On Apr 15, 9:12 pm, darknes...[at]yahoo.com wrote:
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Caveat on that. In a bond fund, movements in the interest income it
pays are normally fairly small. In a money market, or short term
bond, fund, they can be much larger. After 9-11, the Federal Reserve
lowered interest rates to almost zero to fight the recession, and the
income from bank deposits, CDs, Money market funds etc. plunged.

On Apr 15, 9:12 pm, darknes...[at]yahoo.com wrote:

Let me add 'Personal Financial Planning for Dummies' and 'Mutual Funds
for Dummies' to the essential reading list on these topics. Don't be
put off by the titles or the flashy covers, these are very good and
useful introductory books.

On Apr 13, 1:34 pm, "Thomas" <t...[at]mas.zo> wrote:
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yield based on the prevailing level of interest rates.

Movements in income from the fund, and NAV are normally small (unless
it is an 'Emerging Markets' bond fund, or a 'High Yield' bond fund).

A stock index fund has no guarantees on the income it pays, nor on the
level (NAV) of the fund.

Stock funds are mostly held for their capital return (change in NAV)
plus some income (dividends). Interest ('fixed income') funds are
held mostly for their steady annual returns from income (interest).


- quote -

Actually stocks are a (somewhat) better hedge against inflation in the
long run than bond funds or moneymarket funds. Because stocks
represent the operations of real companies, whose sales revenues rise
with inflation (but so do their costs), over the long run the returns
from stocks tend to rise with inflation. But only over the long run.

The only fixed interest funds which are 'proof' against inflation are
real return bond funds (known in the US as TIPS), which are bonds
issued by various governments, whose face value (what you get back
when they are redeemed) is increased with CPI inflation. However they
have tax issues for investors (if held outside a tax deferred account,
you can pay more tax than income you receive on them)-- check with a
US tax specialist. An example would be VIPSX which currently pays a
2% yield.

TIPS are held to be the safest investment any investor can make,
having the full credit and faith of the US government behind them
(there is a clause in the US Constitution which says that Congress
will not alienate any debt, but I don't know if this applies to US
government bonds) which is held to be the best credit rating in the
world, and being indexed to inflation.

In practice, the best thing for a retiree (or anyone else) to do is
maintain diversification, holding stocks and stock funds, bonds and
(some) cash/ money market funds. A typical formula is 110 minus your
age in stocks, so at age 65 45% in stocks (remembering that a woman,
aged 65 in the USA, has something like an even chance of living to be
90-- retirement lasts a *long* time). The balance would be, say, 45%
in bond funds and 10% in cash (money market funds).

Another wrinkle is to add a REIT index fund. REITs are special
stocks, which invest only in residential rental and commercial real
estate (hotels, shopping malls, offices, industrial parks etc.). They
pay good dividends, typically, because by law they must pay out most
of their profits as dividends. A typical weighting here is 10%.
However most Americans have a lot of money tied up in real estate
already (their home) and so this is an area to be somewhat cautious.

REIT NAVs can go up and down (almost as much as stocks) but the
dividend yield (income) tends to be much more stable.

am trying to understand the concept of a stock index versus a fund that invests into
an index tied to interest rates

specifically to vanguard funds but the general concept, as I understand it is that if
a small investor (retiree) assumes inflation pressure exists, they will move from
stock indexed funds into a bond fund (?) or another fund like moneymarket (?) which
would be considered "interest bearing fund" ?