When you are young and don’t expect to retire for 30 years or more, I can understand why you make a great deal of conservative investments such as money-market funds or Treasury bills.
When you are retired, or close to retirement, these sorts of investments make much more sense, protecting you from the risks of over-valued and volatile equity markets.
Even Warren Buffett keeps a significant part of his portfolio in safe investments such as money market funds and Treasury bills when he feels the stock market may be overvalued.
Personally, I maintain a significant portion of my portfolio in equities, and I don’t try to predict highs and lows in the stock market. When the rates of return for conservative investments such as money-market funds are relatively high, I do maintain a portion of my portfolio in these investments. I do this especially after long periods of significant equity appreciation, as volatility risk in the stock market grows.
When the Federal Reserve becomes concerned about inflation, which was their concern last year, they used their influence to reduce short-term interest rates, and as a result the returns for safe, conservative investments such as money-market funds and Treasury bills fell somewhat in 2024.
For example, money-market returns fell from returns well over 5% in 2024 to slightly more than 4.2% currently, and there has been a similar fall in returns for other safe investments such as Treasury bills. Many financial experts still feel that the stock market is too high right now, with price-earnings levels are high relative to expected short-term earnings projections.
Even though returns for money-market funds are lower now than they were at peak rates in 2024, I still maintain a significant portion of my portfolio in Vanguard money-market funds that currently earn slightly more than 4.2%. I believe that if I maintained a 100% allocation of equities in my portfolio, I would likely have better long-term performance, but because I am well into retirement, I am more concerned about stability in my portfolio, and I am more interested in protecting my portfolio against a significant fall in equity values.
I also maintain a significant percentage of Vanguard high-yield bond funds in my portfolio, and I have done this for many years. I believe that this type of investment is also conservative, and does offer stability against significant falls inequity prices.
In general, Vanguard manages its high-yield portfolio in a conservative manner, and it avoids high-risk holdings. For the last year, Vanguard’s High-Yield Corporate Fund Admiral Shares (VWEAX) had a return of 7.98%. The 30-day yield is currently 6.16%. I have invested in Vanguard’s high-yield fund for more than 10 years. Since its inception in 2001, the fund’s return has been 6.06%. The 10-year return has been 4.67%. the yearly expense rate is only 0.12%, which is lower than most other funds.
Currently, I believe that investing in high-yield funds would likely provide better returns than investing in money-market funds or Treasury bills. You can consider investments in other fund families, such as BrandywineGLOBAL High Yield Fund (BGHAX), which has returned an average 6% a year for the past five years, putting it in the top 2% of the category. Another alternative is SPDR Bloomberg High Yield Bond ETF (JNK) which yields 6.94%, which is more than 2% higher than the benchmark for this type of fund.
Bottom line: In the long-run, your portfolio will likely perform better with a significant percentage of diversified equities in your portfolio. However, if you want to protect yourself against short-term stock market volatility and a possible fall in equity prices, consider using conservative alternatives for a portion of your portfolio such as money market funds, short-term investments such as Treasury bills, and high-yield bond funds and ETFs.
Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.
