Conference nyoss1::market_investing

RE: DPDMAI::VETEIKIS
    
>    Since I can get a better return on a bond-fund, why would I want to
>    keep any money in a low-interest money market mutual fund these days? 

The advantage of a Money Market Fund over a Bond Fund lies in its 
susceptibility to interest rate swings (interest rate risk).  A basic 
characteristic of fixed income securities is that the longer the term (30 yr 
bond versus a 5 year bond versus 6 mo commercial paper, etc) the more the value
changes for a given interest rate change.  

By definition, money market securities have terms of under 1 year.  As a result 
of this very short term, these securities are _relatively_ immune to interest 
rate risk.

As risk increases so does the return demanded by investors.  Therefore, longer 
term securities offer higher yield but are more volatile in price.  Many fund 
families offer fixed income funds with 4 general terms: Money Market (very short
term), Short Term (approx. 3-5 yr avg. term), Intermediate Term (~8-12 yr?) and
Long Term (~15-30 yr).  

I have read several articles in Kiplingers, the WSJ, etc. which advise that 
Short Term Bond funds are VERY popular now because they offer significantly 
higher yield than MM Funds and are still _relatively_ stable over small 
interest rate fluctuations.  When (not if) interest rates start climbing again,
these funds will drop in price.  I am of the opinion that the higher yield 
these funds offer will more than offset the price adjustments.  I am assuming 
(perhaps falsely) that interest rates will climb slowly over time, not in a 
sudden jump.  

I have a Short Term Bond fund account with Strong, but they are offered by 
Scudder, T Rowe Price, Fidelity and many others as well.  Most will provide 
check writing if requested as well as automatic transfers from your bank account
each month.  Good Luck,

Tom

    re. .1
    
    Tom, I am invested in the Scudder ST Bond Fund, and like you depicted,
    since its value has varied so little in the last 3 years, this is what
    prompted my topic question. I get fairly good return, 6-8%, and I can
    write checks out of it. My money market fund is around 3% right now.
    
    I appreciate your overview of the risks of short to long-term funds,
    especially since I don't have any experience with intermediate or
    long-term bond funds.
    
    CV

      I  agree with the opinions expressed in .1 and I have money in the
      Scuder ST Bond fund.  I'm pleased  with  its  performance,  as  an
      alternative to a money fund.

      I  believe  that  anyone  using  a  short  term  bond  fund  as an
      alternative to a money fund should keep a careful eye both on  the
      specific  fund they choose and on interest rate trends.  I suspect
      that at some points rates will trend up sharply enough  that  I'll
      want   to  bail  out  of  the  ST  Bond  fund  fairly  quickly  to
      avoid/minimize loss.  My expectation is that I can keep that  loss
      small enoufh that the higher interest I earn now will offset it.

      If  you aren't willing to keep an eye on rates so you can minimize
      this risk, then you might NOT want to consider a ST Bond fund.

    I am pleasantly surprised with the Dreyfus USTreasury Short Term  
    fund.  The price is up 1% since mid-August, and should go up again
    today if the unemployment numbers are bad and the Fed eases rates.
    The fund is loaded with 2-3 year Treasury securities, yielding 
    about 4-4.5%, free of state tax.  Seemed like a good deal to me.
    
    But, along the lines of -.1, I still read predictions of rates heading
    back up, as soon as early 1993, and would be interested in what you
    bond fund holders plan to do when that happens. 

    
    	I am also in the Scudder STB fund and am very happy with it.
    Another great fund from Scudder is their Short term global income fund. 
    This is of the short term variety also, but invests in bonds all over
    the globe. It has been averaging between 9 and 11% since it was started
    in the spring of last year. The NAV over the last year has been between 
    11.85 and 12.19, the majority of that time has been at 12.00 +/- .05 or
    so. Last week in the mail they sent out a short note explaining
    everything what was happening in Europe at the moment and since the
    fund was only partially invested in Europe that it wouldn't have any
    noticable effect on the fund. They even boasted that the NAV inched up
    a few pennies during that period as well. In times like those it is
    nice to be reassured that your money is safe for the most part. 
    
    John

A Money Market fund is managed to provide low_to_0 risk of your capital by 
manageing the fund to a daily NAV/share of $1.00. Although interest rates may 
fluctuate, you will seldom find a Money Market fund that does not protect your 
capital.  

Bond funds are managed to provide a higher return, but you will seldom find one 
that does NOT have fluctuations in the daily NAV.  Changes in NAV are changes in 
your capital investment, although it all comes out in the wash (no pun intended)
at the monthly distribution time. So, if you can afford to have your capital 
investment be at risk (and the advertised return is usually an indicator of risk)
on a daily basis, but balance that with a higher ROI at monthly distribution, 
then go for the Bond Fund.

