A short-term reserve position has been a cornerstone of our investment approach since 2002, explains Richard Moroney, editor of Dow Theory Forecasts, and industry-leading newsletter that has been published since 1946.
By guiding toward a specific allocation to reserves within the equity portion of a portfolio, we can adapt our recommended lists to cope with negative market periods without forcing us to sell stocks at inopportune times.
Sometimes we refer to these reserves as a cash position — a common phrase in the industry and a literal description of the assets many managers hold in reserve. But we do things a bit differently.
Since 2002, we have recommended subscribers hold reserves not in cash, but in a short-term bond fund. We do this for several reasons: 1) bond funds yield more than cash and 2) funds also provide some capital gains.
Our current fund choice — Vanguard Short-Term Corporate Bond ETF (VCSH) — yields 2.3%. Not a massive payout, but with our recommended fund position hovering above 20% and at times 30% during bear markets, that yield adds up over time.
MoneyShow’s Top 100 Stocks for 2021
The top performing newsletter advisors and analyst are back, and they just released their best stock ideas for 2021. Get your FREE copy of MoneyShow’s 2021 Top Picks report here and see why the nation's leading investment experts believe these stocks will significantly outperform the market in 2021.
The Vanguard fund delivered a total return of 34.5% over the last decade, or 3.0% annualized, reflecting the yield plus some price appreciation.
In addition, while short-term bonds do fluctuate in value, they aren’t like stocks, or even like funds with longer-term bonds. In general, bonds decline in value when interest rates rise, and vice versa.
But bond values tend to revert toward their par value (issue price) as they near maturity. The shorter a bond’s term, the less time you must wait for that reversion, which in turn implies less volatility.
The Vanguard short-term bond ETF has a history of consistent performance, generating positive returns in 96% of rolling 12-month periods and 88% of six-month periods since its 2009 inception.
