Amid low interest rates, savers may have to look abroad and accept a bit more risk
Savers have been under siege. Trying to find returns that beat inflation in a time of record gasoline and home-heating prices has been a losing battle.
With the interest-rate cuts enacted by the Federal Reserve, you're lucky to break even on savings yields once you subtract inflation and taxes. The highest short-term insured certificates of deposit less than one year in maturity are yielding no more than 3.6 percent. Bank money-market funds have slightly better returns.
You'll have to leave the United States and accept more risk to find a respectable return on an income vehicle. Several mutual funds offer robust returns and some diversification benefits. The key is to think long-term and beyond federally insured CDs and money-market funds. Of course, that means your principal won't be guaranteed, and if the dollar rebounds, the value of these investments will fall.
Although you gain some measure of safety in a mutual-fund portfolio, issuers sometimes default and don't pay their bondholders. That's why diversified holdings - versus buying single bonds - make the most sense for individuals.
Only a few mutual funds do a good job of managing non-US bonds at a low cost.
Top of my list would be the American Century International Bond Fund, which rose almost 10 percent in 2007, according to Bloomberg data.
Almost 70 percent of this fund is invested in government securities overseas. Over the past half-decade, it has bested about 80 percent of its peers.
Also worth considering is the T. Rowe Price International Bond Fund, also up 10 percent last year. Their managers may also invest as much as 20 percent in "below investment-grade, high-risk" bonds. Keep in mind that recent returns of these funds have looked rosy mostly because of the dollar's descent. That won't always be the case. To balance out your income portfolio, you will need some dollar-denominated bonds.
In the United States, the best way to sample most of the US bond market is through an exchange-traded fund called the iShares Lehman Aggregate Bond Fund. Investing in US government, corporate, and mortgage bonds, the iShares fund offers a range of American bonds and charges you 0.20 percent annually for management expenses. That's hard to beat.
For those who don't want any currency or inflation risk - bond prices drop when interest rates or the cost of living rise - consider inflation-protected savings bonds or I-bonds. The government will pay you a fixed rate combined with a variable indexed percentage based on the consumer price index.
While I don't think the CPI truly reflects all expenses of daily living - it vastly understates home-ownership costs - the I-bond gives you some insulation against loss of purchasing power in a bond portfolio.
John F. Wasik is a Bloomberg News columnist. He can be reached at jwasik@bloomberg.net.
