Can I use my mutual funds as a savings account?
I have around $75,000 sitting in a money market savings account. This is pure savings. I don't plan on needing any of it for at least 2 years. Should I park it in a mutual fund (or a few) and pull out what I need when I need it or continue to contribute as I save? The money market does not pay much interest.
Great question! The answer is once you put together your emergency fund, you should invest your other savings. Here's something to think about: The markets are volatile in the short-term (0-3 years) but over the long-term they tend to go up. Therefore, because your goal for your money is considered short-term, you should be careful in the amount of risk you are taking. You do not want to face a drop in the market when you need the money! Here's how I would aproach it:
1) Anything you need within a year, invest in a cash like investment. (Money Market, Savings, Checking)
2) Anything you will need within 1-3 years, invest in a conservative investment. (CD ladder, short-term bonds, ...)
3) Anything you will need within 4-7 years, invest in a moderate risk investment.
4) Anything longer term, you would be able to take more risk for possibly more growth.
Find out exactly what your goals are for this money and invest your buckets accordingly.
I hope this helps.
Hello and great questions. The answer is yes you can certainly buy low cost not load mutual funds from lets say Vanguard, and they funds will have liquidity in basically one trading day. There will be no up front or back end sales charge on your money. The question I would really concentrate on however is how much risk are you willing take? What if there is a market correction, are you comfortable with your $75,000 only being worth $70,000. I recommend sitting down with a Certified Financial Planner and complete a good risk tolerance assessement to determine and understand what you amount of risk you are willing to accept. It is the age old of risk vs. reward.
If you are planning to have your money in savings over a long period -- definitely invest it! Mutual funds are a good way to do that. Rule of thumb is to keep enough money in a money market type of savings plan to cover two to three months of living expenses should you lose your job unexpectedly. The reason? You won't want to sell your mutual funds for living expenses if the market just went into a downturn as you should have savings money to see you through that. The alternative is to buy a short term bond mutual fund with the money set aside for living expenses and buy a diversified set of growth funds with the rest. Remember, saving money is only half the equation. It is imperative to invest to keep up with longer term inflation and taxes.
For someone in your situation that invested $75,000 in a lump sum in 2000 in an S&P 500 Index fund, they had lost roughly half their investment by the end of 2002, regained their balance by 2007, lost over half again by 2009 and then finally regained their balance in 2013. If that is an acceptable possible outcome then go ahead and invest!
There are many ways to invest and mitigate risk...and yes with such low-interest rates it is hard having that much money earning so little. At a minimum keep any money you will need to pull out in a lump sum in the next 5 years in savings. You need to find an advisor that will help you invest a portion of your funds in a low-risk portfolio. One strategy we use to moderate risk is to buy stocks that pay dividends, and paid and actually increased them during the above-mentioned market turmoil. Here is a link to a definition of the Dividend Aristocrats - a good place to start: https://www.investopedia.com/terms/d/dividend-aristocrat.asp
An easy way to invest in these high-quality stocks is through an ETF by ProShares that does it for you, ticker symbol is: NOBL With this strategy the value of your portfolio will go down in a correction, but based on 25 years of history, your income from dividend payments will likely increase even through market drops.
Without knowing your other assets or other investments you have, I cannot really give you much advice. That said, why have you been sitting in this much cash in this low interest rate environment? If you don't need the money and could continue to add to the account, then the likely answer is yes, invest. If you are going to use the mutual fund, then I would probably use a broad S&P fund or a couple of different index funds.
Hope this helps and best of luck, Dan Stewart CFA®