both completely safe and returning at least 7 percent these days is akin to finding an honest Enron executive. The primary reason is that interest rates are so low. That's been good news for borrowers because low rates push down the cost of debt, from mortgages to credit cards. It's lousy news for savers -- the return on fixed-rate investments is abysmal.

To illustrate: The going national average for a five-year certificate of deposit is around 4.75 percent -- well below the targeted 7 percent you specify. The shorter the time frame of the CD, the lower the interest. By contrast, money market mutual funds, while offering flexibility, are even lower (there, the prevailing national average for a high yield money market is in the neighborhood of 2.6 percent).

Another issue to tackle is what you mean by "short-term." If I can be granted the liberty of reading into your question a bit, it sounds as though you're looking for a safe place to park some cash (maybe for a year at most?) before the markets become more appealing. If that's the case, you should toss the idea of a safe 7 percent return on the compost heap of great ideas that never were because that simply isn't around.

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Instead, go for a money market fund or a one-year CD. The national average was an anemic 2.18 percent in mid-March; click here for current CD rates; click here for current money market rates. Granted, it's nowhere near what you hope to earn, but it keeps your money absolutely safe and accessible.

That leaves you with two final variables -- whether you'd be willing to take a little risk in hopes of getting to your 7 percent return target or, by chance, if your view of "short term" is longer than a year. If you're comfortable taking on a modest amount of risk over the short term, you may want to look at a bond fund. These invest in a portfolio of bonds, which offers you immediate diversification.

Additionally, bonds often prove less volatile than stocks, particularly if they're government bonds or high-quality corporate bonds. I looked up one short-term bond fund and found that, in 2000 and 2001, the fund returned more than 8 percent, which betters your 7 percent goal. However, bonds are by no means a sure thing, particularly if interest rates go up, which lowers the value of existing bonds. By contrast, the fund I found only returned a paltry 3 percent in 1999.

Another option, particularly if you're looking at more than a year, is an index mutual fund. These -- whose holdings mirror the stocks in a particular index, such as the Standard & Poor's 500 -- are generally inexpensive to own and solid performers, particularly in down or volatile markets. Again, though, no absolutely safe bet. If the markets go down, index funds inevitably follow.

-- Posted: March 26, 2002

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