Q. I've got thousands of dollars in savings bonds which I bought in the years I worked for the federal government. I have no faith in President Obama and his policies. I am afraid these bonds might not be worth anything if I don't cash them soon. They're still earning interest. We don't need them to cover our living expenses—we get decent pensions and have other savings. What should we do? —M.D., by email
A. Risk, like everything else, is all relative. Whatever happens to the value of the dollar in the future will happen to all dollars. The only thing you can do is compare yields and terms. Currently, for instance, iSavings Bonds provide no yield but increase to reflect the trailing rate of inflation. In the current six month period that rate is 0.74 percent.
EE Bonds issued on or after May 2005 are yielding 0.60 percent over the same period and EE bonds issued between May 1997 and April 2005 are yielding 1.50 percent. None of those yields stir the soul. But according to recent Bank Rate Monitor figures, you'd earn less than one percent in most 1 year CDs and even less in a 6 month CD.
You can, of course, find higher yields— but not without substantial risk. If you can tolerate some risk and want an inflation hedge that pays a good yield, you might examine some of the REIT exchange traded funds (ETFs) or consider buying shares of major oil companies.
Q. We’re a married couple in our late forties. We have saved well, but invested cautiously. We now have about $100,000 in cash. What low-risk investment options exist today? Do you suggest using a financial planner? —R.O., by email
A. I suggest taking a simple, do-it-yourself route. It isn’t as difficult or as dangerous as you may think. Finding a financial planner, on the other hand, can be dangerous to your financial welfare because a large majority of those who call themselves financial planners are really sales agents, often for a particular company and a particular product. The products will invariably be burdened with high commissions and high costs. Sadly, you are likely to be the last person to benefit from your purchase, if you benefit at all.
Financial planners will send me hate mail for writing this, but this is simply the way it is. That’s why some effort at simple do-it-yourself investing is likely to be the best path.
I say this with only one proviso: I assume that you will invest in a low-cost, no-load mutual fund such as Vanguard Wellington or Vanguard Wellesley or that you will build yourself a “lazy portfolio” with index funds or exchange traded funds. If you want to see how these have done versus more expensive managed funds, visit my website and read “Expanding the Triumph of Sloth” in which I compare the performance of the best known “lazy portfolios” to diversified managed funds.
One painful reality today is that cash is a safe “investment” but it earns virtually nothing, as indicated by the answer to the preceding question. Today, to earn any return at all, it is necessary to take some amount of risk. All investments, and I mean all, will have some amount of risk. It can be interest rate risk in bonds. It can be market risk in stocks. It can be the risk of contractual provisions in insurance-based products. But there is some element of risk wherever you turn. With that in mind, one path for you to follow would be to continue holding significant cash, waiting for interest rates to rise, while establishing a starting investment in a fund of some kind.
In 2008, a year most people want to forget, the Vanguard Balanced Index fund lost 22.2 percent of its market value. That’s nasty. But if you had 75 percent of your $100,000 in cash and 25 percent in this fund, your loss for the entire sum would have been 5.55 percent.
That’s painful, but not fatal.
Over the last three years, this fund returned 1.85 percent a year, in spite of its 2008 loss. It beat 87 percent of the more expensive competing funds, most of which were sold by people who called themselves financial planners. Over the last five years this fund has returned 4.4 percent a year, beating 77 percent of its competitors. It did this by being simple, inexpensive and somewhat diversified.