Jive Weasel

You may be thinking, “Five years is an awfully long time to keep my money dozing away in a money market fund.” Well, yes and no. During some time periods, investors who bought bonds maturing in five years got very little in the way of extra yield versus what they could get in a good money market fund. During other periods, three-year to five-year bonds yielded a good deal more interest than money market funds yielded.

Whenever you investing bonds that won’t mature soon you are taking on risk. First is the risk that the bond issuer may fall into financial trouble between the time that you buy the bond and the time that it is due to mature. Second is the risk that interest rates in general could greatly increase. If the latter happens, caused more than likely by unexpected inflation, you may end up holding a bond that pays you less interest than the rate of inflation.

Most of the time, bonds that mature in a few years should produce a slightly higher rate of return for you than a money market or savings account. However, if you invest in such bonds, recognize that you may end up earning the same (or perhaps even less) than you would have earned had you stuck with a money market fund. Rising interest rates can deflate the value of an investment in bonds.  Invest in bonds only if you expect to hold them for at least three to five years.