Re: High income, low risk? :-)

From: "L. Chen" <am302@FreeNet.Buffalo.EDU>
Subject: Re: High income, low risk? :-)
Date: Sun, 9 Aug 1998 16:37:05 -0400 (EDT)

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> I'm having a difficult time determining how to allocate some
> assets for the short term while still maintaining liquidity
> and achieving a better return than that offered by CDs or
> money market accounts.  Here are the specifics:
> 
> I have $140,000 in a money market fund.  There are other assets,
> but those are tied up in retirement accounts and don't figure in
> this scenario.  This $140,000 is also above and beyond my 6 month
> "emergency fund."
> 
> I'll be starting up a franchise within the next 2 to 8 months.
> The time frame is indeterminate because we are still looking
> for a suitable site.  We may find one in 3 weeks, we may find
> one in 6 months.  It'll be a retail kid's clothing operation.

Conventional wisdom has it that if you need the money within 5 years, don't
put that money in the market.


> Up until the business opens, I'll need to make this $140,000
> work as hard as possible, but will still need to keep most of
> it as liquid as possible, too.
> 
> I plan to use up to $100,000 for startup costs (inventory,
> training, lease, insurance, legal fees, building out the store,
> etc.) and the remaining $40,000 for working capital.

I don't know how you come up with that $140K figure.  But statistics show that
small businesses generally under-estimates startup costs and working capital.


> What I'm planning to do is maintain $70,000 in the money market
> account and split the remaining $70,000 between the following
> funds, all chosen because they're available as Fidelity
> "no transaction fee" funds, and have good Morningstar ratings
> and a good long term (5 years+) track record:
> 
> 10% to Baron Asset fund (small cap)
> 15% to Hotchkiss and Wiley Equity Income fund
> 10% to Invesco Strategic Finance fund (sector)
> 40% to Loomis and Sayles Investment grade bond fund
> 25% to Dreyfus High Yield bond fund
> 
> I'll be routing all the income and dividends from these funds
> into the money market account to bolster my working capital
> and protect it (the income, at least) from share price declines.

It is not clear to me how you will protect your working capital from share
price declines.  The market movement in the past 10 days should convince you
that  a extra 3%(?) PER ANUM return will not compensate for a 10% decline in
share prices in a month -- figuratively speaking.


> ...................
> Should I just bag this whole idea and leave it all in money
> market and laddered short term CDs and forget about taking any
> risk at all?

DEFINATELY.

Chen




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