Dear Expert:
I see all these investment strategies for having millions of dollars when you retire and other future needs, and that is great! But what about the short term? If I'm putting money away for that summer vacation next year, where is the best place to put it to get a maximum gain with medium risk (I don't want to miss the vacation!) over the short term? Expert Answer:
Take no risk with this money! Vacations are important. Your worst scenario would be to have worked hard to save and then invested in a fund such as an equity fund or even a bond fund and find that markets suddenly move against you and you become unable to afford the vacation.
I would be inclined to look at a high interest savings vehicle (if you can find one) that is highly liquid, or a good, low-cost money market fund. When choosing a money market fund, the emphasis really should be on cost. Make sure its management expense ratio (MER) is reasonable.
Check the returns the fund has been generating over the last few months or even during the past month. Remember, the cost of the MER is an expense your savings return will bear over the time until you withdraw from the fund. If the interest rates are around 2% and the fund is hitting you with a 1.25% MER, you'll be making a mere 0.75% net. Put another way, you'll be spending 62% of the return on your money just to manage the fund and pay the advisor. For a money market fund, that's rubbish!
(Editor's Note: One-year returns at May 31, 2004, for Canadian money market funds tracked by Morningstar ranged from 2.95% to 0.19%, with the median return 1.84%. MERs for funds in the category -- excluding segregated funds -- ranged from 2.26% to 0.05%. The median MER was 0.97%.)
Your bank or other financial institution is a good place to start a search for a money market fund.
Do you have a question?
No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
All Ask the Expert questions are read and considered. Unfortunately we can't provide individual responses or respond to every question. Please note that questions about specific securities cannot be considered. Click here to Ask the Expert.
No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
