June 2007
The best mousetrap
Bank-loan funds outperform the other short-term alternatives when rates go up, and short-term bond funds win when rates are
falling. If you were an economic seer, you would predict the market and choose the right one. Most of us can't do that, but
it seems reasonable that a combination of the two would be hard to beat year in and year out.
That's what we tested in the Money Lab, and we found that if you put half your money in the average bank-loan fund and half in the average short-term bond fund, you would have beaten the average money fund in each of the last 7 years (see Beating the money market) and 13 of the last 15 years. The 50-50 mix also beat the average 1-year CD yield, as reported by Bankrate.com, in 12 of the last 15 years.
We tested other time periods in addition to calendar years: 12 months and 24 months going back 15 years. The mix worked better more than 90 percent of the time. Average returns were 5.19 percent during the last 10 years. That may not sound like much, but remember that through much of that period, the Fed kept short-term rates below 2 percent.
Saving in the short run is mostly about avoiding losses and making sure the money is there when you need it. So even as you try to increase the returns on your short-term savings, you should be concerned about the potential for bad years. In our analysis, the worst year for the half-and-half mix was a gain of 3.1 percent in 2005. That was much better than the scant 0.7 percent return that money-market funds earned in 2003, or the paltry 1.2 percent average CD yield you would have had to settle for in 2004. Apparently, this is one of those serendipitous investing situations where a combination of two slightly riskier investments turns out to be safer than the so-called safe alternatives.
Among bank-loan funds, the best in class is obvious. Fidelity Floating Rate High Income fund (FFRHX) is the only true no-load (no up-front sales or annual 12b-1 charge) in the group. It has the lowest annual expenses (0.81 percent), and its yield was 6.5 percent as of March 28.
With short-term bond funds you have more choices. To see how we screened for the top short-term bond funds, check out the Ratings.
That's what we tested in the Money Lab, and we found that if you put half your money in the average bank-loan fund and half in the average short-term bond fund, you would have beaten the average money fund in each of the last 7 years (see Beating the money market) and 13 of the last 15 years. The 50-50 mix also beat the average 1-year CD yield, as reported by Bankrate.com, in 12 of the last 15 years.
We tested other time periods in addition to calendar years: 12 months and 24 months going back 15 years. The mix worked better more than 90 percent of the time. Average returns were 5.19 percent during the last 10 years. That may not sound like much, but remember that through much of that period, the Fed kept short-term rates below 2 percent.
Saving in the short run is mostly about avoiding losses and making sure the money is there when you need it. So even as you try to increase the returns on your short-term savings, you should be concerned about the potential for bad years. In our analysis, the worst year for the half-and-half mix was a gain of 3.1 percent in 2005. That was much better than the scant 0.7 percent return that money-market funds earned in 2003, or the paltry 1.2 percent average CD yield you would have had to settle for in 2004. Apparently, this is one of those serendipitous investing situations where a combination of two slightly riskier investments turns out to be safer than the so-called safe alternatives.
Among bank-loan funds, the best in class is obvious. Fidelity Floating Rate High Income fund (FFRHX) is the only true no-load (no up-front sales or annual 12b-1 charge) in the group. It has the lowest annual expenses (0.81 percent), and its yield was 6.5 percent as of March 28.
With short-term bond funds you have more choices. To see how we screened for the top short-term bond funds, check out the Ratings.
