Q. I own shares of Kemper U.S. Government Fund, class A. I get my interest check every month to supplement my income. My problem is that I had $14,210 on December 31, 1996 but the share price has dropped and now my value is at $14,029. I have had this fund for a long time. Your column mentioned Vanguard Balanced Index Fund. I was thinking of selling my Kemper fund and buying Vanguard. What is your opinion? How do I get information on Vanguard?
—R.N., New Hope, MN
A. If you had looked at your statements carefully at other times you would have noticed much larger changes over a period of a few months. For instance, if you had invested $10,000 in this fund in June, 1992, it would have been worth $8,550 at the end of December, $9,092 at the end of January, $8,826 at the end of February, $8,826 at the end of March, $8,908 at the end of April, and $8,833 at the end of May. Basically, it will tend to rise in value when interest rates fall and decline in value when interest rates rise.
The real problem with this fund is that over a longer period of time it has lost principal for its shareholders. Basically, a $10,000 investor would have lost $450 to commissions followed by losses in market value down to $8,833. In effect, the real return over 5 years has been 4.45 percent a year.
Your fund is NOT unique. An index of 20 large government funds that I maintain has under performed simple purchase of a 5 year Treasury obligation for 44 consecutive months. Thats why I write so much about retirees learning how to buy Treasury obligations and building ladders of Treasury obligations. ( Readers with computers who want to see my Treasury vs. Government Funds research can find it on my website at "www.scottburns.com."
No, a switch from Kemper government to Vanguard Balanced would not be appropriate: risk would be higher.
Q. I am a 68 year old retiree with a self-directed IRA account with Charles Schwab. My last monthly statement showed a total value of about $205,000. Of this amount, $120,000 is in Schwabs Value Advantage money market that averages about a 5.17 percent 7 day yield. The remainder is in seven different funds in about equal amounts: Baron Asset, Janus, Janus Flexible Income, Lexington, American Century Income and Growth, Oakmark, and Strong Advantage. Since my wife still works part time and we have no debt, we manage to meet ordinary expenses with my Social Security and a small pension. I dont plan on drawing on the IRA account until I reach 70 . What do you suggest I do to enhance my situation during the next 2 years?
—AP, Burnsville, MN
A. Although the Schwab money market fund yield is competitive there is no need to have 60 percent of your nest egg in cash. In addition, you have still more in fixed income by way of Strong Advantage and Janus Flexible Income. I suggest that you take three distinct steps:
- First, reduce your total fixed income commitment to about 50 percent. This will mean reducing your money market commitments by about $50,000 and reinvesting the proceeds in equity funds.
- Second, squeeze more yield from the money market cash by creating a Treasury ladder. Even a short ladder of two or three years would increase your yield to about 6 percent.
- Third, commit the new equity cash to value oriented funds such as Vanguard Index Value, Windsor II, or T. Rowe Price Equity Income. There is a reason for this change: while a strong case can be made that an index fund will beat the average managed account the majority of the time, the current enthusiasm for a handful of the largest stocks in the S&P500 index is driving them and the index to new and probably unsustainable highs and valuation levels. Commitment to a value oriented fund— a fund that looks for below average P/E multiples and other valuation measures— will reduce your risk. You will still be exposed to common stocks but, hopefully, to stocks with less price risk.
Questions about personal finance and investments may be sent to: Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas 75265; or faxed to (214)-977-8776; e-mail to firstname.lastname@example.org Check the website: "www.scottburns.com." Questions of general interest will be answered in future columns.