EXPERTS HAVE LATELY been recommending that investors shift some money from short-term bonds—which offer the highest yield these days—to longer-term issues, whose prices are more sensitive to interest rates. Had I followed this advice—and I almost did—I’d have quickly lost money in what’s supposed to be the safe part of my portfolio. Bonds did indeed rally from their October 2022 lows, but have pulled back since early May. Vanguard Intermediate-Term Treasury ETF (symbol: VGIT) was down 4.2% from its May 4 peak through last Friday, while iShares 20+ Year Treasury Bond ETF (TLT) was off 8.8% during that stretch. The “smart money” said prepare to profit if interest rates fall, perhaps because the economy slips into a recession. But that’s a big “if.” The flipside: You lose if rates rise. That’s why I’ve generally preferred short-term Treasurys in my portfolio. That limits my exposure to interest-rate fluctuations and provides a hedge against the risk of falling stock prices. Short-term Treasury prices won’t decline much if rates keep rising, though they also won’t gain much if rates fall from here. An added bonus: Today, we’re enjoying generous yields on short-term bonds and cash investments, including some guaranteed by the federal government. Indeed, those high rates have lately drawn me to money market funds and certificates of deposit (CDs). The bond market got a bad case of the willies in August, burning those who hold interest-sensitive assets. Now, Wall Street is gripped by the fear of rising rates. Budget deficits and the national debt really do matter—finally—or so some are saying. On top of that, the U.S. Treasury must issue a lot of new debt at higher rates, while foreign countries are reducing their Treasury holdings. Prepare for interest rates to be “higher for longer,” some experts are predicting. I prefer not to bet on the direction of interest rates—and I don’t have to. Unlike the stock market, where declines have reliably been followed by greater gains because of growing earnings and dividends, there’s no such natural tendency in the bond market. Yes, higher interest rates lure more buyers, but rates could potentially rise indefinitely. Until 2022, bond and stock investors, as well as homeowners, had enjoyed 40 years of generally falling rates. Who’s to say that trend couldn’t reverse in the decades ahead, and so why take interest-rate risk? I have a young advisor at Fidelity Investments who had better advice for my situation than the high mucky mucks at other big asset-management firms. He had thoughtfully set up a meeting with me ahead of the Aug. 31 maturing of a Treasury note I bought last year. He said Fidelity shared the consensus view that interest rates will fall in 2024. But knowing we were talking about my emergency money, his recommendation wasn’t to take interest rate risk, but rather to focus on avoiding reinvestment risk—the danger that rates will be lower when I go to reinvest the money from, say, a maturing bond. He suggested buying a noncallable three- or five-year CD at 5.1%. That way, if rates decline, I don’t have to worry about where to reinvest my cash: I’ve locked in good rates for a few years to come. Problem is, I can’t commit to tying up any money for three-plus years. I need more liquidity in my emergency fund. I can tie some up for perhaps a year or 18 months. Of course, if rates keep rising, I’d be better off in a money market fund. Last year, I bought that Treasury note with what seemed like a great yield, but it’s now low by today’s standards. I’ve settled on a plan to gradually purchase CDs between now and year-end to create what’s known as a CD ladder. That is, the CDs will mature at staggered dates, stretching from June 30, 2024, through Sept. 30, 2025. Every three months starting in mid-2024, I’ll get cash I can reinvest or spend if needed, such as if I lose my job or to pay for my daughter’s wedding. I recently bought a noncallable CD yielding 5.25% through Sept. 4 of next year. In a month, I’ll look for one maturing in December 2024, then March 2025 and so on. Moving gradually eases my mind about the possibility that rates could be even more generous in the near future. The lesson I’ve learned from the whole experience: Tune out tactical investment advice—and just be happy when yields in your emergency fund are beating inflation. William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles. [xyz-ihs snippet="Donate"]

NEW MORNINGSTAR research on bond funds echoes what the late Jack Bogle preached—and proved—for decades: Costs are the greatest predictor of fund performance, not stock or bond selection prowess. In investing, you get what you don’t pay for, said Bogle, Vanguard Group’s founder and creator of the first index mutual fund. There’s a school of thought that claims it’s easier for active bond fund managers to beat their indexes than it is for their stock fund colleagues. Whether that’s true or not, the fact remains that funds with lower expense ratios outperform more expensive ones, and they do so with less volatility. Those are the findings of Morningstar’s Chief Ratings Officer, Jeffrey Ptak, relayed in a recent column titled, “Why Pay Up for Bond Funds?” “Costlier bond funds not only return less than cheaper funds, on average, but they’re more volatile,” Ptak wrote. “That’s not a coincidence. For even among funds of the same type, pricier offerings are more likely to take on higher risk to clear the higher fee hurdles