Income Portfolio YTD vs Vanguard GNMA and Total Bond Funds VFIIX & VBMFX

Bob Brinker's Marketimer newsletter has an "Income Portfolio" but Bob Brinker doesn't usually report monthly results for it.  This year the bond market has surprised many with how well it has done despite the fear of the Federal Reserve increasing the Fed Funds short term rates in 2015.

This article is an update of our Sept. 12, 2014 article;

"Bob Brinker's Marketimer Income Portfolio and Radio Advice for Cash"

This graph compares the four funds in the Marketimer Income Portfolio with Vanguard's GNMA fund and the Total Bond index fund.

Fund summary:

• DLSNX, up 1.46% YTD
• FFRHX, up 1.31% YTD
• MWLDX, up 1.48% YTD
• OSTIX, up 2.13% YTD

With 25% in each at the start of the year, the average is +1.595% YTD.

Compare that to:

• Vanguard GNMA fund, VFIIX, up 5.57% YTD
• Vanguard Total Bond Index Fund, VBMFX, up 5.09% YTD

The "Marketimer Income Portfolio" has drastically under performed the total bond index and Vanguard's GNMA funds this year.  Of course, safe CDs and Series I Bonds, that I recommend have done the same but they have zero credit or interest rate risk.

• Current Series I Bond Rates
  
  
• Best Savings Account Rate Survey 

Bob Brinker GNMA Advice

Moneytalk with Bob Brinker Commentary for March 17, 2014 Radio Show

The following commentary is from my "Retirement Advisor" writing partner,  David Korn. 

Caller: This caller heard Bob saying recently that he thought GNMA’s would take a hit and that he was no longer recommending them.  The caller said she still owns a large position in GNMAs and wanted to know what Bob would do.  

Bob said his recommendation against owning the GNMA fund is based on a risk/reward decision over a long period of time.  Bob said he is recommending shorter duration fixed income securities as part of an overall diversified bond portfolio.  Bob said the average duration he is recommending is about 1 year.  The GNMA fund duration is typically several years.  Bob said he thinks we will eventually see a normalization of interest rates and when that happens you will see the net asset value of the GNMA degrade and given what they are paying it is not worth the risk.


David Korn: The Vanguard GNMA fund (VFIIX) that Bob recommended for so many years is actually up 2.48% year-to-date, not too shabby at all. It has a current yield of 2.80% and its shares closed Friday at $10.62.

See my article:

Monday, July 15, 2013: Bob Brinker Fan Club:
Sell GNMA to Buy Fidelity Floating Rate Income Fund, Good or Bad Advice? 

•  More about  the Vanguard GNMA fund (VFIIX)

Subscribe Today to the Retirement Advisor

FREE==> SAMPLE Issue  <== FREE

More information:

• Kirk's Two Investment Letters - Best Retirement Portfolio For You
• Retirement Advisor Performance by Year

The above commentary is courtesy of my writing partner, David Korn: 

David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service.  Copyright David Korn, L.L.C. 2012

 If you would like a free sample of David's complete "Brinker related newsletter" and his "Retirement Advisor" newsletter, then click this link to send an email request and please tell us a bit about yourself too.

FFRHX & VFIIX: Sell GNMA to Buy Fidelity Floating Rate Income Fund, Good or Bad Advice?

This weekend I did something I haven't done in a long time, I listened to "Moneytalk with Bob Brinker Host" live while driving to go windsurfing.  I had read about how Brinker recommended selling the Vanguard  GNMA fund (VFIIX) he recommended on the radio show for years to buy the Fidelity Floating Rate Income Fund (FFRHX)  but had not heard him address this on the radio before today.

WARNING: FFRHX acts like a typical stock fund while VFIIX acts like a bond fund in your asset allocation.

This weekend a caller asked about this advice and mentioned his "financial advisor" recommended an annuity instead.  Brinker then went on his typical warpath rant about how terrible annuities are and how the "financial advisor" may want a big commission.  It was clear that after recommending the GNMA fund on the radio for years and years, you had to pay to read his Marketimer to see any more of his reasons for selling the GNMA fund to buy the Fidelity Floating Rate Income Fund that contains much of what some call "junk bonds."