The other problem with a Bond fund is that each time you put money in the fund, 
you are making a BUY and each time you write a check, you are making a SALE.  
Since there are Capital Gains/losses involved due to fluctuation of NAVs, you 
have some record keeping to do.

I maintain a NOW Checking account, a Tax Exempt Money Market Fund and a Tax 
Exempt Bond Fund to handle my cash.  I keep enough money in the NOW account to
cover weekly checks and when it drops low, I backfill with a check from the Money 
Market Fund.  This keeps more of my cash in a higher yielding vehicle.  When the
balance in the Money Market Fund drops low, I transfer a chunck from the Bond 
Fund. Again, to keep more money earning more interest, but also to make record 
keeping easier since there still is some level of taxable CG in the Bond Fund.

However, since the difference between the Tax Exempt Money Market fund and the
NOW Account (net taxes) is rapidly becoming negligable due to our "soaring" 
economy, I am considering eliminating the Money Market Fund.

FWIW

Dave

    re .3
    
    I've only been invested in the bond funds for about a year now, so
    I've never had to deal with the interest rates going up and pushing the 
    NAV down (in any dramatic fashion). 
    
    Which leads me to my next question: I take it you monitor the rates 
    fairly regularly and when they start to go up and up, you switch part,
    or all, of your investment to the fund family's money market fund?
    
    re .6
    
    I didn't think about the tax implications -- Thank you. 
    
    Isn't there anything I can do with my money that doesn't have tax
    implications (he sez cynically). geesh.
    
    CV

>    Which leads me to my next question: I take it you monitor the rates 
>    fairly regularly and when they start to go up and up, you switch part,
>    or all, of your investment to the fund family's money market fund?
    
      Thats  the  general  idea.   Since I've been in ST Bonds the rates
      have come down, so I've benefited from an INCREASE in  NAV.   When
      (as  the  man  said,  "When, not IF") rates start up I expect that
      I'll loose at least some of that capital gain before I  can  react
      and  sell.   My plan is that the capital gain plus higher interest
      will more than offset the capital loss.

This same question was asked/answered in the April '93 issue of the Benham
market letter - Perspective. The VP of research has the same dilemma with
his own mother's money. Here is how he answered:

A conservative investor all her life, my mother was taught to follow the
savings rates posted in the bank lobby. When I told her what our GNMA fund
was yielding, she gladly left the ranks of savers and became an investor
for the first time in her life. I couldn't help but feel anxious, though,
because no matter how low the risk, the actual returns of any investment 
are never guaranteed. 

This is the advice that I gave to my mother:

First separate your savings from your investments. Your savings are cash
reserves, or 'Mattress Money'. Your investments are intended to produce 
income or growth. With savings you don't want ANY fluctuations in the value
of your principal. It's money with checkbook liquidity for emergencies.
Your yield should be enough to keep pace with inflation.

After she allocated some of her cash reserves into savings, she still had
to take care of her primary concern: income. For that you have to make 
'investments'. It's not necessary to take high risks, but you do need to be 
able to tolerate some fluctuations in the value of your investment. That's 
why it's so important to focus on the long-term investment objective 
instead of day-to-day moves in the market. That's his job. (Portfolio mgr).

My mother's objective is achieved by the combination of income and credit 
safety provided by a Ginnie Mae fund investment. It's best for her to be 
patient and to remember that INCOME is her primary need. So a buy and hold
stategy makes sense.

The accompanying table compares dividends paid for 1992 on a $10,000
investment in 3 funds: Gov't Agency Fund (money mkt),Adjustable Rate Gov't
Securities (ARM Fund) and GNMA Income Fund. The two mortgage-backed funds 
paid substantially higher dividend despite a dramatic surge in mortgage
refinancings.

A bond fund's higher, steadier dividends act as a cushion against possible
share price declines. For example, the GNMA Fund generates enough div yield
(compared to the money market designed to maintain a stable share price)
that it's share price could (and may) drop 35 cents per year and it would
still generate a total return that would equal the return from a money market 
fund. For the less volatile ARM Fund, the share price could fall about 20 
cents per year and still match the return on the money market fund. The 
longer you stick with these investments, the greater the cushion you build.

Patience, balance and diversification enable new investors like my mother to 
ignore the day-to-day swings in a fund's share price. 
These are sensible,achievable goals.

     ----------------------------------------------------------------------
              EARNINGS ON A $10,000 INVESTMENT FOR 1992
     
      Benham Fund               Div.    Share price     Avg annual total
                               Paid        Range            Return
     ----------------------------------------------------------------------

     Government Agency        $323.20    $1.00-$1.00        3.39 %

     Adjustable Rate Gov't
     Securities (ARM)         $594.95   $10.01-$10.17       5.23 %

     GNMA Income Fund         $769.04   $10.45-$10.92       7.67 %

     ----------------------------------------------------------------------

Note usual disclaimers about price/yield may vary. Price will fluctuate,etc.
Shares may be worth more/less than what you paid,etc ....