they face.” Upon reading that, my thoughts turned to today’s “bond king,” Jeff Gundlach. Several years ago, I considered investing in his flagship DoubleLine Total Return Bond Fund (symbol: DLTNX), but I was dissuaded by the fund’s high expense ratio, which today is 0.73%. Especially when bond yields in the 2010s were so low, I couldn’t justify paying that much for fixed-income exposure. It’s also important to consider the purpose of fixed-income holdings in your portfolio. Since I’m still working and have a high percentage of my investments in stocks, I view Treasurys as the best way to hedge that risk. I use Treasury bond index funds as opposed to alternatives such as the Vanguard Total Bond Market Index Fund’s Admiral Shares (VBTLX). Vanguard’s Total Bond fund tracks an index that includes all types of investment-grade bonds, with roughly half in Treasurys, but with corporates and securitized bonds also owned. Gundlach and his team, by contrast, invest the vast majority of their fund’s assets in securitized mortgage bonds. That presents a different risk profile but offers a higher yield. [xyz-ihs snippet="Mobile-Subscribe"] DoubleLine Total Return sports a trailing 12-month yield of 3.66%, according to Morningstar, versus just 2.66% for Vanguard’s Total Bond Market fund. Its yield advantage is even greater over my short-term Treasury fund. Yet I don’t need yield right now, nor do I need the higher interest-rate risk of these other funds. Despite vastly higher costs, Gundlach’s fund has destroyed the index fund since the former’s inception just over 13 years ago. DoubleLine Total Return has returned 3.5% per year, versus 2.2% for Vanguard Total Bond. Yet all that outperformance was concentrated in the DoubleLine fund’s early years, before it attracted most of its current $34 billion in assets. Over the 10 years ended May 31, DoubleLine Total Return, with an annual gain of 1.2%, has lagged behind Vanguard Total Bond’s 1.4% annual return. Paying DoubleLine nearly three-quarters of a percentage point every year cost investors money over the past decade. Vanguard Total Bond’s expense ratio is just 0.05%. Unlike most of the high-cost funds in the recent Morningstar study, the DoubleLine fund exhibited less volatility than the bond index fund. The DoubleLine fund fell just over 16% in the recent bond bear market, versus nearly 18% for Vanguard’s bond index fund. That’s good, yet hardly enough to let investors sleep more soundly—or to justify the higher costs. And most active bond fund managers can’t match Gundlach’s record. The bottom line: I’d think twice before investing in any high-cost fund. Management skill rarely compensates investors. The only certainty is that high fees handsomely compensate management. William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles. [xyz-ihs snippet="Donate"]

I’M DETERMINED NOT to repeat my mistakes of 2008-09. I was ruined by that financial crisis or, more accurately, I let it ruin me. I led into it with my chin. I’ll spare you the details of my personal situation in the years leading up to the crash, but the upshot is I was egotistical, financially reckless and looking for a big score. As the crisis unfolded, I piled risk upon risk, mistake upon mistake. I bought 2008 all the way down, loading up on many of the beaten-down financial names: Goldman Sachs, Morgan Stanley and even Lehman Brothers. Unfortunately, I purchased Goldman and Morgan Stanley with borrowed money, using my margin account. I had been using such leverage for years—within prudent limits, I thought. I calculated potential downsides but, of course, it was the potential gains that seized my imagination. The hard lesson for me? It wasn’t that margin investors can be forced to sell stocks in bear markets, particularly the worst and most sudden ones, leaving them no means to buy back in. I knew that. What I didn’t know is that brokerage firms can decide overnight that some securities are no longer marginable and hence they don’t count as collateral. E*Trade said I couldn’t borrow against my Goldman and Morgan Stanley shares anymore. I was forced to sell. Probably less than two months before the low. Then I was laid off at the end of 2009 and missed about a year of potential 401(k) contributions as the market recovered. I entered 2020 much poorer for my folly. But I have no debt today. The car is paid off and has many miles left on it. My big risk is getting laid off again—unfortunately, a real possibility, as it is for so many. But unlike 2008, I’m not picking the hardest-hit stocks and trying to beat the market. I’m not hanging on the words of CNBC celebrities. My investments, largely in target-date retirement funds, are a mix of stocks and bonds appropriate for my age. I have targets for my exposure to U.S. shares, foreign stocks and bonds, and rules for rebalancing to stay near those targets. How am I handling the fastest bear in history? So far, I can only grade myself a B, with a B+ for planning and preparedness, but a C+ for execution. Why? I got emotional. I entered a perfectly well-reasoned buy order on Friday, March 13, with the market down 25% from its high, as I said I likely would. That was my first buy order of this downturn. But mutual fund trades don’t settle until the close. Not only did I end up buying after the “Trump bump” late that day, but the bump slumped all the way back down the following Monday, March 16. I’d unintentionally bought higher than I wanted, only