It is not a surprise he wanted to sell the GNMA fund after it suffered major losses.  For years, when callers asked about the interest rate risk in this fund, Brinker suggested they either

1. Sell the fund and buy a CD ladder or other, similar investments with FDIC insurance.  This is is what I did with most of my money in "fixed income."  I also have money in individual TIPS bought directly from the US Treasury and ibonds, both investments that will never lose money if held to maturity.
2. Place a mental stop loss on the GNMA position and sell when the NAV (net asset value) drops below this price. 

Apparently, Brinker followed his own advice to sell GNMAs after they lost about a year or two's worth of interest and he placed the money in a new fund.

The new fund is very aggressive and should perform in-line with stocks.  That is a TERRIBLE idea for anyone with a "balanced portfolio" where the whole idea of balance is diversification so the bonds go up when stocks go down.    This fund lost 16.47% during the 2008 bear market while the GNMA fund went up about 8%.

WARNING: FFRHX acts like a typical stock fund while VFIIX acts like a bond fund in your asset allocation.

FFRHX Junk Bond Fund lost money in the bear market!!

GNMA Fund went up in 2008 bear market

This is what you want in a "balanced portfolio" to offset stock risk
If you don't want to suffer losses, you should buy CDs

*==> Very Best CD Rates with FDIC <== *

If Brinker is recommending his subscribers buy this fund with money that was in GNMAs, beware that this is a very, very bullish change in his outlook..  

• If he was so smart and good at market timing, whey didn't he switch out of GNMAs and into this fund in 2009?  
• Is he taking calls about this fund on the radio show as a way to sell newsletters to those who lost money in the fund without telling them the fund behaves more like a stock than a typical bond fund?
• Brinker got bearish in 2009 by taking off "dollar cost average new money" to his "fully invested position at the very bottom... now at new record highs, he is recommending selling a typical, relatively safe bond fund to buy a fund that holds junk bonds and behaves like a stock fund?  Another contrarian indicator?

RECORD HIGH!!!

Long Term Results that Speak for ThemselvesSince 9/30/98 inception, "Kirk's Newsletter Explore Portfolio" is UP 450%vs. the S&P500 UP only 106% vs. NASDAQ UP only 101% (All through 6/30/13)

• Subscribe to my service NOW and get the July 2013 Issue for FREE! !   Your 1 year, 12 issue subscription will start with next month's issue.
• Get email alerts when I buy or sell securities for my explore portfolio
• "Auto Buy" and "Auto Sell" levels set ahead of time for target buy and sell levels for my securities.  This allows you to place "limit orders" with your broker in advance so you can go about your business.
• All questions about what I write answered by Email.  If what I write is not clear to you, just ask! 
• Only $155 per year via PayPal & $150 if you send a check.

Charts and Price Quote for

VFIIX - Vanguard GNMA "Ginnie Mae" Fund

and

US Treasury Rates at a Glance

VFIIX - Vanguard's GNMA Fund

Vanguard's GNMA Fund with ticker VFIIX (Charts and current quote) is Bob Brinker's favorite bond fund to talk about on his show "Money talk with Bob Brinker."  Brinker recommends VFIIX on the radio and in his "Marketimer" newsletter portfolios that are not 100% in equities.

Bob has told callers who are worried about net asset value (NAV) fluctuations leading to potential losses to either use a stop loss at a price they don't want to lose any more money or to put the funds in FDIC insured CDs.

This chart shows how the fund has performed on a NAV basis since January 1, 2012.

Bob Brinker's Favorite Bond fund is down fairly significantly this year. I wonder how many expected VFIIX to fall so suddenly?

According to Vanguard, the "income return" from the fund last year was only 2.7%

This means the fund has lost money for anyone who held it as of December 31, 2011 or later. Here is a chart showing the fund adjusted for dividends.

VFIIX with price adjusted for dividends showing a loss since 1/1/2012

Note how VFIIX was a money maker for anyone who "sold in May" at the very top on a basis adjusted for dividends.  Like fame, that was fleeting...

Does these charts erase any doubts about Brinker's ability to time either the stock or bond markets?

FWIW, I got out of Vanguard's GNMA fund some time ago and have my core and explore fixed income funds mostly in a savings account earning 0.85%.  It was not flashy, but making over 1% since 2011 sure beats losing money for a "safe" investment.  I tell my subscribers that I prefered to take my risks in my explore portfolio with equities plus I have TIPS and I-Bonds bought as new issues from the US Treasury so they, unlike bond funds, never lose money.  For more info, see:

• CurrentSeries I Bond Rates
• BestSavings Account Rate Survey 
• VeryBest CD Rates with FDIC

Subscribe to my Newsletter NOW and 

get the June 2013 Issue for FREE! 

