Question for Ted or other Financial Whiz

[Cut-Throat]

Ted had recommended parking cash in the Vanguard VBISX - Mostly a short term treasury Bond Fund. And considered this almost as safe as a Money Market fund.

However when researching this Morningstar rates this Fund Risk Status as above average - Whatever that means.

Here is the link :


http://finance.yahoo.com/q?s=vbisx

Ted - or anybody can you explain this to me?

Thanks,

 

[wabmester]

I'm no Ted, but I can tell you that an "above average" risk rating appears to mean low risk. I took a look at VWEHX (junk bonds), and the risk rating is "below average" meaning higher risk.

 

[WilliamG]

Hi Cut-Throat,
I'm not a financial whiz, but when I was looking for a short term bond fund I was surprised to find that this fund was more volatile in it's NAV than Vanguard's Short Term Corporate fund. I have gone with that fund for a short term bond fund, but any bond fund will have some NAV risk versus the likely stability of money market funds.... Bill

 

[Cut-Throat]

William,

Thanks, good info ! - I am looking at that one also!


wabmester,

Yeah, I follow you kind of a reverse way of thinking about it. Here is a link to another version though. Still a bit confused.


http://www.schwab.com/SchwabNOW/SNLibrary/SNLib100/SN100_FD_Overview/0,7608,52790|Domestic,00.html

 

[Joe Woody]

Cut-Throat,

Morningstar's risk ratings are a function of volatility as one would expect. However, funds are rated against other funds with similar objectives. As a result, a junk bond fund rated as " below average" risk is almost certain to be more risky than a short-term bond fund rated as "above average" in risk. The risk ratings should not be used to compare two funds with dissimilar objectives but rather with other funds in their category.

Forgive me if this is already understood.

Joe

 

[wabmester]

Oops, you're right, Joe.

Here's the definition of the rating:

http://moneycentral.msn.com/investor/glossary/glossary.asp?TermID=302

 

[Ted]

Cut-Throat,

Thanks for referring to me as a "financial whiz." That's about the next best thing as being recognized as one hellova fisherman. (I come pretty close to that but can't top your tarpon. Here in St. Louis, I fish the Mississippi after combined sewer overflows and sometimes hook a Tampon.)

Actually, what I recommended was Vanguard's Short Term Corporate (Bond) Fund. However, there is really very little difference in the probable performance of Vanguard's short term funds that hold corporate bonds, treasury bills, or an index that includes both.

I think that the main reason why Treasury securities (short term or longer term) yield a little less than high grade corporate securities of like maturity is simply that the interest on the Treasuries is exempt from state tax. This is an advantage for high income investors in states that tax interest income, and it causes those investors to bid the price of Treasuries up (and thus the yield down) relative to corporate bonds.

So, unless your income is subject to a fairly substantial state tax, you would probably net somewhat more return investing strictly in corporate debt, rather than Treasury debt or a mixture such as is contained in Vanguard's bond index funds.

 

[WilliamG]

Fyi - evidently John Bogle uses Short Term Corp as a MM substitute..... Bill
http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000009&convId=100618

 

[wzd]

Look at the details in the risk page you referenced. In particular, Standard Deviation for VBISX is 2.70 vs. 2.41 for the category average. Other measures are similiar. As others said, the risk is relative to category, and is above the average for the category. The category risk is relatively low, as indicated by the various measures.

Wayne

 

[Ted]

Among mutual funds that invest in high grade corporate bonds, risk will be almost entirely determined by the average duration of the bonds. (Higher duration equals higher risk equals higher expected return.)

Even within the category of "short term bond funds," there will be some differences between funds in the average duration of their holdings, and this will produce minor differences in the standard deviations of annual returns. However, Vanguard's low expense ratio is likely to cause its return even in bad years to be better than that of funds that have higher expenses but perhaps a little less volatility.

 

[Ted]

Cut-Throat,

Living in Minnesota, you must do some ice fishing. How do you manage to cast a fly into those little holes in the ice?

I actually fish on the Mississippi River very seldom. My favorite type of fishing in Missouri is by canoeing (locally called "floating") the clear streams in the Ozarks and catching smallmouth bass with my ultralight spinning outfit. (I also did this once on the St. Croix River in Wisconsin.) I have always practiced catch and release, and it is especially crucial on small streams where the growth rate of game fish is not very high.

I also love to eat salmon and one of my best fishing trips was catching them from a small boat off the coast of British Columbia. 22 pounds was my largest catch.

 

[John Galt]

I recall the last really good smallmouth fishing I enjoyed
was on the Chippewa Flowage in Wisconsin. We would
float the bays and inlets and cast leeches on a bare hook right up next to shore. Very effective, although leeches are nasty to fish with. I've also caught some very large salmon, only on Lake Michigan though.
These posts are starting to sound like a Babe
Winkleman promo.

John Galt