Back in early July when I wrote my Q2 ’07 Portfolio Review, I wrote about how I had created a “cash management account” where I segregated money which I anticipated needing in the next two to three years. The idea was to physically separate the money so that I wouldn’t be so tempted to trade with it.
It hasn’t exactly worked out as planned but I think it’s OK. My new goal for this account now is to maximize my after-tax returns. I am allowing myself to actively manage the account, with one caveat: I’m not going to ever use leverage.
In July and August I had all the cash parked in Yen. This turned out to be a good trade. As the fixed income markets broke down in August, the Yen has rallied sharply. On Friday I sold my position for a 4.01% profit which includes a miniscule amount of interest. Nothing spectacular, but it turned to be a lot better than municipal bonds (which is what I had thought of buying instead).
Speaking of which, the selloff in Munis has provided us a really great buying opportunity — I swapped out of Yen and bought shares of GHYIX . This fund invests in high yield (higher risk) municipal bonds from around the country. When I bought the fund last week, the yield was 4.8%. Since I don’t have to pay Federal taxes on this interest, my after tax yield is slightly above 5.13%. Not only is the yield very attractive, but I think the fund itself will appreciate as the fixed income markets return to normal over the coming months.
On this subject there’s a great article on MSN Money by Tim Middleton. He lists three high quality, low cost, municipal bond funds you can easily and cheaply buy in your brokerage account. He also makes a great point about why it’s important to buy a fund with a low expense ratio:
The municipal bond market place has hazards for investors. In addition to above-average interest-rate risk, many muni funds accept significant credit risk as they reach out for higher yields. The average long muni fund has an expense ratio of 1.07%, meaning its manager spends a fifth of investment income paying himself. Since investors would notice such a huge price tag, managers patch it over with higher-yielding – i.e., riskier – bonds.