I have a friend who just received a ~$55k year end bonus. He will receive ~$30k net of taxes and his 401(k) contribution. He currently has no debt or mortgage (he is still a renter and will probably be in the market for a house in late '09 or early '10).

He typically put bonuses into index funds in the past, but the volatility of the market is a little scary right now, and he doesn't want his bonus killed by the market in the short term, especially since it will likely be used for a down payment on a house in a couple of years.

What's the best short- term play? What do the money management wizards of this board think? Any CDs yielding decent rates right now? Any other good, safe short-term strategies to hedge against inflation?

P.S. He currently has about $22k in index funds and another $15K in cash in ING Direct (6 mo. emergency fund). His 401(K) is well funded.

On the CD note; I know country wide has 4.1% CD with a 10K balance. other banks offer up to 5% with 50K balance.

EDIT: FNBO offers high rate CDs for high balances such as 50k but I don't have the actual rate info. Someone must have around here

Wow I hate the idea of wasting that kind of money in a savings account where he'll just tread water vis-a-vis inflation, when right now, just when everyone is despairing, will very likely prove to have been an incredibly good time to invest in the market.

But if your friend's a coward what can you do.

seems like his friend is really concerned about the loss of his money since he wants to use it for a future down payment. I personally am working out Zecco so I can invest in the market!

What are your friends long term goals? Short term - I would look at bonds and long term look at a good no-load stock mutual fund if your friend is willing to take risk, but there are rewards when you take risk.

Thanks to all for the helpful feedback. My friend isn't exactly a coward- he has his 410(k) and 15k invested in equities (as mentioned in the post) but just wants a very "safe" pool of short term money for the house down payment (not willing to stomach wild swings in equities given the short term investment horizon). I do agree that stocks are the best long-term play, but in the short run...well, I just have a feeling that the markets will be very choppy in the coming 2-3 years.

Thanks for the referral to the 5% Countrywide CD- we'll definitely check that out. I knew there would be some good suggestions on this site.

It doesn't have to be all or nothing. He can put some in CD's and some in equities.

If your investment I.Q. is anywhere near as high as your credit scores, I will be certain to recommend your advice!!!

That, and I'll hope he gets a bigger bonus next year so he has a little more money to spread around in index funds...although the way the markets are shaping up this year, bonuses might be a bit smaller for many of us in 2009.

I completely agree. Mr. Market is having a sale right now, and this is a perfect opportunity to be shopping.

I'd have him look at ETFs, where ongoing expenses are cheap and he doesn't have any capital gain issues until he sells.

Thanks. Hopefully (for my sake too) the rumors about the Democratic candidates (especially Obama) looking for an increase in the cap gains tax in the coming years proves unfounded. I would imagine any hike at all in the cap gains tax would cause some serious stress in the markets...

That is a pretty nice bonus!! Is he eligible for a Roth? I would make the 2008 contribution on it if he can do that.

Since he plans on using this money in 2 years, he should try to find the high money market account playing right now or even CD to put it in.

Park in a bank of a country where currency appreciates against $. There are so many countries now!
You can get 8-9 % interest + currency appreciation.

Well that's a nice trick, but since you alone among all humans can accurately predict the future, why not just buy a winning lottery ticket and be rich?