I got into this fund in January at $4.40. Back then I had a substantial sum in Vanguard Money market and wanted to make more. It was a good move. Now I am asking myself what are the risks associated with this fund. I am thinking as the US economy improves, the chance of default on the "junk bonds" in this funds diminishes which is bullish for this fund. On the other hand as the economy improves the Fed will sooner or later will have to boost interest rates to stave off inflation and also help the swooning Dollar. this is bearish for this fund.
My question is this: Hiow to you asses the risk in this fund.
When the Fed raises interest rates I believe the rule of thumb is that bonds lose about 1% of value for every year of average duration. Consequently, if the average duration of the bonds held in the fund is 4 to 5 years, the fund would typically lose about 4% to 5% of value. However, the last time the Fed tightened I think the drop only lasted about 6 months. It bounced back and recouped the loss very quickly.
farnawab.........We are in exactly the same position. I hit the one year mark on Friday and have been giving a lot of thought to what to do with this position. First of all......what is there in good alternative investment ideas? A year ago there were lots of good options. I bought a lot of SPY, a lot of Investment Grade Bond funds and a lot of a Mass Muni Bond fund. I didn't get in on international stock funds so I missed that one and they're up a lot too. For me, I don't see any of those as bargains now so what do you give up a 7.5% yield for? A money market fund will pay you near zero so for every 100,000 you take out of VWEHX you're giving up almost 7500.00 over the course of a year. For every cent the NAV goes down you lose 186.00 so the break even point is about forty cents under today's price? Is it going down forty cents? If not, we are ahead leaving our cash in VWEHX. Actually, the number is greater than forty cents because if the NAV drops our interest rate goes up so we make more than 7500 per year. Until I see a better investing idea I'm leaving my VWEHX money where it is.
<<My question is this: Hiow to you asses the risk in this fund.>>
You should Barron's each week. The Current Yield weekly article is very good.
IMO, the "capital gain" upward phase for HY is just about tapped out. So if having 7% to 8% interest baked into the cake each month is enough for you, stick with this HY fund, which is conservative and should have some downside protection. This is my plan for now.
IMO, we are at a overall market top here, Dow > 10,000. This rebound has been engineered by Fed printing trillions of dollars and game is just about up. The economic reality of the U.S. right now is pretty ugly. The foreclosure notices in the San Jose Mercury News are getting BIGGER each week. Watch out :-(
My experience with junk bonds is that they don't always follow the inverse relationship between price and rates. Their prices follow the stock market more because junk trades like a hybrid somewhere between an equity and a true debt instrument. So,I wouldn't worry about the FED raising rates. If they do they won't be significant increases anyway. And don't count on any increases until summer of 2010. FED policy is being driven by jobs right now. No doubt the White House is telling the FED not to increase rates until unemployment stabilizes or starts down. With Bernanke recently being reappointed by Obama you can bet Bernanke is listening to the White House. Bernanke owes Obama one for allowing him to keep his job and not putting Larry Summers in charge of the FED. However,if the long term trend for rates is a steady increase I wouldn't be worried until the FFR reaches around 3%. Remember,two years ago the FFR was at 5.5% and VWEHX was trading at $6.25/share. So,there is a lot of room for junk to appreciate back to where it was even if rates rise.
Although Ive felt the need to respond from time to time to what seems to me to be your endless bashing on this board.... I want to THANK YOU for a reasoned and thoughtfull post to the help inquiry... I didnt think you had it in ya... I found your post insightful and appreciate it. Please keep it up.. We dont need bashing or pumping here on this board. There are bright and seasoned investors here and I welcome the education I get from them.. some of them go back with high-yield since the 80's. I bought my first "junk" on march 12. So all I know is timing. I'll take the $1.19 in cap-gains and the more than 21 cents in reinvested divis. VWEHX may not be the "hottest" # but it seems stable and solid and with some of the crazy crap I trade, I appreciate the stability. Thanks for your post