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Monday, August 09, 2010

Bob Brinker's GNMA Advice

Yesterday on Moneytalk a caller asked Bob Brinker if he should move his money (about $40,000) out of the Ginnie Mae (GNMA) fund Brinker recommends into something else. The caller was worried that interest rates could suddenly surge and cause the net asset value (NAV) of the fund to fall.
For many years, Bob Brinker has recommended Vanguard's GNMA fund (VFIIX charts and more info) on Moneytalk.  He said he expected the fund to trade between $9.50 and $10.50 so the current price of $11.08 is well above his expectations but makes the advice even better.
The caller's question is excellent because the 30 year chart here shows the fund fell in 1987 from about $10.20 to $8.60 or $1.60 in less than a year. 
  • ( $1.60 / $10.20) x 100% = 15.7%
Brinker's advice to the caller was to use a mental stop-loss of $10.90. That means if the fund falls from Friday's close of $11.08 to $10.90, then you sell your position. That would protect your NAV decline to 18¢ or about 1.6% of Friday's price. Until then, you can continue to collect the interest that is currently yielding 3.15%.
Vanguard GNMA "Ginnie Mae" Fund VFIIX
Stop Loss Warning:  Brinker's advice to use a stop loss of $10.90 for VFIIX is good if you are able to execute it perfectly.  What happens if the fund falls in a day from $10.91 to $10.70?  Will you sell the next day at $10.70 or will you try and wait for a bounce to sell at $10.90?  My experience is people, even Brinker himself with his failed QQQ trade, often end up waiting for a bounce to sell into that never comes. 
IF you are worried about NAV declines, then it might make it easier to sell to protect larger losses at $10.70 if you sell half the fund now at $11.08 and put the money into CDs.  That would still give you an average price of $10.90 should the fund gap down to $10.70 where you then sell the remainder of the fund if it gaps lower than your stop loss of $10.90.
Another trick is set your stop loss HIGHER so you get out before those who follow Brinker's advice.  With Brinker's large listening audience, the gap down the day after VFIIX trades at $10.90 could be huge so perhaps set your stop at $10.95.

History:
Look at how quickly VFIIX jumped in 1987 when money poured out of stocks.

Vanguard's GNMA Fund VFIIX in 1987

Remember too that stocks were doing great in 1987 up until Black Monday.

Vanguard's SnP500 Fund VFINX in 1987
Those two charts show well how bond and stock funds usually go in opposite directions which is why they are so good for diversification.

Many of the stocks in "Kirk's Newsletter Explore Portfolio" are paying a great dividend while selling at very low price to earnings multiples.  My portfolios are up significantly over the past 10 years while the index funds are down.   I expect equities to significantly out perform bonds and probably CDs over the next decade and my portfolio should do even better.


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2010 YTD my "Explore Portfolio" is up
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10 comments:

  1. "Bob recommends that those who are concerned about the extremely high net-asset-value of the fund set a "mental stop at $10.90" and sell if it drops to that price."

    Now he's using stops on GNMA investments? If only he'd done that with the Q-trade, he wouldn't have followed it from the 80's to the 20's and he could have avoided much of the controversy.

    Live and learn!

    ReplyDelete
  2. In 1987 when the GNMA nav dropped to $8.60, what kind of a yield did that generate?

    ReplyDelete
  3. If you click on the chart for 1987, it shows the Yield was just under 8% at the start of the year when VFIIX was about $10.10 then it peaked at about 9.25% when the NAV fell to about $8.60.

    An advantage of starting with a 9.25% yield is that offsets the decline in NAV so the actual loss for the fund was not as hard to swallow.

    ReplyDelete
  4. Thanks Kirk,
    GNMA's are kind of a two edge soward for me. Am getting older and like seeing a high nav, but need the income that comes with a lower nav. I have a couple of million in Admiral shares and hate to sell for Capitol gains issue. Think I'm in on average at about $10.25 a share. Guess I just hang on and hang on hope.

    ReplyDelete
  5. This is a great blog!
    You are super.
    Love your comments.
    yourfilled@yahoo.com

    ReplyDelete
  6. Author: I enjoyed your analysis. I am a fan of GNMA funds myself, currently holding PYGNX.

    However, I see a flaw in your logic, concerning this paragraph: "Another trick is set your stop loss HIGHER so you get out before those who follow Brinker's advice. With Brinker's large listening audience, the gap down the day after VFIIX trades at $10.90 could be huge so perhaps set your stop at $10.95."

    The NAV should not drop because of investors selling on Brinker's advice. Mutual funds are not market traded. The NAV is based on the market value of the fund's holdings, NOT on the demand for the fund.

    ReplyDelete
  7. Make sure you read this article:

    Wednesday, August 18, 2010
    Siegel and Schwartz Bond Bubble Warning
    Jeremy Siegel and Jeremy Schwartz Say Bonds Are In A Bubble
    "A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds... We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic. "

    ReplyDelete
  8. Thanks for the kind words Steve, however I don't agree with your comment.

    "The NAV should not drop because of investors selling on Brinker's advice. Mutual funds are not market traded. The NAV is based on the market value of the fund's holdings, NOT on the demand for the fund. "

    How do you think your mutual fund will raise cash to send you should you decide to sell? A mutual fund that holds GNMAs will have to sell GNMAs to raise cash to meet redemption requests. If they get a boat load of requests on the same day, then they might have to drop the price significantly to find enough buyers. Brinker has recommended GNMAs for years on his show so if his listeners all decide to exit the day after the fund closes at $10.90, then the NAV could drop a great deal the next day. Sellers could be very surprised at how much lower they get for selling with a mental stop loss at the price Brinker recommended.

    ReplyDelete
  9. Note. Vanguard's web site says their GNMA fund will go "ex dividend" on Dec. 29 with a 23¢ payout.

    Estimated year-end distributions for Vanguard funds

    VFIIX shows a expected 18¢ long term capital gain and 5¢ short term capital gain payment.

    If you are using Brinker's Stop Loss, you should reduce your stop price to account for this distribution.

    VFIIX Data for yesterday:
    Net Asset Value: $10.95
    All time High Nov 4, 2010 at $11.16

    ReplyDelete
  10. Just a note. From my article, "Brinker's advice to the caller was to use a mental stop-loss of $10.90. That means if the fund falls from Friday's close of $11.08 to $10.90, then you sell your position."

    I heard Brinker on another occasion tell a caller when your mental stop loss is reached, you should call Vanguard the next morning and tell them to sell your shares. If you do this, you will get the closing price, which could be much lower if all his listeners dump this day.

    Yesterday VFIIX closed at $10.87.

    VFIIX - VANGUARD GNMA FUND
    NAV = $10.87
    Change Down $0.07
    % Change Down 0.64%
    Previous NAV = $10.94
    Previous NAV Date = 12/13/2010

    This is below the STOP LOSS TRIGGER of $10.90 so we will see in a few hours what closing price people who follow his advice get.

    ReplyDelete

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