Last night, I had a conversation with my father-in-law. He was frustrated because he has to take his required minimum distribution from his IRA by December 31. The problem is, as he put it, “There’s nowhere to put my money.”
My father-in-law is older, so he doesn’t want to risk his money in the stock market or tie it up in a bond.
He looked at a short-term bond fund that his broker described as “safe.” It is relatively safe but still had a duration of 2.13 years.
Duration is the measure of how much a bond or bond fund should rise or fall with each percentage point move in interest rates.
So if interest rates climb by 1%, the fund’s value should fall by 2.13%. It yields 2.73%.
This is a perfect example of why I’m not a fan of bond funds. Even this “safe” fund, rated five stars by Morningstar, will not yield higher than a CD if rates go up even half a point in the next year.
And that 2.73% yield is only 0.3% higher than a 10-year Treasury, which has no risk. I’d argue that if you held this fund for 10 years, there’d be a lot of risk, as rates are likely to rise meaningfully over the coming years.
Even a return to the 10-year Treasury’s 25-year average of 4.29% would result in a decline of 4% for the fund.
I explained this to my father-in-law. He practically shouted, “So where do I put my money? Under the mattress?”
Here are a few ideas for people who need to stash their cash but can’t take much risk. The yields aren’t great, but that’s what happens when the investment is risk-free…
- EverBank® Yield Pledge® Money Market – It offers a special introductory annual percentage yield for new accountholders for the first year and is guaranteed to be in the top 5% of Competitive Accounts after that. A money market with an offer like that is incredible in this low rate environment. The account is FDIC insured (up to standard FDIC insurance limits).
This is where I keep much of my spare cash, and I’ve had the account for years.
- EverBank® Marketsafe® Emerging Currencies CD – This CD has a three-year maturity, so you need to be comfortable with locking up your money for that long. Your principal is 100% protected, so you can’t lose any money. The CD is made up of emerging market currencies (Brazilian real, Indian rupee, Chinese renminbi, Indonesian rupiah and Turkish lira), and should the CD increase in value over the three-year term, you can earn a market upside payment of seven times the CD’s performance.
I have some cash in this CD as well.
(The Oxford Club has a business relationship with EverBank.)
- PIMCO Low Duration Income Fund (PFNCX) – This is a short-term bond fund with a low duration of 1.32 years. So a one-point increase in rates should lead to a 1.32% decline in the fund’s net asset value. But its annual yield is 2.54%.
This fund has a 1% fee if you sell within the first year of buying it. Be sure to check with your broker to make sure you will not be charged any other fee for buying the fund.
Of course, if you have a long-term time horizon and can handle market volatility, I’m a strong believer in investing in Perpetual Dividend Raisers – companies that raise the dividend every year – even though we’re nine years into a bull market.
Timing the market is impossible. There were many people who said the market was heading lower two years ago, three years ago, six years ago, etc. They missed out on big gains (and dividends).
But you can easily earn 4% yields or more by owning a portfolio of these types of companies.
You can also invest in individual bonds, as long as you plan on holding them to maturity. I’d suggest a bond ladder where you buy bonds with varying maturities. For example, buy the same amount of bonds that mature in 2019, 2020, 2021 and so on – up to seven years.
My father-in-law is right. It’s tough to find places to put cash that pay reasonable yields. The above suggestions are a good place to start though.
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