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If it’s not the Great Rotation, it must be “market timing”…………. July 16, 2013

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Investing-General, Money Market Mutual Funds.
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Good financial planners discourage market timing, but it’s likely that such wise advice often falls on deaf ears. An examination of recent fund flows illustrates an example of where this may be taking place. Market pundits have been forecasting a “Great Rotation” for many months. For those unfamiliar with this term, it predicts that the substantial cash inflows into bonds (as well bond ETF’s and mutual funds) over the past few years will stop at some point. This line of thinking further suggests that rising interest rates will cause investors to abandon bonds, with the stock market being the obvious place for the money to go. This so-called “great rotation” will punish bond holders who are slow to react and subsequently drive equity prices through the roof.

Well, we recently got a glimpse of what this may look like, and as usual, the conventional wisdom was wrong. Interest rates spiked after Fed Chairman Ben Bernanke’s comments regarding possible reductions in the Fed’s bond buying activity. The rise in interest rates caused major outflows from bond funds as Trim Tabs reported outflows of $67.9 billion in June and another $11.8 billion during the period July 1-11. But did that money rotate into the stock market?

Apparently not. Savings deposits grew by $74.8 billion in June while money market mutual funds saw inflows of $33 billion. Equity funds and ETF’s took in only $20.8 billion from June 1 through July 11. Not much of a rotation…………

Further thought regarding these developments suggests that the huge inflows into these cash like investments are not being drawn by the expectation of investment returns. After all, saving rates and money market fund yields are practically zero. The only logical explanation is that the funds are being “parked” within these cash equivalents until their owners figure out where to go next. Hmmm…looks like market timing to me.


Seeking yield??? Use caution!!! December 23, 2009

Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Intermediate Term Bond Funds, Money Market Mutual Funds.
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Many savers have been frustrated by the record low yields we have been experiencing with seemingly safe, short term instruments like savings accounts, CD’s and money market mutual funds.  This has caused many to “stretch” for higher yields by shifting their dollars into bond mutual funds.  Morningstar recently noted this trend in an article that observed that money market fund balances have fallen from a high of $3.6 trillion in January 2009 to a low of $3.2 trillion as of October 31.  This outflow from money market funds was accompanied by an inflow into taxable bond funds of  $233.7 billion.  Meanwhile, domestic stock mutual funds continued to see outflows for the first nine months of 2009  totalling $4.4 billion.  A logical conclusion is that many investors are incorrectly perceiving bond mutual funds as a higher yielding, yet comparably safe alternative to money market funds.  Bond mutual funds will clearly offer higher yields than money market funds as evidenced by the 3.74% yield (30 day SEC yield as of 12/22/09) of the Vanguard Intermediate-Term Bond Index Fund compared to the paltry 0.06% yield (7 day SEC yield as of 12/22/09)  of the Vanguard Prime Money Market Fund.  However, don’t be fooled into believing that this additional yield comes without risk.  Bonds funds can and do fluctuate in value!!  A case in point is the recent drop of the aforementioned Vanguard bond fund from an NAV of $10.93 per share on December 17 down to $10.77 on December 22.  This  1.46% decline consumed several months worth of the so-called higher yield.   So, keep in mind that bond funds, while clearly less volatile than equity funds, do entail risks. Funds that will be needed in the very immediate future do not belong in bond mutual funds.

Money Market Mutual Fund Yields October 17, 2009

Posted by forwardfinancialplanning1 in Money Market Mutual Funds.
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Yields on money market mutual funds are at historic lows.  For instance, Vanguard Prime Money Market has a current yield of 0.18%, while T Rowe Price Prime Reserve has 0.00%.  Since this week’s 3 month Treasury bill auction set a record for lowest rates, this situation will continue for the near future.  This would be a good time to investigate alternative places to keep your emergency funds.  Some bank and credit unions may offer higher yields.  CEFCU currently offers an insured money market accounts yielding 0.90%  ($2,500 minimum) and 0.99% ($25,000 minimum).  Many of our clients reside in McLean county and CEFCU membership is available to all residents of McLean county.  While no one will get rich with yields of 0.90-0.99%, they are still 4-5 times what is available from the mutual fund families.