(More Info, Testimonials & Portfolio Returns)

Bob Brinker's GNMA Advice

Summary: Bob Brinker March 18, 2012 Moneytalk Radio Show.

For a full show summary, see Moneytalk Summary - March 18, 2012

GNMA
Caller:  This caller asked Bob what she should do with her GNMA fund given that rates have gone down and if she sells, what should she go into?  Bob said the second part of the question was the hard part and a problem.  Bob said he likes to invest for income in the context of an overall portfolio.  If you follow Bob’s lead, you are either going to go with his Income Only portfolio or a Balanced Portfolio which has 50% in fixed income.  Bob said he has GNMA component in both  of those portfolios and continues to hold them.  Bob said he would rather that be a given percentage of a portfolio, but not the entire portfolio.  Bob said in his Income Portfolio, GNMA is one of five holdings and in the Balanced Portfolio there are other holdings as well.

Caller:  This caller heard some talk shows over the weekend and he heard a lot of concern over the GNMA Fund because of inflation fears.  Bob said the people who are voicing that concern probably never recommended them in the first place.  GNMA has been one of the best performing fixed income securities for a long time, even through a difficult time.  Bob said the Vanguard GNMA Fund is trading within 1-2% of its all time high.  At the same time, you will have fluctuation in net asset value and so if you are unwilling to accept that fluctuation you can set a mental stop, but then you might sell and have cash and not have many places to put it in this low interest rate environment.

EC:  Here is a link to an article entitled, “What to do about low interest rates” that includes a reference to holding a GNMA Fund:  http://tinyurl.com/84n86yw

Kirk Here: These are some related charts and quotes:

GNMA (VFIIX), Total Bond (VBMFX),  TIPS (VIPSX)
High-Yield/Junk Bond (VWEAX)

For a full show summary, see Moneytalk Summary - March 18, 2012

This above is a subset of the March 18, 2012 issue of "David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service." Together David Korn and I write "The Retirement Advisor" newsletter.

CLICK HERE to download a FREE issue of "The Retirement Advisor."  Website for more information and annual Performance Data

If you would like a free sample of David's complete Newsletter and his "Retirement Advisor" newsletter, then click this link to send an email request and please tell us a bit about yourself too.

Bob Brinker's Vanguard GNMA Fund (VFIIX) Advice

Vanguard GNMA + Cash Reserves Advice

Vanguard's web site says their GNMA fund (VFIIX quote & Charts) will go "ex dividend" on Dec. 29 with a 23¢ payout. If you are using "Bob Brinker's GNMA Advice to use a Stop Loss" to protect yourself from high net asset value loss, then you should reduce your stop price to account for this distribution.

Current Quote for VFIIX

As many regular readers if this blog know, I sold my GNMA fund awhile ago and bought TIPS and iBonds. I also sold all my bond funds not indexed to inflation. I put the remainder of my "fixed income money" in short term savings accounts that earn 1% or more. I have no reason to take bond fund risk until the Federal Reserve "normalizes" interest rates.

Some people need the income but I tell my subscribers there is a better alternative. I recommend selling SOME of your appreciated stocks or funds when you do your annual rebalance then use some of the profit taking cash for spending over the next year. Put the money into a savings account to use during the year to replace the income from bond interest and dividends. My explore portfolio is up 17.9% YTD so I've already taken significant profits.

I currently have the bulk of my fixed income cash at HSBC Bank and StarOne Credit Union. They both just dropped rates so I am leaning towards moving some of the money to American Express for 1.30%. For details, click "Learn More" here. If you hear of a large bank paying a better rate for short term savings, send me an email with the details.

Fixed Income Advice

This is what I sent my newsletter subscribers earlier today:

Hello Subscribers

I moved my explore portfolio cash reserves from Schwab, where I was earning 0.25%, to American Express Bank where they are paying 1.30% APY.

