During the last eight months, with the market bouncing up and down, there have been times when I did not look too smart buying stocks through it all.
Of course I looked the most foolish on March 9, when I wrote the prophetic Nostradamus was a punk! Have we reached bottom? Some folks were commenting that they were staying in cash until the DJIA dropped to 5,000. Today that looks highly improbable, even if the market gives something back over the next few months.
There must be some readers that also have contrarian instincts and made good money this year. This is a reminder to take something off the table. It's time to book some gains. We all did great in 1999 and 2000 only to give it all back and then some. Don't let that happen to you again!
But where to put the cash. A checking account will only pay you a fraction of a percent interest -- no thanks. Treasuries are safe but do not pay much either unless you invest long term. What I decided to do was find an Exchange Traded Fund (ETF) that allowed me short term liquidity, security, relative stability and paid a higher yield. I also liked the idea of an ETF because it allowed me to keep the funds in the brokerage account and I could still keep score.
What I decided on was the Vanguard Total Bond Market (NYSE: BND) ETF. It is currently paying a 4.15% yield and I can trade shares anytime to get cash.
I selected this ETF because Vanguard charges the lowest management fees. This ETF blends short term (1-3 years) intermediate term (3-5 years) , medium term (5-10 years) and long term bonds (10 or more years) in large numbers so you have size and diversity. This reduces volatility and increases safety.
The following chart indicates the current distribution. Notice that only 11% of the funds are in long term positions. This is a good thing in a market where U.S 10 year treasury note rates have been going up.
You can also buy ETF's that focus on treasuries but the yield will be less. If the market continues to move up rapidly you will be sacrificing some potential gains. However, the added security is well worth it if you want to be more confident of surviving the present economic storm.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of BND.
What I decided on was the Vanguard Total Bond Market (NYSE: BND) ETF. It is currently paying a 4.15% yield and I can trade shares anytime to get cash.
I selected this ETF because Vanguard charges the lowest management fees. This ETF blends short term (1-3 years) intermediate term (3-5 years) , medium term (5-10 years) and long term bonds (10 or more years) in large numbers so you have size and diversity. This reduces volatility and increases safety.
The following chart indicates the current distribution. Notice that only 11% of the funds are in long term positions. This is a good thing in a market where U.S 10 year treasury note rates have been going up.
| Total Bond Market ETF | |
|---|---|
| Under 1 Yr | 0.9% |
| 1 - 3 Yrs | 34.8% |
| 3 - 5 Yrs | 31.3% |
| 5 - 10 Yrs | 22.0% |
| 10 - 20 Yrs | 5.3% |
| 20 - 30 Yrs | 5.6% |
| Over 30 Years | 0.1% |
| Total | 100.0% |
You can also buy ETF's that focus on treasuries but the yield will be less. If the market continues to move up rapidly you will be sacrificing some potential gains. However, the added security is well worth it if you want to be more confident of surviving the present economic storm.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of BND.
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Reader Comments (Page 1 of 1)
5-20-2009 @ 8:44PM
william lindblad said...
So far you have been up on things. If I were interested in the market I would give yo a call. As I have been watching your advice for quite awhile, take it as a compliment. You are on the way to one of old Lou's pointed hats.
5-21-2009 @ 12:30PM
gis cowboy said...
Sheldon,
What is the profile for the ETF share value to drop based on a rise in interest rates? I realize the long part of the portfolio is the most sensitive, but interest rates are at a all time low.
5-21-2009 @ 1:21PM
Sheldon L said...
gis,
Good question.
The range from high to low in worst case has been about 10%. It is my expectation that as interest rates rise the portfolio share value will indeed go down some. The rate it goes down depends on the rate of rise of interest rates. It will not be affected as much by 10 year treasuries since the long position is a small portion of the portfolio. Since there are so many bonds in this type portfolio investors should realize that all of the time frames for rollover do not coincide. For example, I would expect 20% of the 5 year notes to rollover every year. Therefore I think this ETF's yield might lag behind the rise in rates but not for long.