Negative Real Return Is the Price for Safety
The price to keep our money safe finally hit our face: five-year inflation indexed bonds yield from a recent auction produced a negative number, -0.55%. It means investors in these bonds are guaranteed to earn a return at 0.55% below inflation in the next five years.
As absurd as it may sound, investors don’t have a God-given right to earn a return above inflation. If you must keep your money safe, you will have to pay the price. The price for safety changes with time. At times it’s a low return, but still positive after inflation. Right now that price for safety is a return below inflation.
Does it mean the price for safety is "too high" today? We only know it’s higher than before but we won’t know if it’s "too high" until after the fact. Under some scenarios the price can be too high. If the economy goes well without much inflation, riskier assets will do better than the safe, inflation indexed bonds. It would seem foolish to chicken out in bonds earning a pittance. If the economy stagnates with high inflation, you will be happy with a small negative real return when other assets do even worse. Which way will it go? Beats me.
Target Maturity Bond Funds and ETFs
Bonds or bond funds? For anyone who has more than a slight interest in bonds, that’s a perennial question.
Money guru on TV Suze Orman says you should buy bonds not bond funds because a bond fund doesn’t have a set maturity date. When you sell from a bond fund, you can get back less than what you put in. There’s some truth to that but it’s largely false unless you are investing for a fixed time period in the near future and you will be liquidating all at once when that time comes.
A bond fund on the other hand offers diversification you can’t easily match with individual bonds. A bond fund holds many bonds. Unless you have a huge sum of money devoted to bonds, it’s not feasible to buy that many individual bonds.
Simplicity Won, Nice Guy Lost
Marc Hedlund was the CEO of online personal financial management software company Wesabe, which sadly shut down in July. Its competitor Mint has been successful in the same space. Wesabe and Mint let users see all their accounts in one place, sort of like an online version of Quicken. Marc wrote his take on why his company lost in the competition with Mint on his blog earlier this month.
I met Marc Hedlund online, although never in person. Back when my blog barely had 100 readers, Marc recognized my blog as one of the three personal finance writers people should read, placing me among J.D. Roth at Get Rich Slowly (one of the most popular personal finance blogs on the Internet today) and Linda Stern at Reuters. I’m grateful of him seeing a gem in obscurity and telling others about it. Maybe some of you still reading my blog today were tipped off by Marc in 2008.
Mortgage Refinance and Resetting the Clock
Today’s installment on mortgage refinance appears as a guest post on My Money Blog. The conclusion:
"Don’t let the fear for resetting the clock stop you from refinancing to a lower rate."
Book Review: Comeback America
Are you concerned about the deficit and the national debt? I am. Very concerned. One of my biggest fears is that despite my hard work and diligent savings, my accumulated savings will be decimated by inflation and currency devaluation because of high deficit and national debt.
With interest, I read Comeback America by David Walker. Walker is a former head of Government Accountability Office, a non-partisan investigative arm of Congress. At the time he wrote this book, he was CEO of The Peter G. Peterson Foundation. Peterson is the author of Running on Empty about the unsustainable entitlement programs. I read Running on Empty a few years ago and I liked it.
Both books are about fiscal responsibility. They sound the alarm about the problems of current budget deficit, and more importantly, the projected increase in deficit and national debt due to unfunded liabilities in the entitlement programs: Social Security, Medicare, and Medicaid.
Cost Basis Tracking After Converting Vanguard Mutual Funds to Admiral Shares
Forget about what I said about having both Vanguard mutual funds and ETFs. Vanguard just announced they lowered the minimum investment requirement for Admiral shares in most broad index funds from $100,000 to $10,000.
Admiral shares are a different share class in the same Vanguard fund but with a lower expense ratio. In most funds that offer both Admiral shares and ETF shares, the expense ratio on Admiral shares is about the same as the expense ratio on ETF shares. Only 16 out of 30 Vanguard index funds offer Admiral shares. See list here.
With the new lower hurdle, it no longer makes sense to hold both mutual fund shares and ETF shares in the same Vanguard fund. If you invest in Vanguard funds and you prefer the simplicity of open-end mutual funds, just buy Admiral shares.
FirstIB Mortgage Refinance Review
My mortgage refinance with First Internet Bank of Indiana ("First IB") is done. The new loan paid off the old loan. All done.
I thought I would update the progress as it moved along but it went so uneventful there wasn’t much to update. Here’s the timeline:
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