Bond Funds

A recent article in the Wall Street Journal by Jonathan Clements highlighted the advantages of low-cost bond funds.

Jonathan correctly points out that low-cost bond funds consistently outperform their high-cost cousins. This is not because low-cost bond funds are run by superior investment managers. It’s simply a result of the funds’ low expenses.

As an example, take Vanguard GNMA with an expense ratio of .20% and Franklin US Government Securities with an expense ratio of .72%. Both funds focus exclusively on GNMA securities. The difference in their expense ratios is .52%.

According to Morningstar, for the period ending 11/30/2005, the difference in their 3, 5, and 10 year returns was .51%, .55%, and .48% respectively. It’s no coincidence that the difference in returns almost exactly matches the difference in expenses. High-cost bond funds mute the power of compound interest and herd you into the land of mediocre investment performance. At our family-run investment company and in our newsletter we focus exclusively on low-cost bond funds – you should too.

Investment Resources

An Efficient Frontier

The concept of an efficient frontier is central to investing.What is an Efficient Frontier? An Efficient Frontier is nothing more than the line that connects one optimal portfolio across all levels of risk. An optimal portfolio is the mix of assets that maximizes portfolio returns at a given level of risk.The Chart below illustrates an Efficient Frontier for a combination of two assets classes – long-term corporate bonds and stocks.

Compound Interest Table

Click Here to download our free compound interest table.