If you have significant funds in a retirement account at Vanguard's prime money fund and don't want to move to another institution, then  I suggest making a ladder of CDs with Vanguard's CD Ladder tool.  Divide the funds into 5 buckets. Keep 1 bucket (20%) in Prime money fund ready for any buying opportunities or potential rebalancing, then put the remaining 80% into CDs for 3, 6, 9 and 12 months.  As the 3,6 and 9 month CDs mature, buy a new 1-YR CD.  After 9 months, you will have four one year CDs with one maturing every quarter.  When interest rates normalize, you can put the CD funds into the total bond fund again.

You can get an idea what different banks are paying for CDs and savings accounts for various amounts by using the rate tool here.  I use American Express because it is available to everyone and it is "too big to fail."  You can often find better deals with more restrictions such as the 1.3% at Capital One plus 10% bonus and up to $60 credit detailed here, but you have to be a member of Costco.

For reporting simplicity, I have enough to calculate already, I will keep my core portfolios fixed income in Vanguard's prime money fund knowing it is a slight drag on my reported performance compared to the above CD ladder strategy.

The difference between 1.30% at American Express and 0.06% at Vanguard is $1,240 per $100,000.  Thus it is worth the trouble if you have significant money in fixed income you don't want exposed to rising rates in the bond market.

2010 YTD my "Explore Portfolio" is up 18.7% YTD
(My explore portfolio has 70% in equities and 30% in fixed income so the stocks are doing very, very well)

Subscribe NOW  
and get the This Month's Issue for FREE! !
Your 1 year, 12 issue subscription will start with next month's issue.

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 208%  vs. the S&P500 UP only 23% vs. NASDAQ  UP a only 20%   (All through 12/13/10)  

(FREE SAMPLE - More Info - Return Data )

In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 18.8%

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%

Click for Larger Image

More GNMA Charts

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

• Historical Chart 
• More VFIIX Charts 
• More Info 
•  US Treasury Rates at a Glance

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.

Subscribe NOW   

and get the This Month's Issue for FREE!!
Your 1 year, 12 issue subscription will start with next month's issue.

  Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 204%  vs. the S&P500 UP only 22% vs. NASDAQ  UP a only 19%   (All through 12/9/10) 
In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 18.8%

2010 YTD my "Explore Portfolio" is up 17.4% YTD
(the explore portfolio has 70% in equities and 30% in fixed income so the stocks are doing very, very well)

TIPS vs GNMA Performance with 2.2% Inflation Rate

TIPS vs GNMA Performance update with 2.2% CPI-U Inflation Rate.  Both securities are backed by the U.S. government.

Bob Brinker continues to recommend Vanguard's GNMA Fund, VFIIX, on his radio show. Over the course of last year, I sold out of my "explore portfolio" position in Vanguard's GNMA fund and replaced it with individual TIPS.  A good, recommended alternative is Vanguard's TIPS fund, VIPSX.

Vanguard Comparison Table
Vanguard Fund (5/24/10)	SYMBOL	Yield	YTD
GNMA	VFIIX	2.97%	2.79%
Total Bond Index	VBMFX	3.01%	4.05%
Prime Money Market Fund	VMMXX	0.05%	0.01%
Inflation Protected Security Fund (TIPS)	VIPSX	0.65%	3.00%
Total Stock Market Index Fund (for comparison)	VTSMX	1.48%	-0.95%

Last Week's CPI Press Release says Year-over-year CPI rose at a 2.2% rate.

On a seasonally adjusted basis, the Consumer Price Index for All  Urban Consumers (CPI-U) declined 0.1 percent in April, the U.S.  Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 2.2 percent before seasonal adjustment.

• My 5-yr TIPS with a 1.25% base rate will earn 3.35% at this rate of inflation.
• My 20-yr TIPS with a 1.375% base rate will earn 3.575% at this rate of inflation

In the Retairement Advisor newsletter, we recommended the TIPS fund from Vanguard, VIPSX, over TIPS for all of 2009 and so far this year.

2009 Total Return
VFIIX = 6.9%
VBMFX = 5.9%
VMMXX = 0.53%
VIPSX =  10.8%
VTSMX = 28.7%

• GNMA:  Government National Mortgage Association (”Ginnie Mae”) securities. 
• TIPS:  Treasury Inflation Protected Securities 

More Information:

• Los Altos Town Crier Newspaper Article about my success
• Kirk's Two Investment Letters
• Newsletter Testimonials 

Subscribe NOW and get the May 2010 Issue for FREE! ! 

