September 15, 2006
It's Been Fun
This will be my last entry in the Getting Started blog.
Recent events have increased demands upon my time and this is but one of the sacrifices I must make.
I've enjoyed sharing what I've learned over the past 10 years with you and hope you'll continue to learn in the future.
Remember, no one is more interested in your money than you are!
Best wishes & Better Investing,
Gary
Posted by Gary Simms at 09:51 AM | Comments (2)
September 08, 2006
A Lot More Pennies...
Last week you were introduced to money market funds that pay substanitally more than a common checking account.
Money markets are fine for short term reserves - cash you'll need to get to right away. But what about cash you don't need for the foreseeable future?
"A Lot More Pennies" is the title of a section of John Bogle's book Bogle on Mutual Funds, New Perspectives for the Intelligent Investor. Here Mr. Bogle argues that cash reserves that are not immediately needed should be invested in short term bond funds rather than money markets.
Why?
Simple. Higher return.
Take a look at the same page we looked at last week for money markets. This time scroll down a bit until you see "Bond Funds." Look at the first group, "Taxable Short-Term Bonds."
You'll see four funds listed. All invest in loans (bonds) for periods of time longer than money markets. Typically a few years vs. 30 to 90 DAYS for the money markets.
Notice the three divisions here like we saw in the money markets. Treasury, Federal, and commercial (investment grade.) The Short Term Bond Index fund contains the entire universe of short term bonds.
We all know that risk goes hand in hand with reward so if we're getting more return, we're taking more risk. And this is true.
With a money market fund your dollar is always worth a dollar. With a short term bond fund this isn't true. Sometimes your dollar is worth more than a dollar ;-) and sometimes it is worth less than a dollar. :-(
While we look at only the interest rate for a money market fund we must also consider this changing value of our dollar with bond funds. When you combine the interest with the change in value of the dollar you get "Total Return."
Right now Short Term Investment Grade is yielding 5.11%, the same as Prime Money Market fund.
We've been in a rising interest rate market where the Federal Reserve Board has raised rates 15 time in a row until this latest session where it left them unchanged. When interest rates go up the value of the dollar of a bond fund goes down. You can see this interest rate activity by looking at the returns for money market and short term bond funds.
Due to the recent rising interest rates Prime has out performed the Investment Grade Short Term bond fund.
Look at the long term performance and you'll see the short term bond fund has solidly out performed the money market account.
John Bogle says the chances of interest rates rising or falling is about the same it should average itself out over time.
Prime Short term Investment Grade Bond
year to date 3.14% 3.10%
1 year 4.38% 3.60%
5 year 2.14 % 3.57%
10 year 3.77% 5.30%
since
inception 6.52% 7.41%
While that 1% to 1.5% may not seem like much remember it is compound interest and over the course of a lifetime it will add up.
Not convinced? Look at it this way. It is extra money and no matter how little it is I'd want it!
Consider using a short term bond fund for cash reserves you don't immediately need.
Posted by Gary Simms at 09:48 AM | Comments (0)
September 01, 2006
Money Markets
Money market funds are one of the four basic types of funds. (The other types are bond, stock, and real estate for those of you wondering!)
Money markets are mutual funds that invest in instruments of short term loans like Treasury bonds, or Federal Agency bonds, or commercial paper issued by corporations.
Everyone should be familiar with money markets.
Why? Well my dad can tell you. He had a fit when he discovered this local bank was paying 1% on his checking account and Vanguard Money Market Prime is currently paying 5.11%.
Here is a link to Vanguard's money market page.
Notice there are two categories of money market funds: taxable and tax free.
Tax free funds usually only make sense for investors in the highest tax bracket. The majority of folks are interested in the taxable funds because you'll be money ahead, even after paying taxes, in the taxable funds.
Remember the three types of instruments money markets can invest in? Treasury bills, Federal Agency notes, and commercial paper. Take a look at the names of the money markets. They will give you a clue to what the fund invests in.
The only real infomation you need is that the Prime Money Market fund invests in commercial paper.
Admiral Treasury shares require a minimum open balance of $100,000. Otherwise they are the same as the Treasury Money Market fund.
Also notice how the rates vary with risk. Treasury is the least risky with the lowest rate. Prime, with commercial business, is the most risky and has the highest rate. Federal is in between and its rate reflect this.
So there's how to get started with money market funds.
You'll soon be earning significantly more with you cash while you're waiting for those investment opportunities.
Posted by Gary Simms at 08:49 AM | Comments (0)
