Vanguard Short-Term Investment-Grade (MUTF:VFSTX): Treasury bonds, while an effective counter to declining stock prices, are the most sensitive to changes in interest rates, and at some point, rising rates will become a headwind. Money market funds with their constant $1.00 net asset values are not impacted by changes in interest rates — the static NAV makes money market funds a popular flight-to-safety destination — but with money market funds yielding 0.01%, you are almost certainly going to lose to inflation over time.
A shock-absorber that has the potential to make you some money but still isn’t very sensitive to changes in interest rates is Vanguard Short-Term Investment-Grade. This actively managed bond fund holds a handful of Treasury bonds but is more focused on corporate bonds, and hence has a higher yield than its Treasury bond-oriented siblings at Vanguard.
The combination of a short maturity profile and relative yield advantage has served the fund well when interest rates rose. In 2013, while its short-term peers struggled to generate any return at all and Vanguard Total Bond Market (MUTF:VBMFX) declined 2.3%, Short-Term Investment-Grade was able to notch a return of 1% — tops among all of Vanguard’s actively managed investment-grade bond funds.
The fund isn’t without risk and the potential for price declines. In 2008, anything that wasn’t Treasury-issued was shunned by the market, and VFSTX suffered for it, declining 7.6% at its low point. However, its resilience can be seen in its short six-month recovery time. Investors who can tolerate some change price should do much better here than in a money market fund over time.
Vanguard Ultra-Short-Term Bond (MUTF:VUBFX): Investors who are a bit more sensitive to changes in price but still looking for something to do with their rainy day money should also consider Vanguard’s new Ultra-Short-Term Bond. This isn’t a money market fund, so the NAV will fluctuate, but those changes should be minimal and you’ll pick up more yield than a money market fund.
Vanguard Precious Metals and Mining (MUTF:VGPMX): Gold, not Treasuries, is considered by some to be the ultimate safe-haven asset. While I have my doubts about the metal itself being of much use in an end-of-days-type scenario, the only way to “play” the metal at Vanguard is through Vanguard Precious Metals and Mining, so let’s focus our attention there.
VGPMX has been anything but a bastion of safety. In fact, six years into a bull market for stocks, and this fund is fast approaching a new record maximum drawdown. The fund’s previous max drawdown of -68.9% was reached in November 2008 in the midst of the credit crisis. It never recovered that loss, climbing to within 8.5% of its previous high at the end of April 2011 before tumbling again (and again), and as of the end of January, VGPMX was at -64.2%.
Click to Enlarge The accompanying chart of the fund’s maximum drawdowns over the past 25 years (roughly) isn’t exactly a picture of safety and smooth sailing.
Engage Less Often
Adding a flight-to-safety fund like Short-Term Investment-Grade to a stock-heavy portfolio can reduce the intensity of your flight response, as you’ll have already prepared for some trouble ahead of time.
But another strategy to consider is that you do have some control over how often you face your fight-or-flight response. When you watch (or read) the financial media, you are constantly bombarded by forecasts and warnings of danger ahead. If you simply cut back the frequency with which you engage the financial media outlets (or better yet, cut them off entirely), you’ll encounter your flight-or-flight instinct far less often. And, as we showed earlier, most headlines don’t actually warrant a response in your diversified portfolio.
Rather than having to resist the strong impulse to flee every time you turn on CNBC, you can avoid facing the response all together by not tuning in in the first place.
Editor/Research Director Jeffrey DeMaso helps publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Indepedent Guide to the Vanguard Funds.