Like so many other investors who are in the same camp, I have been desperately seeking safe (a relative term these days) places to invest some of our family’s hard-earned cash. My wife and I have worked very hard to build a nice, little nest egg for our little girl’s future college expenses, and for her future overall (and, if we’re lucky, for retirement). It is, however, getting harder and harder to find safe harbors to dock our little ship (figuratively speaking, of course).
As the old saying goes: “Don’t fight the FED” The only problem with adhering to such simple advice at this moment in time, however, is that following such advice will leave many of us in the poor house – especially those who are now in their retirement years. Fed Chairman, Ben Bernanke, has made it quite clear that he intends to keep short-term interest rates (A.K.A. Fed Funds Rate) low at least, and until, some time in 2015 – and that date has now been moved, at minimum, twice since the Fed lowered short-term interest rates to their historically low levels, currently at 0.25%.
UNITED STATES INTEREST RATE
The benchmark interest rate in the United States was last recorded at 0.25 percent. Interest Rate in the United States is reported by the Federal Reserve. Historically, from 1971 until 2013, the United States Interest Rate averaged 6.18 Percent reaching an all time high of 20 Percent in March of 1980 and a record low of 0.25 Percent in December of 2008.
Source: http://www.tradingeconomics.com/united-states/interest-rate
And the message that policy makers are sending is pretty clear: The country is broke and we are having difficulty paying our debts; thus, for the foreseeable future, we will need to try and deflate our way out of our problems. Though the Fed justifies its stance by citing historically low inflation rates (somewhere on the order of 1.5% to 2.0%), the truth of the matter is that real inflation is running somewhere in the neighborhood of 5.5% to 6.5% – AND, maybe as high as 8% (see here, here and here). This, unfortunately, does not bode well for many investors – especially retirees.
Given the low interest rate environment in which we currently live, seniors, and those people living on a low to moderate fixed income, are certainly finding it more and more difficult to “get by.” In a desperate attempt to try and increase their monthly income, many investors have turned to riskier assets, like junk bonds, lesser quality dividend paying stocks and/or corporate bonds that are further out on the the yield curve (i.e. bonds with a longer maturity time horizons). Those tactics will, though, create many problems for investors if inflation continues to rise and/or if the economy does not improve in a meaningful way in the next year or so.
But what is one to do? To do nothing ensures that inflation erodes one’s current income and savings. To invest in safe, low yielding investment instruments (think treasuries and their currently low interest rates ) ensures that inflation still wins the day, while also running the risk of capital destruction (i.e. the risk of losses should the economy again falter). Investing in riskier assets (e.g. junk bonds or low quality stocks) certainly exposes investors to the same potential for capital losses if (i.e. when) their investments eventually turn against them.
For me, the answer to this dilemma has been to invest in the economic stalwarts that have consistently paid dividends; and to do so, I have learned, over time, that the best and most efficient way to invest is with the use of mutual funds and Exchange Traded Funds (ETFs). For a long time, I favored the individual approach to investing – I didn’t like the idea of other people managing my investments. Over time, however I have learned that investing, and making money (i.e. in an advantaged sort of way), is really tilted toward those who are already wealthy and in the know. Simply put, certain information and opportunities are just not afforded to the masses. Fortunately, though, ETFs and mutual funds offer alternatives.
ETFs are designed to track an index, a commodity or a basket of assets like an index fund, but they trade like individual stocks on the major exchanges. As such, ETFs offer the most efficient and cost effective way to build a diversified portfolio. And, though there are ETFs available for those who wish to invest in bonds, I believe it is best to stick with mutual funds for all or your bond investments.
Now, finally :-D, with all of the aforementioned in mind, two funds that I believe can be used as core holdings in anyone’s portfolio are Vanguard’s VWELX and VWINX. First, VWELX:
Product summary
Founded in 1929, Wellington™ Fund [VWELX] is Vanguard’s oldest mutual fund and the nation’s oldest balanced fund. It offers exposure to stocks (about two-thirds of the portfolio) and bonds (one-third). Another key attribute is broad diversification—the fund invests in about 100 stocks and 500 bonds across all economic sectors. This is important because one or two holdings should not have a sizeable impact on the fund. Investors with a long-term time horizon who want growth and are willing to accept stock market volatility may wish to consider this as a core holding in their portfolio.
And next, VWINX:
Product summary
This 40 year-old, income-oriented balanced fund offers exposure to stocks and investment-grade bonds. Balanced funds typically offer a higher allocation to stocks; however, this fund is unique in allocating about one-third to stocks and two-thirds to bonds. The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends. This focus may provide a higher quarterly income distribution than non-income focused balanced funds. Investors with a medium- or long-term time horizon who have a goal of steady income and who are willing to accept modest movement in share price may wish to consider this fund as a core holding in their portfolio.
Both funds offer an efficient and low cost way to create a fairly diversified portfolio, and both pay quarterly dividends. Both funds also have a very good track record for total returns (see here and here). The biggest difference between the two is that VWINX is more heavily weighted toward bonds than stocks – something that may be more well suited for us older (Uhh Hmm, I mean well-seasoned) investors. 😉
If you need any reassurances that these funds are tried and true just consider that VWELX has been around since The Great Depression and that it is now surviving The Great Recession quite well. Though VWINX has not been around quite as long as VWELX it does have a solid forty-three year history going for it.
For those who have no interest (at least not yet) in investing in bonds, I would suggest looking at State Street’s Consumer Staples Select Sector SPDR® Fund (XLP). It is an ETF that focuses on companies that produce those things that people use most (i.e. staples) like food and toilet paper. And, like VWELX and VWINX it, too, pays a quarterly dividend and has a low expense ratio of 0.18%. It’s overall performance record (see here) is a little less impressive than the Vanguard funds but, nonetheless, consistent.
Well, there you have it. Three investment vehicles that can be used, rather comfortably, as core holdings in one’s portfolio. As with any information you receive from this site, or from any other source, you should be certain to perform additional research before making any final investment decisions.
Disclosure: At the time of this post, I did not own any of the securities discussed herein, and I did not have any intentions to purchase any of the aforementioned securities at any point within the next three trading sessions (i.e. at any time before 2/21/2013).