to see prices immediately tumble. I said I wouldn't get upset, but I was. I wasn’t going to let that happen again. My two subsequent moves were rushed, even though they were limited and kept my stock exposure within target. I also made a modest trade on March 16 in my mother’s account, selling a tax-exempt bond fund for the Vanguard Total World Stock Index ETF. With my “Trump bump” experience in my mind, I insisted to her financial advisor that we buy the exchange-traded fund, not the regular mutual fund version. I wanted that price, that minute. No need to call me back. Just buy it. In fairness to me, Mom’s stock exposure remains reasonable and she might benefit from a bit more foreign diversification. You’ve heard the cliché about fear and greed. But one component of greed is Fear of Missing Out and, last week, I caught FOMO like a virus. Mom and I were almost immediately underwater on all three trades, though yesterday's big rally undid a lot of the damage. But such short-term losses aren't a big problem or surprise. I know it’s not about buying at the bottom, it’s about buying when the market gives you opportunities. And 25% to 30% off the high is a good opportunity, just not necessarily the bottom. Maybe I should add a time element to my rebalancing plan. Last week, a smart investment advisor told me that he rebalances client portfolios when their allocations get too far out of established ranges, but that he only considers such rebalancing once a month. Similarly, a Vanguard Group wealth management executive told me they generally rebalance client portfolios quarterly, though they'll move between periods if portfolios get too far out of whack. There’s discipline in that. A discipline that tames the FOMO virus. Markets may be higher or lower by the end of this month or the next or the one after that. There’s no way to know. But when you’re in the throes of FOMO, you are thinking markets are more likely to rise than fall in the near term. And none of us has any business making assumptions like that, any more than we should sell because our gut tells us markets are heading lower before they head higher. The market being the cruel beast that it is, I suspect that until FOMO gets beaten out of me, the lower we go. So I need to slow my roll, but not make the opposite mistake of being afraid to buy when called for under my plan. Am I beating myself up too much for rushing some trades? Maybe. I’m still prudently invested. Unless I lose my job for an extended period, I won’t be forced to sell, like I was 11 years ago. This pandemic is a horrible tragedy, as well as a financial and economic crisis, unlike anything we’ve ever seen. But we have a responsibility to invest wisely and opportunistically. In wealth management terms, this almost certainly is a great buying opportunity. This time, I want to be able to tell my family that I bought. William Ehart is a journalist in the Washington, D.C., area. Bill's previous articles for HumbleDollar include Luck of the Irish, No Sweat and Resolve to Rebalance. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart. [xyz-ihs snippet="Donate"]

BALANCED FUNDS ARE a great first investment for those with a moderate risk tolerance. But which fund? Vanguard Balanced Index Fund Admiral Shares, with its incredibly low 0.07% expense ratio, $3,000 investment minimum and mix of 60% stocks and 40% bonds, is the standard by which all balanced funds should be judged—and it’s likely your best choice. But if it isn’t one of your 401(k) options, chances are you’ll find the plan includes one or more of the other five funds in the accompanying chart. They’re the largest and arguably the most successful balanced funds and, together with Vanguard Balanced Index Fund, are among the 10 biggest in the 401(k) market. They’re also good choices. These longstanding brand names don’t have the buzz of bitcoin or smart beta ETFs. But they continue to deliver generally consistent, solid results. Their average age is 62 years. Through many management changes and many market crises, their parent companies have kept them largely on track. Most balanced funds are actively managed. That means that, since the Vanguard index fund’s inception in 1992, they have tried to beat it, rather than match it—a difficult feat, but one that two of the five actively managed funds in the chart have accomplished over the past 15 years, while the other three weren't far behind. These were also the five largest balanced funds 15 years ago—and they’ve lived up to their reputations. Each has its own distinctive appeal. Whereas Vanguard Balanced Index Fund offers exposure to the entire U.S. stock market and only investment-grade bonds, some of the active funds have juiced returns with lower-quality bonds, including junk bonds. Fidelity Puritan currently has the lowest-quality bond rating of the group, at the last rung of investment grade, according to Morningstar. The index fund’s top-quality bonds will hold up better in bad times. The higher expense ratios of the active funds can incentivize them to increase risk, with an eye to boosting returns and thereby overcoming the drag from their higher annual expenses. Most of the actively managed balanced funds have more of a large-company investment focus than the index fund does. Some use a growth style, others value and some have significant foreign exposure, which has detracted from returns over the past 15 years. Undoubtedly, each has had ups and downs