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Ask MAX: Should I Settle for 3%?

06/30/06 -

Robin asks: 'I am retired and widowed. Since the stock market has been so up and down, should I just put my savings (less than $100,000) in a savings account paying 3%? I feel that I am too old to always be keeping an eye on the stock market.",

The stock market is always up and down. The key is to only invest an amount of money that you can stand to see go up and down. The single biggest mistake investors make is investing too much of their portfolio and panic selling after an ordinary 10% - 20% drop in the market — often right before the market turns around.

Consider putting some of your money in a low fee stock index fund like Vanguard 500 Index (VFINX) — perhaps just 25% if you are nervous about losing money. A larger chunk, say 50%, should be in lower risk investments. A low fee bond index fund like Vanguard Total Bond Index (VBMFX) is a decent choice with limited downside (perhaps 10% in a down market for bonds) and a roughly 5.25% yield. The rest (25%) could be in a virtually no risk investment like a Vanguard money market fund — the Vanguard Prime Money Market Fund, currently yielding just under 5%. Fidelity has an equally good and cheap lineup of similar funds.

Buy these funds through Vanguard to save on commissions that an ordinary broker may charge.

As for earning 3% in savings - shoot higher. I've linked my checking account to HSBC Direct and ING's Orange Savings account (both are “online” savings accounts — FDIC insured with no risk). You can sweep money in anytime and earn over 4% (these are not teaser rates but current rates will change with swings in shorter term interest rates). HSBC Direct currently yields a whooping 5.05%. Your bank branch can't come close to matching these rates on liquid FDIC insured money with no minimum or transfer fees.

A Fund Fee We Love

06/22/06 -

Nobody hates mutual funds fees more than we do. At MAXfunds.com, we absolutely hate loads, deplore high expense ratios, and barely tolerate 12b-1 fees. So you'd think when the Securities and Exchange Commission ruled last year to continue to allow mutual fund companies to charge shareholders for selling shares of a fund (up to 2% in redemption fees) that we'd be hopping mad. But we're not. In fact, we're actually tickled pink. Redemption fees, you see, are the ones we absolutely love.

Redemption fees are charged by some funds if an investor sells a position held for less than a certain period of time. The amount of the fee and the redemption fee period varies from fund to fund, but a common redemption fee is 1% of sales made within 90 days after purchase.

Redemption fees do bear a strong resemblance to back-end loads (or contingent deferred sales commissions or CDSCs), which we hate. So why are we in favor of a fee that seems to do just about the same thing? Because redemption fees discourage short-term investing - the practice of hopping in and out of a fund to benefit from quick rises in NAV prices.

Why Bother?

While we have nothing against shopping around for a high-yield CD, we think you can do better with low-fee bond funds most of the time. In fact, our general forecast for stocks coupled with our risk aversion in our lower risk portfolios is why we own bond funds.

Callable CDs

06/01/06 -

Imagine getting an FDIC-insured 6.5% return with zero risk! Too good to be true? With Callable CDs you can get mouthwatering returns without the ups and downs of stocks. Trouble is, you can’t have your cake and eat it too.

CDs (certificate of deposit) are appealing to risk-averse investors. They are FDIC-insured against loss (unlike mutual funds) and readily available with just a few thousand dollars at your local bank – seemingly without sales charges or commissions.

With interest rates on the rise, CDs are becoming more attractive, particularly to those worried about stock market gyrations and low dividend yields from stocks.

Because of the safety, CDs typically don’t yield much – the best CDs yield slightly more than government bonds for similar maturities. As interest rates have climbed in recent weeks, investors can typically get around 4% - 5.5% on better CDs, depending on the term.

New AARP Fund

05/26/06 -

It's a match made in mutual fund marketing heaven.

AARP, the organization dedicated to the interests of persons who aren't quite as young as they used to be, launched its first three mutual funds and the end of 2005. And you don't have to be over 50 – the minimum age to join AARP – to invest in them.

AARP's Conservative, Moderate, and Aggressive Funds are geared toward investors with risk tolerances ranging from, well, conservative to aggressive. Each fund invests in a different mix of three underlying index funds managed by State Street Global Advisors. Those indexes track U.S. stocks through the MSCI U.S. Investable Market 2500 Index, international stocks through the MSCI EAFE Index, and U.S. Bonds through the Lehman Brothers Aggregate Bond index.

According to AARP, the aim of the new no-load funds is to make the investment process easier in hopes of encouraging people to increase the amounts they invest.

April 2006 performance review

Bonds took another dive in April – a move that appears to be continuing into May. Long term U.S. government treasury bonds – the most interest sensitive bonds – fell nearly 2% in April, after a 3% drop in March. Bonds are down just over 5% for the year, and now have a three year average return below 3% (or only slightly above what you would have received in a good money market fund over the same period).

Viva la Revolution!

05/09/06 -

Newly elected socialist/populist Bolivian President Evo Morales sent military troops to natural gas facilities on May 1st, claiming state control over the country’s resources. Oil companies were given 180 days to renegotiate contracts with the country – almost literally at gunpoint.

Such a move is bad for the global “oil imperialists” of the world like Exxon Mobil, Petrobras and Total S.A. It doesn’t bode well for investors in Latin American mutual funds like T. Rowe Price Latin America (PRLAX) – our current Latin American fund category favorite.

When socialism is on the march it’s best to get your money out of the way.

Oils Well That Ends Well

In case you’ve missed the nonstop media coverage, gasoline prices are again approaching $3 a gallon. Does this “crisis” situation offer any investment opportunities? Can it derail the economy and stock market? And why is gas so expensive anyway?