Dear Community Members
I’m a beginner in Investment area and looking for short term investment options only because my project/job visibility currently is for around 3 years. I’m at 40. I might need to move out of US in case project doesn’t get extension. Currently I have ~26K in 401K invested in T. Rowe Price Retirement 2050 fund in fidelity. I have cash around 25K. Kindly advise on below queries:
(1) Should I keep or take out money from 401K considering short term visibility. I know about early 10% withdrawal penalties and taxation.
(2) I was thinking about opening high yield saving account but after some research I found that since I already have fidelity account so better to open a brokerage account where I can earn 4% interest rate which is more than popular HYSA like CapitalOne 360, American express saving, Ally etc. Is opening brokerage account in fidelity is wise decision?
(3) I’m also planning to buy some Index funds so how about starting with FXAIX and how much should I start with?
(4) Any recommendation on searching low cost EFTs or T-Bills or Fidelity CDs?
Any other investment recommendations would be really helpful.
If you are setting aside money that you will need in 3 years then you are a saver, not an investor. You can’t take on that much risk in such a short timeframe. Your best bet would be a high-yield savings or money market account.
Got it. Thank you for your input on this. Since I already have fidelity account so now I’m going to add money in brokerage account because money is just sitting in checking account. Apart from this how about adding some money in only Index fund or ETF and taking out in around 3 years? I can understand that I need to pay taxes during withdrawal but hope I’ll get some profit as well in 3 years. Isn’t it?
Again…my advice here for a 3-year window is that you cannot invest…only save.
I cant find exactly what I am looking for, but here is an article about rolling returns of the S&P by time invested. What this shows is that for all 3 year periods over the last 30 years, you would have lost money in the market roughly 20% of the time. Me, personally, I am not willing to roll that dice. Further causing me concern is that the market is at historically high multiples right now.
Got it. Thank you for sharing that article. That is a kind of deciding factor whether short term investment is a wise choice or not.
Are there any recommendations on 6 month / 1 year CDs or T-Bills considering short term investment as I understood 3-year timeframe is not for investment.
I cant really provide specific recommendations. You could always do a short-term CD ladder or just throw it all in a MMF. An important thing to consider is that your rates of return are going to be mainly driven by the short-end of the yield curve. The Fed is not going to be your friend here because they are in an easing cycle.
Look at PFFA for an interest increase. It derives its return from preferred stocks. Yes, there is a risk of principal decline, but not nearly as much as with stocks. You can buy it at no commission with discount brokers like Fidelity. Buffalo High-Yield Fund is a 5 star fund to look into also.
Thank you for your response on this.
Is there any specific reason choosing PFFA because I see it’s expense ratio is 2.52% and for BUHFX expense ratio is 1.03%
I’m going to give an answer that reflects the fact that you have a timeline with a fixed duration of three years. Most any bond fund is rolling, meaning it has no fixed maturity date. So even if a bond fund like SHY has a two-year duration, it doesn’t mature on 1/23/2027! It never matures. Two years from now, it will still have a two-year duration.
I think in three years you’d like to have cash in hand, ready to exercise whatever career and relocation decisions you are facing.
So I would choose Money Market Funds, high yield savings at banks, US Treasuries (regular or TIPS) which mature in three years, or these special kinds of bond funds which mature on December 15 of the 2027.
iShare iBonds ETFs (not the same as US Savings Bonds Series I… it’s confusing)
Invesco Bulletshares
You can get these ETFs in US Treasury, US Treasury TIPS, investment grade corporate, and high yield (junk) varieties.
For example: I own IBTF, US Treasury ETF maturing December 2025. I also own BSCP, Corporate Bond ETF maturing December 2026. IBTG would be the December 2027 Treasury ETF.
I would not buy high-yield (junk) at this time, the credit spreads are too compressed. You are not being compensated for the extra risk.
I would not buy individual corporate bonds because you need to buy many to mitigate default risk. I bought a GE bond thinking it was safe, then there was some news that they were thinking of defaulting on this particular bond, and the market value immediately tanked. That was not fun.
You need to look at return and not fixate on expense ratios. PFFA uses leverage, which drives up expenses. Leverage helps you on the way up, but kills you on the way down.
Both these investments will lose you principle in a rising interest rate environment. Will interest rates rise or decline over the next 3 years? I would think decline, but the market can fool us many times.
You bought it at the beginning of the fastest increase rate increase in 100 years. Your timing could not have been worse. You are a smart person, and you still made that mistake. But I did also.
That is the problem with government artificially suppressing interest rates. It forces savers to reach for yields and take risks which are not prudent.
I didn’t own Preferred Stock during the 2022-2023 Bondmaggedon. I held it for a while but was out of it before COVID. Sorry you held longer duration bonds during that period. When IEF and TLT lost their upwards momentum, I went to cash after holding them for years. I was aware that NIRP / ZIRP was going to expire and go rotten.
I totally agree, I don’t rely on predictions, I rely on price action to tell me what to do, and I religiously stick to technical indicators. They always acts with a lag, you’re always behind the curve getting in and out, but you avoid most of the bear market and you ride up on most of the bull market. Having said that — these are advanced techniques. I don’t recommend for just anyone. You have to be quite mathematical. And disciplined.
Here’s a backtest from 1970 of a tactical approach which is in the public domain. Google or ChatGPT on “Gary Antonacci GEM portfolio rules” and you will be served up the instructions on how to implement this for free using ETFs like VOO, VEU, and BND. Shown is GEM BLUE vs S&P500 GREEN, logarithmic price scale. Notice it did not participate in the withering bear markets, which is how it won. “Win by not losing”. But… it has underperformed recently. So, you can’t have it both ways. You have to decide if you’re willing to put up with bull market drag in order to not get killed in bear markets. That’s my choice.
This is conceptually what Wall Street does in-house for their own internal profits. They sell “buy and hold” to the masses, but they do sometimes the opposite internally. This conflict of interest has gone on… forever, basically.
Starting with $10000 on 1/1/1970, the S&P gave you back $3 million, the tactical portfolio $17 mliion.
Long term stock market returns forecasts are not useful for trading, but they do inform my overall risk appetite, which now is no more than 60% equities ever (I’m almost 64 anyway, so that’s not too cautious).
Tactical approaches are morally equivalent to, “if it starts raining put on a raincoat. If the sun comes out, take it off”. Nothing more complex than that.
