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I have 20k in my emergency fund, which is about twice what I planned having in there. I think I can safely invest half of that in something better than the ING savings account it's currently in.

I used to think that an S&P 500 Index fund was the way to go for a no-thought investment, but now (after the latest bubble burst), it seems like that isn't diversified enough.

Is there an index-index? Risk is ok, I just want to put the money somewhere without needing to do a lot of research.

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6 Answers 6

Since this is your emergency fund, you generally want to avoid volatility while keeping pace with inflation. You really shouldn't be looking for aggressive growth (which means taking on some risk). That comes from money outside of the emergency fund.

The simplest thing to do would be to shop around for a different savings account. There are some deals out there that are better than ING. Here is a good list.

The "traditional" places to keep an emergency fund are Money Market Mutual Funds (not to be confused with Money Market Accounts). They are considered extremely safe investments. However, the returns on such a fund is pretty low these days, often lower than a high-yield online savings account.

The next step up would be a bond fund (more volatility, slightly better return). Pick something that relies on Government bonds, not "high-yield" (junk) bonds or anything crazy like that.

Fidelity Four in One comes pretty close to your "index of indexes" request, but it isn't the most stable thing. You'd probably do better with a safer investment.

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Very helpful, thanks. One clarification is that I wouldn't invest the money I need for my emergency fund. I've just been dumping extra money into my emergency fund, and now I think I'm ready to take the extra out and start investing it. –  Sean Clark Hess Jul 13 '10 at 14:10
    
Aw nuts, -1 for my reading skills. I thought you were looking for a better return on your emergency fund. :-) –  msemack Jul 14 '10 at 12:35
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So people keep their emergency fund in a mutual fund? I thought you were supposed to keep it in something guaranteed in case the market went south. –  Sean Clark Hess Jul 14 '10 at 13:35
    
Yes, the emergency fund should be in something safe. (Up to you how you want to define "safe".) Money Market Mutual Funds are considered extremely safe. Not FDIC insured, but they (almost) never go down in value. Bond Funds are less safe, but not too bad if you pick something that is based on government bonds. –  msemack Jul 15 '10 at 18:57
    
Related: basicallymoney.com/questions/1526/… –  msemack Jul 15 '10 at 19:00

You can also create a CD ladder (say 1/3 in a 6 month CD, 1/3 in a 1 year CD, 1/3 in a 2 year CD) with half of your emergency fund money. You always want to leave some of it in a liquid account so you can get at it immediately without any interest penalty. CD's provide higher interest than a savings account. By staggering the lengths of the CD's, you give yourself more options, and can roll them over into CD's with higher rates (since interest rates are soooo low right now) as the CD's mature.

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Cool idea. There are so many tricks to know :) –  Sean Clark Hess Jul 14 '10 at 13:34
    
Short to medium-term CDs don't really have an interest rate advantage over good savings accounts right now (I've checked). Medium to long-term CDs expose you to (modest) interest rate risk, as rates are liable to rise in the event of inflation but your money will be locked away. –  fennec Jul 27 '10 at 22:13
    
Saying CD return rates are horrible is a gross understatement... –  Pacerier Nov 17 '13 at 21:57

Congrats on having such a nice emergency fund. That's pretty substantial.

I don't want to be the one to suggest the One Investment To Rule Them All because I might be wrong. :)

I'd investigate other avenues for investment. Here are a few (in no particular order):

  1. Foreign currencies
  2. Commodities
  3. Distressed real estate
  4. Start up an online business

My two cents but I think you're wise to be wary of investing in US equities now.

Hedging (both with your passive investments and with another source of income) is something you can afford to do.

(But to answer your question, there are indexes that are broader than the S&P 500. The Wilshire 5000 index has all of them, for example.)

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It sounds like you want a place to park some money that's reasonably safe and liquid, but can sustain light to moderate losses. Consider some bond funds or bond ETFs filled with medium-term corporate bonds. It looks like you can get 3-3.5% or so. (I'd skip the municipal bond market right now, but "why" is a matter for its own question).

Avoid long-term bonds or CDs if you're worried about inflation; interest rates will rise and the immediate value of the bonds will fall until the final payout value matches those rates.

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If you are looking for an index index fund, I know vanguard offers their Star fund which invests in 11 other funds of theirs and is diversified across stocks, bonds, and short term investments.

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Since you already have twice your target in that emergency fund, putting that overage to work is a good idea. The impression that I get is that you'd still like to stay on the safe side. What you're looking for is a Balanced Fund.

In a balanced fund the managers invest in both stocks and bonds (and cash). Since you have that diversification between those two asset classes, their returns tend to be much less volatile than other funds. Also, because of their intended audience and the traditions from that class of funds' long history, they tend to invest somewhat more conservatively in both asset classes.

There are two general types of balanced funds: Conservative Allocation funds and Moderate Allocation funds. Conservative allocation funds invest in more fixed income than equity (the classic mix is 60% bonds, 40% stocks). Moderate allocation funds invest in more equity than fixed income (classic mix: 40% bonds, 60% stocks). A good pair of funds that are similar but exemplify the difference between conservative allocation and moderate allocation are Vanguard's Wellesley Income Fund (VWINX) for the former and Vanguard's Wellington Fund (VWELX) for the latter. (Disclaimer: though both funds are broadly considered excellent, this is not a recommendation.)

Good luck sorting this out!

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