Answers to the Major Concerns That Affect Your Finances

Frightened by the Dow`s ups and downs? You are not alone. Money market funds have captured $53 billion in assets for the year to date vs. $44 billion over the same period in 1996 as investors focus on protecting principal and rebalancing equity-heavy portfolios. But, in the quest for safety, folks may be skipping over a real opportunity.

Hugh F. Doherty, DDS, CFP

Better Than Money Market Funds: Short-Term Government Bond Funds

Frightened by the Dow`s ups and downs? You are not alone. Money market funds have captured $53 billion in assets for the year to date vs. $44 billion over the same period in 1996 as investors focus on protecting principal and rebalancing equity-heavy portfolios. But, in the quest for safety, folks may be skipping over a real opportunity.

Short-term government bond funds, which invest primarily in U.S. Treasuries with maturities of three years or less, typically are a tough sell because they cannot guarantee principal protection like money market funds. Yet, performance figures show that annual total returns on short-term government bond funds consistently beat money funds. William Stevens, who manages Montgomery`s Short Government bond and Government Reserve funds, predicts that "the Fed could raise rates by as much as three-quarters of a percentage point, and short-term government bond funds would still offer a better total return than money funds." Frank Trainer, director of fixed income for Sanford C. Bernstein, an investment-management firm that offers only short- to intermediate-term bond funds in its fixed-income menu, goes one step further: "Even for my most risk-averse clients, I do not recommend money market accounts," he says.

Of course, with a higher yield comes slightly more risk. But consider the following: On a rolling 12-month basis from 1970 through 1995, neither money market funds nor two-year bonds experienced a single negative return. Better: Over that same period, short-term bonds provided an average annual return of 8.4 percent, one percentage point higher than money funds. For a $50,000 sum invested in 1970, that return advantage translates into a tidy $77,675.

Not everyone should opt for a short-term bond fund for the cash in his or her portfolio. According to Gerald Thunelius, manager of the Dreyfus Short Intermediate Government fund, "The key is liquidity. If you plan on staying invested for at least a year, then short-term government bond funds are the better place to be."

Money-Smart Management: 11 Rules of Thumb

Financial planning is not nearly as complicated as it seems. Some of my simple rules . . .

1. Reinvest. All mutual funds let you automatically reinvest earned income in additional shares. Sign on. You can`t spend what you don`t get your hands on.

2. Enter credit card purchases in your checkbook. This running tally of how much you`re spending lets you know whether you really can afford that next purchase.

3. Buy stocks after they split. A stock`s price often rises on news of a split and falls right after the split. Wait and take advantage of the lower price.

4. Beware of very high stock-dividend yields. The higher the yield, the higher the risk. A high yield is designed to attract investors.

5. Beware of when a no-load fund has a load. Although no-load funds don`t charge you to buy or sell shares, some have annual 12b-1 fees to cover promotional costs. Switch out of a fund with a 12b-1 fee that is higher than 0.25 percent of assets, but beware of tax implications. No-load index mutual funds make experts of us all. These funds invest in a representative basket of stocks of an index - such as the Standard & Poor`s 500 Index - and their returns mirror that index. Three-quarters of all professional money managers do not outperform the S&P 500 Index on a regular basis.

6. Limit the number of funds you own. The average investor needs five funds at the most - a money market fund, a growth fund, a growth and income fund, a small-company fund and an international fund.

7. Don`t choose bond funds for fixed income. Contrary to what many people think, these funds do not hold onto bonds until they mature. A fund`s yield varies continually as the manager buys and sells securities. Instead, buy Individual A-rated (or better) corporate bonds or Treasuries held until maturity.

8. Keep municipal bonds out of your IRA, Keogh or SEP. Because the income from these bonds is tax-exempt, yields are lower than on taxable bonds. Anything you put in your IRA is sheltered from taxes, so go for higher-yielding corporate bonds.

9. Check Social Security records every three years. Compare your W-2 withholding with the Social Security Administration`s printout, which you can obtain by calling (800) 772-1213. An uncorrected mistake could reduce your lifetime benefits.

10. Have your kids take college courses in high school. Eliminating one college course can save at least $600 - if the college charges by the credit, not by the semester.

11. Double-check the check. Always add up your restaurant tab. Miscalculations are not in your favor.

Hugh F. Doherty, DDS, CFP, is a national lecturer, financial advisor to the health-care profession and CEO of Doctor`s Financial Network. For personal financial consultations or to have Dr. Doherty speak to your study club or dental society, call (800) 544-9653.

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