Copyright 2020 Tom Madell, PhD, Publisher
July 2020. Published July 2, 2020.

Cash Is Trash; Choose Bond Funds Instead

With the stock market soaring lately in spite of its big dip in Feb. and March, it's anybody's guess where prices might be headed next considering the deep hole the coronavirus has blown in economies around the world. Of course, one should not try to focus on what may merely be transitional trends but on evaluating what the longer-term prospects for any investment might be. With most stocks already up so much over the past decade and generally at high historic valuations, along with what might turn out to be some investors' large measure of overconfidence that the US economy will fully recover rather quickly, I am quite skeptical that most stock fund investors will do particularly well over the next few years.

Many bond funds, on the other hand, have mostly been on a slow and steady climb over the last year, and have done especially well since the coronavirus started to adversely impact stocks around the end of Feb. With money market funds offering close to no return at all, along with the Fed recent promise of keeping interest rates pegged near zero through 2022, investors should think twice about keeping much there. Perhaps they should now have at most half of what they might have had before the coronavirus struck.

It is often reflexive when investors are fearful of stocks, as they were earlier this year, for them to choose to park money in cash. But that appears to be a poor choice under present circumstances. So what remains for most investors should be a healthier dose of bonds than pre-pandemic. The Fed promise strongly suggests that the category will continue to do well for quite a while since rising interest rates are the chief enemy of bond investors. While some investors might scoff at the low dividend yields now being offered, they should pay more attention to rising prices as investors send more and more money in their direction, the greater demand resulting in higher prices, or net asset values (NAVs).

Of course, while in the long run, bond funds may not offer as much longer-term potential as stocks, if one is hesitant about stocks going forward, bonds would clearly seem to be a much better choice than parking money in cash. Even if bond fund prices show no further appreciation from here, an investor will still receive dividends that are considerably higher than that of a money market fund.

While not all bond funds will necessarily do well under current market conditions (for example, high yield bond fund performance is highly correlated with stock performance and is down on average close to 3% since stocks cratered), let's look at how some popular funds have been doing since the start of March through June 30 and over the last 12 mos.

Fund (Symbol) 4 Mo. Return Actual
12 Mo. Return
Current Dividend
12 Mo. Return
 Vanguard Short-Term Investment-Grade Inv (VFSTX)  1.56% 4.85% 1.40% 4.68%
 PIMCO Total Return Instl (PTTRX) 1.90 8.34 2.04 5.70
 Vanguard Inflation-Protected Secs Inv (VIPSX) 2.81 8.00 -0.55 8.43

 Vanguard Total Bond Market Index Adm (VBTLX) 2.38 8.96 1.37 7.14
 Vanguard GNMA Inv (VFIIX) 2.01 5.41 1.71 6.03
 PIMCO Real Return Instl (PRRIX) 2.94 8.38 -1.73

 Vanguard Shrt-Term Infl-Prot Sec Idx Adm (VTAPX) 1.00 3.37 -0.30 3.00

 Dodge & Cox Income (DODIX) 2.71 8.38 2.78 8.13
Notes: Potential 12 Mo. Return shown is hypothetical beginning Mar. 2020 and based on assumption that fund maintains same 4 mo. rate of return over the next 8 mos.
Negative dividend yields for inflation bonds do not include any subsequent adjustment for inflation.

Now look at how a typical money market fund has done over the same periods along with yield and estimated potential future return :

Fund 4 Mo. Return Actual
12 Mo. Return
Current Dividend
12 Mo. Return
 Typical money market fund  0.13%




Bottom Line: If bonds continue to attract cash, and if the above funds rise at the same rate over the next 8 mos., by March of 2021, the 12 mo. gains would be as shown in the first table. On the other hand, money market returns are almost guaranteed by Federal Reserve policy makers to return no better than shown over the next two years or more. Clearly then, under the Fed's promise, investors should shun cash and instead invest in bond funds for the majority of their portfolio that they choose not to invest in stocks.

Free Portfolio Management Help Offered

I would like to announce a new feature of my website that will hopefully be a positive for some of my Newsletter readers.

