Tuesday, October 6, 2009

Leaving Cash – Taking Risk

Over the past week, I have rebalanced a few of my investments away from cash into riskier assets.

Brokerage Account: In addition to my traditional savings vehicles (Savings and CD's), I have had cash (approximately $5,000) invested with Vanguard in a tax-free money market mutual fund (VMSXX) for years. When yields were healthy, it provided a nice, tax-free savings vehicle with negligible risk. Unfortunately, money market rates are essentially zero. As a result, I decided to take a little risk and invested the money a riskier asset, Vanguard High-Yield Tax-Exempt Fund (VWAHX).

Rationale: Definitively a risky move, the risk premium over the money market rate justifies the risk. I will watch the fund's performance carefully. I expect to be out of the fund in 12 – 24 months.

IRA Account: When times got scary last year, I moved a very large percentage of my IRA to cash. Gradually, I have been moving the money into the market while maintaining a slug of cash. Although I will retain a small trading reserve in cash, I moved the remaining cash into (PLDDX) the Pimco Low Duration Fund.

Rationale: By pushing out the duration (1-3yrs), I expect to double or triple the yield (compared to the MM fund) on this slug of money. Over the years, Pimco has proven to be an outstanding steward of investor funds. I considered using their Total Return fund; however, I am believe interest rates will rise. In a rising rate environment, a lower duration is better.


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