Posted on 08/05/2002 6:50:42 PM PDT by Lazamataz
You can't say we don't have choices. We can lose our money in a quick, disastrous way by investing in common stocks. Or we can lose our money in a slow, methodical way by investing in short-term fixed-income securities.
While the agony of the stock market is understood, the tiresome misery of fixed-income investing is less clear. So let's do a quick scan of the fixed-income universe relative to inflation.
According to the Department of Labor, the consumer price index, excluding food and energy, was rising at a 2.3 percent annual rate at the end of June.
This means a taxpayer in the 27 percent tax bracket would need to earn 3.15 percent before taxes to "stay even" with inflation.
Unfortunately, 3.15 percent is difficult to find.
You won't find it in money market mutual funds. They earn a bit over 1 percent, an average of 1.30 percent.
You won't find it in short-term certificates of deposit, either. You have to commit to a two-year CD, according to www.banxquote.com, to get a 2.62 percent yield.
Ditto U.S. Treasury obligations. The yield on a two-year treasury is only 2.28 percent.
Long term? The yield on a 10-year treasury is a measly 4.39 percent.
So where do we invest for yield?
My three suggestions are GNMA funds; adjustable-rate mortgage funds; and, for tax-deferred accounts, treasury inflation-protected securities funds.
· Ginnie Mae funds: Government-backed mortgage securities have the same credit quality as treasury obligations.
They yield more than treasuries of the same maturity because of uncertainties about when mortgages will be refinanced. If interest rates rise, people will hold on to their mortgages. If rates fall, people will refinance. As this is written, Government National Mortgage Association securities, Ginnie Mae's, are yielding 1 percentage point to 2.4 percentage points more than treasuries of the same estimated maturity.
Vanguard GNMA currently has an effective maturity of six years. Over the last 12 months, according to Morningstar, the fund has provided a yield of 5.96 percent. This fund requires a $3,000 minimum initial investment. It has done better than 90 percent of its competitors in time periods from three to 15 years.
You can learn more by visiting the Vanguard Web site at www.vanguard
.com, the Morningstar Web site at www.morningstar.com or Money Central at www.moneycentral.msn.com.
Others with strong top-quartile records are American Century Ginnie Mae, trailing yield 5.55 percent; Fidelity Ginnie Mae, trailing yield 5.37 percent; and T. Rowe Price GNMA, trailing yield 5.23 percent.
· Adjustable-rate mortgage funds: These funds also invest in government-backed mortgage securities. And they limit their investments to pools of adjustable-rate mortgages. This means they should be less vulnerable to rising interest rates. Unfortunately, the minimum investment in many of these funds is relatively high -- try $200,000. Also, there are fewer of them, their track records are shorter and they tend to have lower yields.
That said, Monterey PIA Short Government has a five-star rating from Morningstar, requires only a $1,000 investment and has provided a trailing yield of 3.83 percent. Asset Management Adjustable Rate Fund requires a $10,000 minimum investment and has had a trailing yield of 3.81 percent.
Goldman Sachs Adjustable Rate Government Fund institutional shares require a minimum investment of $50,000 and have provided a trailing yield of 4.65 percent. One Group Ultra Short Term Fund has a $200,000 minimum and has provided a trailing yield of 4.05 percent.
· Treasury inflation-protected securities funds: Nothing will guarantee an after-tax return that beats inflation, but there are now four mutual funds that invest in the treasury inflation-protected securities, called TIPS. These securities were introduced in 1997. Quirks in their taxation make it best to own them in a tax-deferred account.
That said, the 10-year TIPS was recently offering a return just under 3 percent plus the change in the consumer price index. If inflation rises because of a falling dollar, surging oil prices, massive increases in the money supply or a jump-started economy, these securities may be one of the few havens.
American Century Inflation-Adjusted Bond Fund has no minimum for an IRA purchase and provided a total return of 6.61 percent in the first six months of this year. The fund has an expense ratio of 0.51 percent. Vanguard Inflation-Protected Securities has a minimum $1,000 IRA purchase and provided a total return of 7.37 percent in the first six months of this year. This fund has an expense ratio of 0.25 percent.
In July, Fidelity introduced its entry, Fidelity Inflation-Protected Bond Fund, with a retirement account minimum investment of $500 and a capped expense ratio of 0.5 percent.
These are funds everyone should consider for a retirement account; a 3 percent real return, guaranteed, is far better than the 2 percent real return traditional bond investors earn.
This is the biggest con on earth. With housing likewise excluded (fuel too, I think) and hedonic adjustments, the CPI is so understated, it is rumored that The Great Greenspan himself no longer tracks it. I've read Austrian school economists tracking the growth of MZM who put the rate of inflation at never less than 5% - 10% in a given year.
Guess the PPT decided to close the door in the middle of the night. The manipulation has become overwhelming. They're using Rubin's tactics of getting in early, getting in big, and staying in throughout the day.
Richard W.
How exactly does blowing up infrastructure and killing people help the economy?
This is a a myth resulting from our WWII. Experience.
Wilson and FDR caused the Depression. When they stopped trying to fix things, the economy improved.
Furthermore at the end of the war every major industrial center ie Japan,Germany and England was reduced to smoking rubble.
Our industry was untouched.
Did Vietnam or the Gulf War help the economy?
That said I think the Iraqi attack should start by taking out the Saudis. I've friends in the 10th Mountain division and I want them alive...Screw the UN, open up with nuke tipped artillery shells & cruise missles.
Lehman Says Fed to Cut Interest Rates
Stocks Score Big Gains on Rate Cut Hopes
These guys are terminally hopeless. They have gotten it exactly wrong over the last 3 years. It's almost unbearable to watch.
Richard W.
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