FORIGN MONEY MARKET

Savers have been running on a treadmill toward higher interest rates -- as time passes, there is no real progress. The misery of investors has been cause for celebration for borrowers as interest rates remain historically low, with a cloud of uncertainty keeping them low.
The forecasts made by the economists at 24 of Wall Street's biggest bond dealers in January 2002 tell an important story. In developing forecasts for 2002, 21 of 24 said interest rates would first begin to rise sometime in 2002, which was the prevailing viewpoint at the time. Only three saw the Federal Open Market Committee not boosting rates until 2003, though none foresaw the half-point interest rate cut in November 2002 that brought rates to a 41-year low.
What this illustrates is the difficulty of forecasting in an ever-changing world, even for some of the best-educated and well-respected Wall Street professionals. Just as rates have remained lower, for longer, than anyone first envisioned, the opposite could very well be true when rates one day begin to climb.
Two weeks ago in this space, the prudent steps for borrowers -- debt consolidation and debt repayment -- were addressed.
So how can savers best make lemonade from the lemons of low interest rates?

For those individuals dependent upon interest income, a laddered portfolio can and will afford greater protection from interest rate volatility as cash investments are diversified over a range of maturity dates. A laddered portfolio is one in which an investor buys a series of CDs with staggered maturity dates. Investors thus avoid rolling over their entire CD portfolios at a low point in the interest rate cycle. In low-yield environments such as today's, investors with laddered portfolios do better.
Take, for example, an investor with a portfolio of five-year CDs laddered to mature at annual intervals. Only 40 percent of this portfolio has been reinvested at sub-normal yield levels and, assuming no dramatic improvements for the remainder of 2003, by year-end 60 percent would have been reinvested. But even then, the other 40 percent would still be chugging along at much higher interest rates, including the portion invested in 2000 at what was then a five-year high.
Just as the laddered structure has provided protection in a time of continually declining interest rates, it would also benefit the investor in an environment of abnormally high interest rates by reinvesting at progressively higher rates. Don't think this will happen? Remember, no one foresaw the current state of interest rates as recently as 13 months ago.
What about those not dependent on interest income who have dutifully dispatched of high-interest debt such as credit cards, and refinanced the mortgage at rock-bottom interest rate levels? Consider using the extra cash to rebuild the safety net or emergency fund. Check out high-yield money market deposit accounts as a way to keep pace with inflation while preserving liquidity and having the protection of FDIC insurance.
The presence of this safety cushion provides greater flexibility for future investments or expenditures, but is a preventative to incurring debt at higher future interest rates should unforeseen circumstances arise.
Savers may be running on an interest rate treadmill, but certain actions now will help keep the finances in tip-top shape regardless of how flat or steep the grade of interest rates becomes.

Back in the bad ol' days when the sluggish economy led to money market fund yields that were flirting with zero, some funds waived part or all of their expense fee to ensure that investors would garner at least some return. Now that the economy is flourishing enough for yields to rise, expense ratios are going up too.
"Many of the waivers that were implemented were the result of a potentially negative yield -- which isn't possible, but the fees would have chewed up the effective return down to nothing, so they reimbursed at least back to the zero level, if not above," says Jeff Keil, vice president of Global Fiduciary Review at Lipper, a mutual fund research company.
"It was a temporary phenomenon by some funds to keep from going underwater. I would guess a sizeable portion will reinstate their fees to a point. Some may not reinstate the entire fee; they may see this as an opportunity to gain a shade more yield than their competitors."

David Bachert, a spokesman for AIM Investments, says they started reinstating fees as soon as the Fed began hiking short-term rates.
"AIM began incrementally reinstating waived fees and expenses when the Federal Reserve Open Market Committee (FOMC) raised the federal funds target rate from 1 percent to 1.25 percent. AIM intends to carefully monitor the FOMC's actions and corresponding market conditions in determining the ongoing use of this policy."
While quite a few funds across the board waived fees, Peter Crane, of IMoneyNet, says it was most prevalent among those charging expense ratios of 1 percent or better, which he estimates to be about 5 percent of money funds.
Experts say with all other things being pretty much equal, when selecting a fund, the lower the fees the better.
"These funds are designed primarily for short-term investors," says James McDonald, manager of taxable money market funds at T. Rowe Price. "You want liquidity and safety of principal. It's a cliché, but you want to put a dollar in and be sure to get a dollar out. With regulations the way they are, the funds have to maintain very high credit quality. Over the years, money funds have become a generic product and it's pretty hard to differentiate yourself other than to establish a very good long-term track record."
The problem is that too many people don't pay much attention to the expense ratio, which is what it costs to run the fund annually. There may be other charges -- brokerage or transaction costs -- that also whittle away at your overall return.
Vanguard, known for its low fees, charges an expense ratio of 0.30 percent on three of its money market funds and only 0.13 percent on its Admiral Treasury Money Market fund. The average expense ratio for a taxable retail money market fund, according to Lipper, is 0.73 percent.
"If Vanguard can run a money fund for the cost that they run it -- you do incur expenses. But does it need to be 1 percent or more? Probably not," says Reuben Gregg Brewer, manager of Value Line's mutual fund research.
If you don't keep a lot of money in a money fund, or if you use it as a temporary parking place while you decide how to reinvest the money, it may not matter to you if the expense ratio is a bit high. But if you use a money fund as a longer-term investment vehicle for an emergency fund or a future purchase, it pays to shop around and trim expenses as much as possible.
For some help in selecting a money market fund, check Bankrate's listings of the 10 highest-yielding taxable money market funds and the 10 highest-yielding nontaxable money market funds.