of its own making. Dodge & Cox Balanced stumbled badly during the financial crisis, thanks to its heavy stake in financial stocks. And portfolio manager changes are a source of uncertainty. In fact, Fidelity Puritan recently lost its lead fund manager and, next year, Vanguard Wellington will lose one of its lead managers, both because of retirement. Morningstar has cut its rating of Puritan to neutral, pending evaluation of new management, but has expressed more confidence in Wellington’s remaining team. With all that, there’s a lot to recommend all six funds. Here are five reasons to consider buying a balanced fund: The 60% stock-40% bond split, which is what these funds typically maintain, is ideal for moderate risk investors. It’s like mild salsa. In fact, it’s the industry standard for moderation: mostly stocks, to tap into the potential growth we need, but a hefty slug of bonds to limit volatility. Most investors below their 50s are advised to go heavier on stocks. But it’s also crucial to stay within your risk tolerance. That’s especially true for less-experienced investors. While target-date retirement funds are also great choices for set-it-and-forget-it investors, they’re a different animal. The allocation to stocks declines over time, plus they often have substantial foreign exposure. With a balanced fund, you have a better idea of what you’re getting. Even the best advice—about low-cost indexing, broad diversification, astute asset allocation, periodic rebalancing—can be a blur for beginning investors. The great investment books sometimes contradict each other on crucial issues, such as how much to invest overseas. As in other areas of our lives, we shouldn’t let the perfect be the enemy of the good. A lot of people have made a lot of money in balanced funds without knowing anything about asset class correlations or the price of shares in China. Your 401(k) choices may be limited—but there’s a good chance one of these funds is in there. The American Balanced Fund, normally available only through financial advisors for a heavy cost, may be available without a commission in your 401(k). I think of my mother, sitting in funds like Vanguard Wellington and American Balanced, and reinvesting her dividends and capital gains for decades. Her financial advisor was happy with such a low-maintenance client. What did Mom know about investing? Not much, except to buy and hold her balanced funds. Mom slept soundly, while I tossed and turned, worrying about whether my asset allocation was the right one. William Ehart is a journalist in the Washington, D.C., area. Bill's previous articles include Weight Problem, Not My Guru and China Syndrome. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart. [xyz-ihs snippet="Donate"]

MY LAST BLOG POST—about value-oriented Dodge & Cox Stock Fund—got me looking at the long-term returns for some highly touted large- and mid-cap growth and blend funds from 15 years ago. My surprise: Of the 15 funds in my admittedly unscientific sample, six went on to outpace both the S&P 500 and an index fund focused on the same market segment. The six winners are boldfaced in the accompanying table. Note: For two of the winners, Jensen Quality Growth and Vanguard Primecap, I used the S&P 500 as their style benchmark. The reason: Like the S&P 500, they have a blended investment style, rather than being pure growth funds. I believe it’s important to judge funds not only against a comparable style index, but also against a broad market index, such as the S&P 500 or Wilshire 5000. Why? An investor needn’t necessarily own, say, growth or value funds, or have extra small- or mid-cap exposure. That decision is on the investor. Think of it this way: When you invest in a style-specific actively managed fund, you’re certainly hoping to beat the broad market over the long haul. Otherwise, what’s the point? For my 15 celebrated funds from 2006, the range of outcomes has been quite broad. If you’d bought one of the 15, you had a 40% chance of picking a winner—meaning the fund beat both the S&P 500 and a comparable style index—and a 27% chance of ending up with a disappointingly bad loser. (Guess who bit on one of the losers at around that time? Ahem.) Interestingly, your odds of good results were much better if you stuck with the big, established fund firms. Lesson: The volatile gunslingers who occasionally shoot the lights out, like Ken Heebner who still runs CGM Focus, can be hazardous to your wealth. (Ahem, lesson learned.) Despite the success of six of the 15 funds, the experiment still illustrates indexing’s appeal. Four of the 15 funds were especially lackluster. One—the Bridgeway fund—was merged into a similar fund that also performed poorly. Others abruptly changed investment strategy, which happened at FPA Perennial, now named the FPA U.S. Core Equity Fund. That change in strategy saddled shareholders with a huge capital gains liability in 2015. Then there’s the issue of manager tenure. You might find the right manager at the wrong time in their career. Case in point: After a great 28-year run, T. Rowe Price Blue Chip Growth manager Larry Puglia will retire at year-end. How much longer will Brian Berghuis of T. Rowe Price Mid-Cap Growth (tenure: 29 years), Steven Wymer of Fidelity Growth (25 years) and Fidelity Blue Chip Growth skipper Sonu Kalra (12 years) run their funds? That’s the tough question that both existing and potential investors need to ask themselves.