Expert: Paul Henneman - 2/27/2005

Question
Mr. Henneman,

I have been able to save $5000 in the past year by working extra hours after school.  Currently the money is in the bank.  I plan on using it to pay for school in January 2006.  Until then, I would like to know the best way to invest $5000 and make a descent return. I have some investment background through my financial classes at school, but I do not want to be very risky with the money. What are my best and most profitable options?

Thanks!

Regards,

Anthony

Answer
Anthony,
  Thank you for your email! You do not have much time in investment terms for your money to grow before January of 2006, less than a year. For short time periods such as that, there is a significant risk that your investment could actually lose money instead of grow in size. I would recommend a money market account. The interest rate you will receive is very low, about 2% for a good one. THis means that your $5,000 will only receive about $100 in interest in a year. But it is perfectly safe, as long as you look to a money market that is FDIC insured. It is also easy to withdraw. The one I like is through www.NetBank.com (they are FDIC Insured).
  If you truly do want to invest for the next year, I would definitely not suggest anything more aggressive than a mutual fund. THere are 'index' funds that mirror the overall market. This would be a good option. Before you do anything, I would read 'Investing for Dummies'. THis book goes through the basics of mutual funds and how to find them. More importantly, it discusses most major forms of investment. This will not only get you started on a life long investment plan (everyone should have one), but help you decide for yourself the best form of investment.
  To sum up: A money market is a great place to 'park' money that you cannot not fully invest for a long period of time. A mutual fund is more risky, and could fall in value. but it could also rise. A best case scenario would be a 20 percent or so return, increasing your $5,000 to $6,000. But be careful to check how easy it is to withdraw your funds from a mutual fund. You would not want to find out too late that the one you choose only allows withdrawls quarterly, and not be able to pay your bills for school!
  Some good websites to research various mutual funds are www.morningstar.com for mutual fund performance and other data, and www.motleyfool.com for general advice.

I hope this helps! Please do not hesitate to follow up with me if I can be of any further service.

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com
www.VEReports.com