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Saturday, June 14, 2008

GNMA or “Ginnie Mae” Advice

Bob Brinker loves to talk about his favorite GNMA fund from Vanguard, VFIIX (Charts for VFIIX.) He has had a near constant GNMA position in his newsletter portfolio #3 for what seems like ages. Brinker likes Ginnie Maes for their slightly higher income and greater safety compared to a more diversified Total Bond Fund.
Brinker cautions his audience that there is some capital variation of about 5% around an average price of $10. Thus, GNMAs are not for "CD Investors" [they should read Best CD Rates] who can't stand to see their net asset value decline perhaps 10% when rates go up a couple of percent in a short period of time. For those like me who profit from the volatility of equities AND fixed income investments, Brinker's favorite GNMA fund is a great way to profit from normal market volatility.

Today on our GNMA forum in the "Investing for the Long Term" group, Willamae F. asked the following:
  • "GNMA prices have dropped rapidly, interest rates have risen. Do you all expect this to continue?"
Here is a chart of the fund she speaks of:


My answer:
  • Timing the bond market is as tough as the stock market. I like buying GNMAs for my personal and newsletter explore portfolios when interest rates make big moves up and we get prices near $10 on my favorite GNMA mutual fund.

    I will probably add some more $ if I see a fat pitch but I'll announce that to my subscribers before I post about it on free forums.

    Currently the fund I like is trading at $10.11

    Lets look at how it has worked out for my explore portfolio

    I established my GNMA position about 2 yrs ago (4/17/06) when I bought $10,000 worth at $10.09 when rates were 5.11%... nice returns on that even if the fund itself is only up two cents.

    I bought $10,000 more a few months later (6/29/06) at $9.93 when rates were at 5.25%. Getting 5.25% plus 18¢ of capital appreciation (1.8% extra) gives me about 6% a year... not too shabby for a SAFE fixed income investment.

    IF you think the data that shows inflation has doubled from about 1.9% on average two years ago to its current rate of over 4% will continue to get worse, then you don't want to be a buyer of bond funds.

    But if you think the inflation scare is temporary and part of the economic cycle, then there should be a very good buying opportunity between now and the near future.

  • Also, it is hard to catch a falling knife so a dollar cost average approach like I used to establish my position two years ago often works well. I often wait for falling knives to hit the table and bounce... hoping they don't bounce onto the floor. If they do bounce up then fall lower, that is where having a second buy target makes sense.
From Vanguard:
  • The fund invests at least 80% of its assets in Government National Mortgage Association (GNMA or “Ginnie Mae”) pass-through certificates, which are fixed income securities representing part ownership in a pool of mortgage loans supported by the full faith and credit of the U.S. government. The balance of the fund’s assets may be invested in U.S. Treasury or other U.S. government agency securities, as well as in repurchase agreements collateralized by such securities. Securities issued by most U.S. government agencies, other than the U.S. Treasury and GNMA, are neither guaranteed by the United States Treasury nor supported by the full faith and credit of the U.S. Government. The fund’s dollar-weighted average maturity depends on homeowner prepayments of the underlying mortgages. While the fund does not observe specific maturity guidelines, the fund’s dollar-weighted average maturity will normally fall within an intermediate-term range (3 to 10 years).
My Returns 1/1/1999 through 05/31/08:

My "70:30 Explore Portfolio" was up 198.7% or 12.3% compound annual return.
  • $100,000 invested 1/1/99 became $298,674
  • Subscribe TODAY and get the June 2008 issue for FREE!
My "50:50 Conservative Core Portfolio" was up 72.5% or 6.0% compound annual return.
  • $100,000 invested 1/1/99 became $172,470
My "80:20 Aggressive Core Portfolio" was up 72.3% or 5.9% compound annual return.
  • $100,000 invested 1/1/99 became $172,261
VFINX (S&P500) was up 31.7% or 3.0% compound annual return.
  • $100,000 invested 1/1/99 became $131,745
Vanguard's Money Market Fund was up 38.8% or 3.5% compound annual return.
  • $100,000 invested 1/1/99 became $138,784

To find out how I've profited greatly from these difficult market conditions over the past decade, subscribe to "Kirk Lindstrom's Investment Newsletter" today!

2 comments:

  1. “Ginnie Mae” How do you feel about this now ?? I'm 62 and need safe with a little risk

    ReplyDelete
  2. I sold my GNMAs and invested my "fixed income money" as described on page 8 of my December investment letter under "Fixed Income Update." More Info

    ReplyDelete

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