CHAPTER 2:
THE MULTIFACETED STOCK MARKET:
A GUIDE TO DIFFERENT INVESTMENT STYLES

Page 26
The First Decision: Stocks, Bonds, or Cash

ETFs represent different areas of the stock and investment grade bond markets. For cash holdings, you will likely be best off in a low cost money market fund.

The closest alternative to a money market fund available through ETFs is the iShares Lehman 1–3-Year Treasury Index Fund, ticker symbol SHY.Although the 4.7 percent yield paid by SHY is higher than that paid by most money market funds, the yield advantage is small compared to the best money market funds. Moreover, SHY has some price risk, and you do have to pay commissions to buy and sell SHY, whereas the best money market funds incur neither of these disadvantages. In particular, during periods when the Federal Reserve has boosted short-term interest rates, the total return available from a good money market fund has actually been higher than that from short-term bond funds such as SHY. (Of course, the converse is also likely to be true. If the Federal Reserve is on a well-telegraphed campaign of lowering interest rates, SHY could potentially generate capital gains in addition to its yield.)

The first decision that the individual investor must make is how much to invest in each of these areas. The optimal asset allocation in general will be different at different points in the life of an investor and will depend on the economic outlook...

Also, read Gerald Appel's latest book Opportunity Investing