Corporate Short-Term Bonds A Safe Play

If you were smart enough to have invested during the dark days of 2008's fourth quarter and 2009's first quarter congradulations. Now what? Well, one alternative is to just let it ride. The market is always forward looking and all leading economic indicators remain high. If you have a long-term plan then stick to it.

But like all markets nothing ever goes straight up or down so you may want to protect a large percentage of your gains by moving into something more conservative. And if you liquidated your stock investments during those dark days now's probable not the time to jump back in. You'd be better off hoping for another 5-8% pull back. Whatever your situation one conservative alternative to doing nothing or hiding your money under the mattress is to invest in Short-Term (no-load)Bond Funds.

Steven Huber, co-manager of the T. Rowe Price Strategic Income fund, says corporate bonds - domestic and foreign - are a good conservative investment within a improving economy and near-term ultra low interest rate enviorment.

Here's a list of some Short term: Bond Funds with the best performance in their category for the last 3 months.

My favorites for those who want no risk but seek yields above the Mutual Fund Money Market Funds (MMF) less than 1/2% yield is to just move your money to an FDIC insured US bank MMF which currently pay just over 1%. It's a pittance return but that's still a 50% increase over Mutual Fund Money Market Funds which are not FDIC insured. So, it's more yield, less risk.

Individuals with more than $3,000, willing to take a tiny bit more risk, should consider my favorite four no-load, extra conservative Bond Funds, from Vanguard:

#1)Vanguard Short Term Bond Index Fund - Investor Shares Class - VBISX
Annual Management Expense Ratio _____0.19%
Annual Portfolio Turnover _____________101%
Total Portfolio Assets ($B) _____________$10.5
Minimum Investment ____$3,000

#2) Vanguard Intermediate Term Bond Index Fund - Investor Shares Class - VBIIX
Annual Management Expense Ratio _____0.18%
Annual Portfolio Turnover _____________86%
Total Portfolio Assets ($B) _____________$3.2
Minimum Investment ____$3,000

#3) Vanguard Short Term Federal Fund - Investor Shares Class - VSGBX
Annual Management Expense Ratio _____0.19%
Annual Portfolio Turnover _____________89%
Total Portfolio Assets ($B) _____________$8.6
Minimum Investment ____$3,000

#4) Vanguard Inflation-Protected Securities Fund - Investor Shares Class - VIPSX
Annual Management Expense Ratio _____0.20%
Annual Portfolio Turnover _____________28%
Total Portfolio Assets ($B) _____________$19.3
Minimum Investment ____$3,000

#5) Vanguard Short Term Investment Grade Fund - Investor Shares Class - VFSTX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________49%
Total Portfolio Assets ($B) _____________$20.4
Minimum Investment ____$3,000

#6) Vanguard GNMA Fund - Investor Shares Class - VFIIX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________63%
Total Portfolio Assets ($B) _____________$32.6
Minimum Investment ____$3,000

#7) Vanguard Intermediate Term Investment Grade Fund - Investor Shares Class - VFICX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________48%
Total Portfolio Assets ($B) _____________$9.6
Minimum Investment ____$3,000

Investment research overwhelmingly shows that lower cost fixed income funds tend to yield higher bond investing returns.
The fixed income asset market is no place for you to try to beat the market and to attempt to get higher returns by picking your own bond. Even professional fixed income asset market money managers do not beat the bond market. The higher the mutual fund company expenses, the lower the net returns to individual investors.

Why Not Long Term Treasuries Bonds Now?
If Treasuries have been such a success story, why not stick with what’s worked? Here’s why: Because they were too successful. When investors rushed into the safe arms of a U.S. government guarantee last in the fourth quarter of 2008, Treasury prices soared and yields evaporated.

Yields have been slowly rising on long-term government bonds. Between the Federal Reserve’s recession-fighting rate cuts and the panicky investors flooding the market, Treasury yields are so low that prices have nowhere to go but down. Bond prices and yields move in opposite directions which is the primary reason I'm suggesting short-term investment grade corporate bonds. “For the most part, today’s Treasury market is a place where the average investor can only lose money,” says 80-year-old Ben Jacoby, co-founder of Brinton Eaton Wealth Advisors and a veteran of the long bear market of the 1970s.

Going forward, the picture looks bleak for Uncle Sam’s bonds. To pay for the gargantuan stimulus package, the government will issue even more of them, flooding the market. “Yields will have to rise for those bonds to find buyers,” says Dan Fuss, vice chairman of fund company Loomis Sayles, and that will depress the value of existing bonds. Now that investors may have regained their appetite for stocks, it’s entirely possible that they’ll dump bonds, further driving up supply. Another threat to bond values is inflation, which, by reducing the future value of bond yields, also puts downward pressure on prices.

You might think that if the stimulus spending proves inflationary, you should take a look at Treasury inflation-protected securities, or TIPS. But those have low yields too, and Fuss isn’t upbeat about their prospects. “It will be a while before there is any inflation to protect yourself from,” he notes. Still, everyone agrees as the economy continues to improve inflation will return. The price of Oil has already doubled from 2008's fourth quarter low.

Dividends For Defensive Investors

Turning to dividend-paying stocks in times of market turmoil is not a new concept. In fact,noted analyst Benjamin Graham recommended shares of large, prominent and conservatively financed companies as a defensive equity strategy when he wrote The Intelligent Investor more than 50 years ago.

And with a population of nearly 80 million baby boomers starting to retire, this need for income will become even stronger. With longer life expectancies and the potential for rising inflation, income-seeking investors will need to make sure their money continues to grow.

Consider the facts uncovered in a Legg Mason Study:

Especially relevant to today’s volatile markets is the record of outperformance that dividend-paying companies have posted in down years for the market. Our chart below illustrates how, since 1980, dividend-paying stocks of S&P 500 Index have outperformed non-dividend-paying stocks in each year the broader index generated a negative total return. Dividend-Paying stocks have outperformed non-dividend-paying stocks in down years for the S&P 500 Index (%)

Especially in a difficult equity market, dividends do matter.

• For the defensive investor, dividends have the potential to cushion returns in a down market period, as they have in every down market period since 1980. Of course, past performance is no guarantee of future results.


• As illustrated the Legg Mason study of Standard & Poor’s “Dividend Aristocrats,” on the front side, companies with a long-term history of rising dividends have generated higher total returns with lower risk over time.


• Remember, too, that dividends have always been an important component of total return, especially when they are reinvested and compounded over time. As illustrated in the Legg Mason study, $1 invested in the S&P 500 Index from 1929-2008 would have grown to $37; but with the reinvestment of dividends, the same $1 would have grown to $929.
  
  Note: Past performance is no guarantee of future results. All
  investments involve risks, including loss of principal
  amount invested. Common stocks are subject to market
  fluctuations. Dividends and yields fluctuate and are
  subject to change. Yields and dividends represent past
  performance and there is no guarantee they will continue
  to be paid. While dividends may cushion returns in down
  markets, investments are still subject to loss of principal
  amount invested.

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