NEW YORK (Money Magazine) -- Question: Over the past ten years, the stock market has gone nowhere and a buy-and-hold strategy only makes advisers rich. There is plenty of money to be made by buying the dips and selling the rips. Why don't you advise others to do this?
The Mole's Answer: While I completely disagree with your assertion that the market has gone nowhere in the past ten years, I actually do advise clients to do a type of buying on dips and selling on rips. Let me explain.
First, I admit that it hasn't been a stellar decade for the stock market. I also admit that I've heard advisers claim the market has been flat over this time period. I've seen media articles claiming the S&P 500 is nearly exactly where it was ten years ago.
But this doesn't mean the stock market has gone nowhere. It all depends on which measures you're looking at.
The S&P 500 essentially comprises only the largest 500 U.S. companies which, as it happens, have been the worst performing parts of the global stock market. Further, as I noted in How's your global portfolio, the index itself doesn't include the portion of the return that came from dividends.
Granted, over the past ten years, we have seen one of the worst bear markets in history in which many markets lost nearly 50% of their value. And you'll get no argument from me that we are currently in another down market.
Yet, over the ten year period ending June 30, 2008, the U.S. stock market, as measured by the Vanguard Total Stock Market Index Fund (VTSMX) eked out a 3.5% annual gain, after paying fees. Over the same time period, the international stock market turned in a respectable 7.1% annual gain, using the Vanguard Total International Stock Market Fund (VGTSX) as a measure.
If you had invested in these two funds, with a portfolio of two-thirds U.S. and one-third international, the total return would have been 4.89% annually. While this is certainly nothing to write home about, $1,000 invested ten years ago would have been worth $1,606 - not too shabby.
Throwing in some alternative asset classes would have also given your return a boost, and in general can be a good way to hedge against losses. For example, if you had changed the above portfolio to invest 10% of the U.S. portion in Real Estate Investment Trust stocks via the Vanguard REIT index fund (VGSIX), and 10% of your international in Vanguard precious metals and mining (VGPMX), both of which happened to perform very well in the last 10 years, your annual return would have been 7.03% and your $1,000 would have grown to $1,973. Nearly doubling your investment is not exactly horrible.
If these returns come as a bit of a surprise, that's because very few people actually achieved them. And the reason can be chalked up to the two usual suspects; expenses and emotions.
Expenses take from our return in obvious ways, though all of the funds mentioned above have very low costs. By some measure, our emotions also tend to reduce our return by another 1.5%, as we get into certain markets or sectors at the wrong times - after they have been hot.
Buying the dips and selling the rips
I may not agree with you that the market has gone nowhere over the past decade, but I'm absolutely on the same page with you that we should buy low and sell high. The problem is that I don't actually know what days the market will go up and which days it will drop. That's one of my strengths as a financial planner - I actually know I don't know.
Nonetheless, I believe in rebalancing a portfolio. If you allocate 60% of your portfolio to stocks and they decline, you have to buy. And if stocks increase, you have to sell some to get down to that target allocation. I think that's essentially what you're advocating, and you can count me in.
Over the past decade, that 60% equity portfolio (comprised of 40% VTSMX and 20% VGTSX), and 40% bond portfolio (40% Vanguard Total Bond (VBMFX)) returned 5.10% annually. But if you rebalanced annually, you boosted your return to 5.45% per year.
In a way, rebalancing is market timing that actually works. Unfortunately, most consumers in the stock market let their emotions get the best of them, and are unable to tough out the market ups and downs.
However, I don't believe in buying one day because the Dow dipped 300 points, and selling the next because it recovered. Fun and exciting though it may seem, there is little evidence that it actually works. I've had some people claim to make 30% in a down market, but so far none have allowed me to audit their account.
My advice: Take the gloomy media reports with a grain of salt and invest for the long-term. Circumstances are usually not as bad as they are made out to be. Don't move in and out of the market on a daily or even monthly basis. The more you move in and out, the lower your returns are likely to be.
The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail themole@moneymail.com.