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 159% (a double plus another 59%!!) vs. the S&P500 UP a tiny 8.6% vs. NASDAQ UP a tiny 3.5% (All through 12/31/09) 

FREE SAMPLE

In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 18.8%

 

TIPS vs GNMA Performance Update with 2.1% CPI-U Inflation Rate

Bob Brinker continues to recommend Vanguard's GNMA Fund, VFIIX, on his radio show. Over the course of last year, I sold out of my "explore portfolio" position in Vanguard's GNMA fund and replaced it with individual TIPS.

Today's CPI Press Release says Year-over-year CPI rose at a 2.1% rate

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 2.1 percent before seasonal adjustment.

Not seasonally adjusted CPI measures: The Consumer Price Index for All Urban Consumers (CPI-U) increased 2.1 percent over the last 12 months to an index level of 216.741 (1982-84=100). For the month, the index was unchanged prior to seasonal adjustment.

My 5-yr TIPS with a 1.25% base rate will earn 3.35% at this rate of inflation
My 20-yr TIPS with a 1.375% base rate will earn 3.475% at this rate of inflation

In my other newsletter, The Retirement Advisor, we recommended Vanguard's TIPS fund, VIPSX, over Vanguard's GNMA fund last year.

Vanguard's GNMA fund, VFIIX currently at $10.82, currently yields 3.16% and will lose NAV (net asset value) if inflation spikes in the future. It will gain NAV if we see deflation and rates drop.

ECRI says we have begun a cyclical upturn in inflation. That doesn't mean we will get hyper (over 10%) inflation, but it means deflation is off the table.

• April 03, 2009: Upturn in ECRI's WLI Growth Rate Says US Business Cycle Recovery Ahead
  
• February 05, 2010: ECRI Global Inflation Outlook - Higher Inflation Ahead
  

Owning Vanguard's TIPS fund over its GNMA fund paid off last year:

• in 2009 Vanguard's TIPS fund, VIPSX, gained 10.8%
• in 2009 Vanguard's GNMA fund, VFIIX, gained 5.3%

More information:

• Kirk's Two Investment Letters

• October 25, 2009: Bob Brinker's GNMA VFIIX Bond Fund Timing Advice & My Alternatives

Bob Brinker's GNMA VFIIX Bond Fund Timing Advice & My Alternatives

Saturday (Oct 24, 2009) a caller named John from Parsippany, NJ asked Bob Brinker for his opinion on market timing bond funds. John wanted to sell his bond fund and put the proceeds into low yielding money market funds.

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.

VFIIX PRICES

Date	Close
23-Oct-09	10.74
22-Oct-09	10.75
21-Oct-09	10.74
20-Oct-09	10.76

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.

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?

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.

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%.

• HSBC Savings & CD Rates

Due to FDIC and NCUA limit concerns, I have CDs and savings accounts at several institutions.

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.)

• Star One CU Savings and CD Rates
  

Finally, Bob Brinker spends a good portion of his show bashing the Obama administration and congress for deficit spending. High deficits will lead to higher interest rates for one of two reasons.

1. The fed will have to continue printing money causing inflation
   or
2. Making the interest payment from all this debt will require more debt.

Treasury investors could see either case as a death spiral similar to what happened to GM and other companies that went bankrupt. They may demand much higher interest to compensate

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.

Click for Current VFIIX Historical Chart

Consider TIPS (Chart and Info)

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.

More info:

• Bonds: Information About Investing in Bonds
  
  
• CD Rates at Largest US Banks
  
  
• Very Best CD Rate Survey

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:

• New Rates for I-Bonds

Questions and Comments: "Anonymous" posters should sign your name if you want questions answered. Please use your first name and city at the end of the question such as "Pete from Pittsburgh" or Mark from Maui." Even better, register with Google and get an account with your picture in it then follow this group! Your picture will then show on the "Followers" list on the right hand side of this blog.

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 161% (a double plus another 61%!!) vs. the S&P500 UP at tiny 9.8% vs. NASDAQ UP at tiny 4.8% (All through 12/28/09)

As of December 28, 2009, "Kirk's Newsletter Explore Portfolio" is up 34.3% YTD vs. DJIA up 20.2% YTD
(More Info & FREE Sample Issue)

HURRY! Subscribe NOW and get the December 2009 Issue of "Kirk Lindstrom's Investment Newsletter" for FREE!!