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What to do with extra cash

Are bond funds a good idea?

DEAR HARRY: I have been worried about the possibility of increased interest rates. It has frozen me with more cash than ever. My stockbroker has been urging me to put the money into two bond funds: one short-term and one intermediate-term. In that way, he says, I'll get some interest and very little risk because the funds are constantly replacing old issues with newer ones when the old ones mature. He did warn me about the risk to my principal if rates rise, but he insists that it is minimal and short-term. He also pointed out that I do not need the principal for current living. What do you advise?

WHAT HARRY SAYS: First of all, re-examine your investments. Are you too heavy in stocks? Too light? Once you have determined that, consider the possibilities for that load of cash. Individual bonds with short maturities are a possibility. So are CDs. Now that Congress has come to its senses regarding default, I like U.S. Treasurys and CDs. I would keep the lion's share (about 75 percent) of the money in three-month Treasurys or CDs. The rest can be spaced out evenly for up to six months. There is a strong likelihood that we will see higher rates soon, and I would like the risk to end within six months. A short-term bond fund is one notch below, in my opinion. Longer-term bond funds are out.