short term investment suggestions

What do you guys think would be the best investment vehicle over the next 2-3 years for money I hope to use for grad school. right now I have short term cash in an online savings account that gets me about 4.75% - 5%, but I am wondering what is my best option. Obviously not looking to use this in mutual funds or equities, but my knowledge of bond and bond funds in the real world is admittedly pretty weak. thanks for any suggestions.

You definitely want to be pretty conservative with this stuff. The main advantage you have is that you (presumably) don’t need to access the money for 2-3 years, so you can try to get a liquidity premium from certificates of deposit. You might want to ladder some CDs, just in case some unexpected need comes up in the interim. Now, if you can afford to take some risk of losing money, you can try to use a small portion to get high yield bonds in a high yield bond fund, but this is not really a good idea, because the economic outlook is bleak and high yield stuff may have exposure to some of the land mines in the economy. You’d also have to be comfortable with a small-to-moderate risk of losing some of your principal. So if you did this, you’d only want a small portion of your savings there, with as reputable a bond manager, with no real estate exposure, and you’d want it diversified in a bond fund. My sense, however, is that you’ll need the money protected, and that you’d only get an extra percent or two on a small portion of your principal, so just do laddered CDs.

I also would suggest CDs. If you know when you need the money there is no need to ladder, you can time the CD expiration to coincide with the time you need the money. Bond rates (treasuries) are low right now, so there is some risk of capital loss with any bond fund over a 2 or 3 year time horizon. Of course this capital loss would be on a small scale relative to equities. Valuations on high yield are very wide right now on historical terms, and that sector (which has already been hit somewhat due to recession risk) will see the biggest rebound once we see signs that the economic downturn is cycling back into a recovery. I would figure out how much risk you were comfortable with, and split my port between CDs that expire when you need your money, and a smaller % in a domestic high yield bond fund. EM spreads are not nearly as attractive IMO. In the end, you have to own whatever decision you make based on your own knowledge and information, not on the basis of anyone’s advice, especially mine.

since you can’t take any risk your options are pretty limited. taxable floaters currently yield better than CDs but you run the risk that those rates drop over the next two years.

depending on your tax rate…munis are a deal right now