The Higher the Yield, the Greater the Risk

Their message is unmistakable: Investors, clearly running scared, are convinced the bloodbath is far from over.
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"Cash is king" has fast become one of the buzz phrases among Wall Street's swelling number of worrywarts. Hordes of jittery investors well believe it. Responding to a skidding economy, plunging home sales, swelling job losses, and especially to a destructive stock market, they've been rushing like crazy to sell their equity holdings and fatten their cash reserves. In turn, much of this cash is being channeled into liquid cash investments, such as money-market funds, which now boast burgeoning assets of some $3.5 trillion.

But the rates of return on these funds are so puny that many investors, such as Beatrice Hunt, a struggling Chicago waitress, refuse to join the MM parade. In an e-mail the other day, she wrote: "Dan, I just read your article where you quoted someone as saying that one of his favorite investments is cash. He's all wet. Sure, we all want more money, but cash right now is an awful investment and I'm certain most of your readers would agree with me. Just look at the latest yields on money-market funds. They keep getting tinier and tinier. The numbers speak for themselves and pretty soon the returns may be invisible. Wall Street keeps saying cash is king. Baloney. I say cash is trash."

Reading her e-mail reminded me of a memorable remark from Sweeney Todd, who said, "The history of the world, my sweet, is who gets eaten and who gets to eat,"

Beatrice is surely one of those who is getting eaten. Actually, devoured might be more appropriate.

"I am a 63-year-old widow who has been waiting on tables for more than 30 years and I barely make a living," Beatrice wrote. "You have no idea how tough it is out there in restaurant land these days. Everyone but everyone is cutting back on their tips and practically every restaurant I know is cutting their help. I can't remember the last time I got a 20% tip. Things are so tough I'm not even buying all the medicine I need because I can't afford the costs."

Her chief purpose in e-mailing me, she wrote. "If you want to do something really worthwhile for many of your readers, write an article on the best ways to increase your interest income without taking big risk. I can't imagine there's a reader of the HuffingtonPost.com who doesn't want the answer to that one."

She's hardly alone in her concern about the emaciated returns from money-market funds. It's now, in fact, a national concern. Okay, so what can you do to fatten your returns?

For some thoughts, I rang up veteran investment adviser Richard Moroney the editor and research director of Dow Theory Forecasts, a leading and well-regarded investment newsletter out of Hammond, Ind., that dates back to 1946.

Moroney shares Beatrice's view. His advice to investors: "Don't keep your cash in cash!" In the past, he says, holding a lot of cash used to make sense. No more, though, he feels, observing that in the current environment, returns on cash, such as money-market funds, are so low that the strategy just doesn't pay.

For example, the average taxable money-market fund yields only 0.43% and those that invest strictly in Treasury securities pay less than 0.10%. What's more, most industry watchers expect short-term interest rates to remain low.

Noting the stock market's primary trend is down and that it's prudent to respect that trend, Moroney recommends investors hold 30% to 40% of their equity portfolios in short and medium-term reserves (notably fixed-income maturities of 1-3 and 4-7 years, respectively.) He favors government and corporate bond funds, including exchange-traded funds which focus on these areas.

There's no doubt that money markets offer investors easy access to their cash and peace of mind. But with yields at historic lows, Moroney believes it behooves investors seeking higher returns on short-term reserves to consider alternatives. In this context, he pinpoints 10 such funds that he describes to me as "relatively low risk."

--Short-term government bond funds: Vanguard Short-Term Treasury Fund (trading symbol VFISX), estimated dividend yield, 1.5%; iShares Barclays 1-3 Year Treasury Fund (SHY), yield 0.5%.

--Mortgage-backed bonds: Vanguard GNMA Fund (VFIIX), yield, 4.5%; iShares Barclays MBS (MBB), yield, 3.6%.

--Intermediate-term government funds: Vanguard Intermediate-Term Treasury Fund (VFITX), yield, 2.2%; iShares Barclays 3-7 Year Treasury Fund (IEI), yield, 1.5%.

--Short-term corporate funds: Vanguard Short-Term Investment-Grade Fund (VFSTX), yield, 5.2%%; iShares Barclays 1-3 Year Credit Fund (CSJ), yield, 4.7%.

--Intermediate-term corporate funds: Vanguard Intermediate-Term Investment-Grade Fund (VFICX), yield, 6.1%; iShares Barclays Intermediate-Term Credit Fund (CIU), yield, 5.7%.

A word of caution: It's no state secret, but it's worth keeping in mind that the higher the yield, the greater the risk.

Meanwhile, on the stock front, beaten-up investors continue to run for cover. For example, in the recent week ended last Wednesday, investors unloaded a hefty $22.7 billion worth of equity-oriented mutual funds, according to liquidity tracker TrimTabs Research.

Their message is unmistakable: Investors, clearly running scared, are convinced the bloodbath is far from over.

The bottom line: It's time to join the chase for fatter returns.

You can reach Dan Dorfman at Dandordan@aol.com.

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