A year and a half ago, in my Jan. 2019 Newsletter, I announced that I would no longer be updating a mainstay of my site up until then, that is my fund/ETF Model Portfolios for stocks and bonds along with percentage allocations for each fund as well as for cash.

As I have explained several times since then, and additionally in emails sent to readers who expressed concerns, this decision was based on my observation that the asset allocations assigned to particular funds were not proving to be particularly useful. For example, a stock fund with say a 25% allocation within a quarterly Model was not often proving to be predictive of a better return several years later than one with say a 10% allocation.

Given this knowledge, it would have been not in investors' best interests for me to keep giving the impression that the allocation percentages were a useful projection of what might happen in the future. So I replaced the quarterly changes to funds with merely a list of my recommended funds without the allocation percentages. The current list of recommended funds was presented in last month's Newsletter. Of course, the list can change from time to time as conditions change.

This was a tough change for me, and apparently many readers, to swallow. But it merely acknowledged the reality that no one can predict how a given fund or even its fund category will perform in the future. And precise allocation percentages imply such predictions. Therefore, I decided the best investors can do is to try to latch on to what appear to be good performing funds with low expenses and other positive characteristics (such as highly experienced management and favorable low tax footprints) and hold on for years, unless a recommended fund's characteristics change significantly.

And, of course, allocation percentages will be different for different investors depending on the degree of risk one is willing to take. While all fund investing involves risk, some funds are much riskier than others and "one-size fits all" Model Portfolios cannot capture what each and every investor should do to achieve their objectives.

For over 20 years, I have hoped to be a sort of "remote" advisor to many investors, especially those who felt the need for such input (not all do) if not being able to find an in-person advisor or perhaps having had unsatisfactory experiences with traditional ones.

Over that period, my website has gained considerable popularity. Even today, my site is the number 1 site for searches using or for "free mutual fund/ETF newsletter" in spite of all the competition that big investment companies present.

From the growth of my own portfolio of fund investments, and those of some people I have previously advised, as well as a long love of studying mutual fund investing, it has become apparent that I have accumulated knowledge of funds significantly beyond that of most investors, and even many professional advisors.

From my correspondence with investors, it appears that some readers want more than just articles. They want actual guidance in setting up and managing their investments by a knowledgeable person, but without the cost or difficulty in finding a professional advisor. With this in mind, I have decided to offer free, responsive, personal fund advice that will go beyond merely writing newsletter articles. I know of no other important fund website that is willing to do this. So it is a rare opportunity to get such guidance for free.

In fact, down through the past 20 years, I have occasionally received requests for help such as this. Sometimes it was provided with just one or two emails; at other times, it required quite a few over a period of weeks or even months.

You, in no way, are ever pressured or obligated to follow my suggestions. Unlike some advisors, I do not steer people to investments that I will somehow profit from myself.

Since people are often leery of what they see on the Internet, I have made available two older archived summaries of a) feedback from readers and b) some of my earlier background.

Note: The web pages shown date back over a decade; however, the material presented remains as valid today as when first published and positive praise for my site has continued up to the present day. You should find most of the links shown on the pages still useful.

I have no idea as to how many people will be interested in making use of this offer out of the two thousand or more people who are readers of my Newsletter. Therefore, I may limit the number of people I agree to help. If a large number of people request help, names will be added to a wait list for help on a first come, first served basis.

Why am I offering to do this? As a retired individual, I have extra free time on my hands. This is my way of giving back to other investors who have down through the years added so much to my own investment knowledge and even success.

What's the catch? None, really, but in exchange for the free help I provide, I am requesting that individuals who receive help and are satisfied with it consider making a minimal contribution of $25 or $50 dollars to a charity of their choice. (In case you are not aware of a temporary change to the tax law: the coronavirus CARES relief act passed by Congress recently will allow individuals to deduct up to $300 and married couples up to $600 even if you take the standard deduction on your 2020 Federal income taxes.)

Also, you agree that I will be able to incorporate some of the details of the email messages on my website, without, of course, revealing your name or email address.

If interested, contact me at my site's email


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