Investment portfolio outcome successes depend primarily upon the age of the beneficiary or account owner and the long term probabilities of inflation, growth, and politics. The age of the beneficiary is well known while the other parameters are guesswork. Short term politics won't matter for a 20-30 year old, but matter a lot for a 60-70 year old. Thus for practical purposes we can ignore the long term and focus on life expectancy of the beneficiary and short term politics.
However painful our impressions of the long term may be, we should ignore them. In this sense the outlooks of both younger and older investors are closer than most advisors would have us believe. Many advisors want all of us to stick our money into formula index plans based upon age and never move our money elsewhere. Nearly all of those plans did very poorly last year. They are based on the expectation that stock indexes will do well sometimes and bond indexes at other times, so that a mixture of the two will win out over time.
For someone living off their money, retired or leisured, as well as for very conservative investors of any age, the goal is adequate income and not losing capital. In normal times one can earn 4-6% per year on money market funds or TBills with little or no risk of capital loss. This was the case as recently as two years ago, but governments have lowered short term interest rates to encourage people to take on more debt and have therefore declared war on savings and on people who do save. We hear a lot of criticism of Americans for not saving, but all the advantages are given to borrowers, not to savers.
Most money market funds in the US have depended upon very short term commercial (corporate) bills to finance seasonal inventory plus some Treasury Bills and about-to-mature mortgage bonds. Commercial bills (paper) and mortgage bills both crashed last year and Treasury bills spiked to the sky. We are very fortunate that some of the brightest people in investment run the money market funds since they saved the system from total meltdown last year.
But money market funds now have some
major enemies. Mostly they are financial firms which are in danger of bankruptcy and collapse. But it's rather scary that Lawrence Summers, Timothy Geithner and Paul Volcker are part of the group who came out with these preposterous claims against money market funds. They are blaming money market funds for the collapse of Bear Stearns and Lehman Brothers last year! Most money market funds caught on to the dangers in those firms and refused to re-invest or roll over their very short term holdings in those firms' commercial bills. The money market funds protected their shareholders.
We have to be very careful of money market funds now. Mainly because they pay so little, but also because their enemies want to have the government repeal the $1 per share sacred trust that money market funds have made with their investors.
What are the alternatives? My favorites are and have been up to two year maturity or duration funds holding US Federal or municipal bills and notes. (You could also ladder one to two year notes if you have enough to do that with every month, and some one to do it.) When interest rates are very low you only want funds with extremely low annual costs, so I have primarily used Vanguard funds.
I have three favorites. Vanguard's short term Federal Fund (VSGBX/VSGDX) is good for non-taxable (IRA or 401k) accounts. The Vanguard Federal money market fund is paying 1.39% distribution annually, while the Vanguard Federal short term funds (2.3 years) pays 3.45%. Both consist of treasury bills and notes plus Ginnie Mae's, Fannie Mae's and Freddie Mac's.
