Oakland, CA | East Bay; Bond Fund Investing Options for Short-Term Outcomes

Hi, I am Erik Wolfers. I’m the founder and managing member of First & Main Financial. We’ve been helping clients with personal financial solutions since 2001. Today I want to talk a little bit about uses of cash—in the short-term or intermediate term or even long-term.

We met with the client today and talked a little bit about what to do with extra cash. There’s no perfect right answer unless you know what you want the outcome to be. In the short-term, if you’re going to need cash and you want all of your cash available to you, then you don’t want to put it at risk—you wouldn’t want to put it in something that might go down in value.

These days, and as it’s been for quite a while, you don’t really get much return, or zero return essentially in a checking account or savings account. There are online savings accounts from various institutions that maybe pay .8% right now or something like that, that are FDIC-insured—and there are CDs available which have a maturity date.

Something that we use for some of our clients as a sort of a cash substitute are ultra short-term bond funds. What that means is you’re putting your money in a pool with others, and then a manager is buying bonds that mature generally within about a year-and-a-half. A bond is just a loan—you’re loaning your money to someone else and they’re paying you a stated rate of interest; at the end of the term of the bond you get your money back. Generally, the safest entity to loan money to is considered the U.S. federal government—so if you buy a U.S. bond, you’re basically just loaning the government money, helping to finance operations.

There are corporate bonds, municipal bonds—there is a lot to know, but more than anything it’s simply you loaning your money and getting money back.

Ultra short-term bond funds are relatively stable but they’re not perfectly stable. There is some volatility. So there is some risk if you put money in ultra short-term bond funds and you need to sell it in the short-term. You might not have made any money, or you might have lost a little bit of money. But they are significantly less volatile then the stock market or even a bond fund where the average maturity of the bonds inside of the fund is much longer—3 years, 5 years, 7 years, 20 years. There are bond funds that have mostly bonds that don’t mature for a long time; more than 10 years, more than 20 years—so the risk is greater and the volatility is greater in those kinds of funds, but they also do pay a higher rate.

So again, the question becomes—when do you need the money? If you can afford to ride through volatility, you’re going to get paid more by participating in a pool of bonds that don’t mature for a long time. If you need money in 2 years, 3 years, 5 years, you can take risk with it and then you just need to understand what the potential outcomes might be.

If I need money in 3 years and I put it in the stock market right when I need it, the stock market might be down and I may have not made any money, or may have even lost money. If it turns out that I didn’t need the money, it might wind up being better over the long-term to have that money invested in stocks rather than bonds.  It’s impotant to understand your time frame for needing the money, what potential outcomes you will accept, and then act accordingly.

We help our clients with these kinds of questions all the time. If you are looking for some financial guidance; whether for a one time financial plan or continuing advice on your investments, we invite you to meet with a First & Main Financial planner for a free consultation. We would be more than happy to sit down with you, assess your situation and review our services to help navigate your financial future.