Brinker defended his advice to stay in GNMA funds. Brinker said the net asset value (NAV) of his favorite GNMA fund from Vanguard, VFIIX, would have to fall to $10.40 in a year to lose the approximately 3.3% yield from the fund to break-even with money market funds.
Perhaps John should read my article "Bob Brinker GNMA Advice - I Like CDs Better" where I wrote:
Bob Brinker has taken a lot of calls from his listeners worried about inflation leading to net asset value (NAV) losses for his favorite GNMA fund (VFIIX at Vanguard) when rates soar after inflation returns to a normal level.Just because you can put the proceeds from selling VFIIX into the money market fund from Vanguard currently paying only 0.17% doesn't mean that is what you should do!! There are funds that pay better rates. Also, rates on money funds will go up if interest rates rise so the difference Brinker calculated is ONLY good if rates stay the same.
Bob's standard answer is you should be willing to accept NAV fluctuation for VFIIX between $9.50 and $10.50.
I think the callers have a valid concern and I am not happy with Brinker's answer.
Today VFIIX closed at $10.71 so a decline in NAV to $9.50 would be an 11.5% loss!
Why take a risk of a 12% loss to get an extra percent or two of interest if you don't have to?
For example, when I sold the GNMA fund in my taxable personal account, I put the money into a CD at HSBC. Rates are down, but you can still get a 1-YR CD at HSBC paying 1.85%. I also have a significant amount of cash at HSBC in their online savings account earning 1.35%.
I have at Star One Credit Union earning 1.50% in their savings account linked to a checking account that pays 0.50%. Both accounts have NCUA insurance for $250,000 (FDIC equivalent for credit unions.)
- The fed will have to continue printing money causing inflation
- Making the interest payment from all this debt will require more debt.
Why does Brinker keep saying he sees VFIIX limited to $9.50 to $10.50? Does he not have a long-term chart for VFIIX?
Continued fiscal incompetence in Washington COULD cause interest rates to soar to the levels seen in the 1970s and 1980s. If that happens, do you really think the NAV of VFIIX will "only" drop 13% to Brinker lower limit of $9.50? Here is a historical chart to help you answer that question.
You are not limited to FDIC/NCUA savings accounts and CDs. The US Treasury will auction TIPS tomorrow (CUSIP Number 912828KM1) that mature in 4.5 years. The "base rate" for those is expected to be about 1% plus the principal will be adjusted for inflation. If we get 2% inflation in the next year, then you should get a return of roughly 3.0%. If we were to get 10% inflation in one of those years, then the return for that year should be about 11%. I've used money in IRAs to buy TIPS funds and will buy CUSIP Number 912828KM1 tomorrow via my broker for my 401(k) rollover and for my ROTH.
If you don't have a large amount to invest, then you could buy iBonds. I expect the base rate for iBonds will be zero next month but the inflation adjustment should be 3.0%. Thus, you can buy $5,000 worth of iBonds on Nov. 1 and probably get about 3.0% for the next six months. I-Bonds also give you inflation protection PLUS tax deferral you don't get with TIPS.
See I Bonds Explained
In summary, Brinker built a "straw man" argument why he prefers Vanguard's GNMA over their money market fund. Who says you should leave your money in a low yielding money fund when there are far better alternatives that will benefit if rates go up? This article suggested CDs, savings accounts paying up 1.5%, TIPS and iBonds as better choices.
Nov. 2, 2009 Update: The Bureau of the Public Debt today announced an earnings rate of 3.36% for Series I Savings Bonds issued from October 2, 2009 through April 30, 2010. The base rate for these iBonds will be 0.30% and the inflation component is 3.06%. See:
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