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I have my IRA in a Fidelity MM, which is now paying less than 1/2%. I thought investing in the Fidelity MM would protect the principal as it would always have share price of $1.00, but even that now is in question.
Does anyone know where I might be able to transfer this (fairly large) IRA in order to get a better rate and safety?
I looked at a bank CD, but rates for IRAs in banks near me are also very low.
I would rather remain out of the stock market. I would also have to consider RMD each year.
Any suggestions?
Treasury bonds? Sounds like you want as little risk as possible, otherwise I would suggest some energy company (MLP) like MMP or KMP. They pay a nice dividend each month but you need to check on their tax status.
Yes, I am now retired.
Thank you kindly for your answer. If I am not mistaken, GNMA stands for Government National Mortgage Association. If that is correct, hasn't the Mortgage sector/market been very, very volatile?
#1- Wouldn't the Principal be in jeopardy?
#2- Would you be able to tell me the rate (yield, I believe it is called) you are receiving currently on the GNMA?
#3- If I had $100,000 invested, how much dividend would be received monthly?
While the it is true that these funds are made of bonds issued by the GNMA, the important thing is that they are fully backed by the Federal Government -- this is quite different than investing in other kinds of securities that have no such backing.
Though the yield does change in response to both the rates on the underlying mortgages and the demand for the fund itself, the holdings of the fund are guaranteed to be paid by the Federal Government.
The long term risk to principal is pretty close to nil, as the Government has to pay the promised rate to Vanguard. Ginnie Mae: For Investors
There has been some volatility in the mortgage rates over the past year, but from an investor perspective the higher mortgage rates mean that the newer mortgages have a higher yield -- rates for mortgages are unlikely to drop much below where they currently are. For full disclosure, it is important to understand that the Vanguard mutual fund, like anything else, can be effected by external forces and when there was mass uncertainty as to the direction that our economy was heading there were folks that pulled money from Vanguard for a short time. If you to were to sell into that panic your invested money would have shrunk. I left mine in and it has done fine.
The current yield I am getting, as my dividends are currently reinvested in the fund, is over 5.6% after expenses. If you want to have a monthly check, which I am pretty sure that Vanguard can do, the dividend would still be over 4.5%, and the check would be something larger than $375, far better than anything you can get from a CD...
If you are worried abuot principal, be careful about investing in a bond fund. Especially in this low rate environment, as the NAV could surely drop. I would suggest looking into building a bond ladder of highly rated corps, or possibly agency bullets as another option. If your IRA is indeed fairly large, the Fidelity bond desk should be able to help you with ease.
As far as the money market "breaking the buck", I think you are now in the clear. That was more of a concern 12 months ago.
The GNMA Fund from Vanguard is already highly laddered -- their largest single holdings are never more than about 10% of the total pool, way way less risk than anything you could do with only $100K on our own..
I don't see how owning a GNMA fund would be any safer than holding a few individual GNMAs yourself. Either way, they're backed by the full faith & credit of the U.S. government.
Alice is clearly concerned with protecting principal and there's no risk to principal if holding individual GNMAs to maturity. I think Vanguard's GNMA fund is generally a pretty decent conservative investment, but as with all bond funds, the NAV fluctuates so you CAN lose principal. And as muniman pointed out, that's more of a risk now than it would be if interest rates were high.
laddered and diverse are two totally different things.
I looked up that Vanguard and notice that the top 2 holdings are G2 4.5s with a 5% WAC, making up 8.6% of the fund. This means that Vanguard is getting paid 4.5% on the underlying loans that are 5% to the ginnie homeowner. How long will those will Ginnie borrowers be able to to borrow at 5%? I imagine that it wont be for long and mortgage rates will rise, pushing down the price come RMD time. If the new rates are 6%, 7%, 8% or more, yes, teh fund will earn more interest in the future, but the current holdings of the fund wont be worth as much and the price will drop. Who would want 4.5% when they can get more? This is all considered in the daily pricing. Additionally, G2s, while be backed by the good ole USA, are still cuurently bought at premiums in the fund and pay down at par, and they are paying down quickly these days, as the G2 borrower is riskier than a regular GNMA borrower (who is still more at risk than a conventional borrower). The OP missed the window of late last year and early this year where all the gains have been as the prices rebounded, which is why people are seeing nice gains/performace currently.
For the OP, I'm not an FA, so I wont pretend to give investment advice. And I am certainly not trying to talk you out of buying a fund, but please ask your FA about this and express your concern. if they dont acknowledge this as a legit concern, then please walk away.
There are several problems with holding an individual GNMA -- the minimum face amount is $25,000. With only $100K in invest that is exactly four bonds, hardly anything to ladder.
The payments you would receive are then an ugly mix of interest, regular principal pay down and refinance settlements -- VERY unpredictable, and the risk of needing to either repurchase or get liquid before maturity is messy, with bond desk fees eating WAY MORE than the management fee at Vanguard.
Sure, if rates SOAR the current portfolio will temporarily sink in net asset value as the Vanguard managers rebalance internally, and if rates were to fall (which seems all but impossible) the mix of bonds in the portfolio would also change over time, but honestly either scenario is pretty remote right now. So long as the OP asks for either a fixed check well below the NAV fluctuation, or ask for a variable check amount that will never allow your principal to fall below a specific par amount their principal should be preserved. The underlying bonds are all solidly backed by the Federal Government.
Of course it is a mutual funds and they do keep some cash around for redemption and such, but Vanguard is very serious about creating a well structured ladder and I really do not foresee the yield shifting dramatically over the near term. Should things move dramatically Vanguard is among the easiest of firms to shift to any other fund or cash.
I understand muniman's concern about the OP perhaps having missed a bit of a higher yield window, and I would echo his concerns about the value of talking to a qualified financial adviser of the suitability of the Vanguard GNMA fund for their goals. I feel comfortable with having my money in this fund because I understand how it works and the OP should get enough info too. I really have no concerns that this is decent fixed income return with risk about as low as possible.
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