A few days ago, I mentioned I invested in the stock market at a low with money marked for an intermediate time horizon. I didn’t get the price I wanted, however. I initiated the $3,000 investment in VTSMX, the index fund following the total stock market, on Monday night following the stock market’s sharp decline. My order at Vanguard wasn’t placed until Tuesday’s fund price was set, after the market had regained over half of its losses.
Next time, I will be prepared to take advantage of dips at the right time. As commenters suggested, I will opt for an ETF that tracks the market, accepting a small transaction fee in return for an immediate price. Additionally, I’ll keep money in a money market account at a brokerage to eliminate a delay caused by transferring funds from an external account.
Additionally, I believe it’s time to get a better rate of interest for the cash in savings I might need within a year. This short-term money would earn a better return in a money market fund. The bulk of my cash is earning 3.0% APY at ING Direct and some earning more at FNBO Direct. Yesterday, however, I invested a big portion of my cash in VNJXX, the New Jersey Tax-Exempt Money Market Fund.
This money market fund is currently earning 4.83% APY based on the average yield over the past seven days, and the interest income is tax-free, both federal and state (for me as a resident of New Jersey). Since there are no fees, as the economic situation changes and the fund begins earning less than the after-tax equivalent of a high-yield savings account, I can easily move the funds back.
Money Market Funds like VNJXX are riskier than savings accounts, however. The prospectus outlines five specific risks: state-specific risk, income risk, credit risk, manager risk, and non-diversification risk. I weighed these risks and determined that the fund is a better option for most of the cash I am keeping for short term goals like purchasing a house.
Updated August 16, 2013 and originally published October 2, 2008.