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Old 12-30-2010, 09:15 AM
 
Location: Ponte Vedra Beach FL
10,822 posts, read 7,345,377 times
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Default Fixed Income Investments

<<Unfortunately it's hard to find a safe investment that pays anything.>>

Instead of people commenting here and there about fixed income investments - I thought it would be useful to start a separate thread. Disclosure - I've been doing fixed income investing for over 30 years - BUT I AM NOT A PROFESSIONAL. So my comments here are based only on personal non-professional experiences and observations.

I guess the first issue that the quoted statement brings up is "what is safe"? Is one looking for income for the next 10 years - or a place to park money to pay the taxes you may owe in April? IOW - is maximizing/maintaining income the main goal - or preserving principal? If the former - well one can get 4.5% to 5% tax-free returns on high quality state GOs these days. If the latter - about the best you'll do is maybe 1.25% taxable in a "high yield" FDIC insured bank account.

Anyway - is anyone interested in discussing this? No need to start writing a treatise if no one's interested - not much fun talking to myself . Robyn
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Old 12-30-2010, 12:48 PM
 
Location: The South
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Good topic. Buy corporate bonds, always investment grade , arrange maturitys as a bond ladder, hold till maturity. This has worked for me for 14 years, except for the bonds I bought from Leman. But like anything , no risk equals no yield
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Old 12-30-2010, 12:50 PM
Status: "Content and Mellow" (set 19 hours ago)
 
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Great thread, I was thinking about asking you to start one. Glad you did.
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Old 12-30-2010, 01:13 PM
 
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Buy silver. It is going to go through the roof in the coming years and is still under-valued. Buying gold is not something I'd recommend because the train has already left that station (unless you have A LOT of disposable income). Sinking $10,000 in silver right now will earn you a hefty profit in 5 years, because silver is only going to go up as China gobbles up more and more American debt, real estate and other assets.
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Old 12-30-2010, 02:34 PM
 
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Well i held heavy fixed income positions right up until this past month when the newsletter i follow dumped all our intermediate term bond funds and our emerging market bond fund... some of the money went into an international equity fund but the bulk went into a short term high yield bond fund.. we went from about 20% equities in november to about 35% now.

at this stage our pre-retirement portfolio has had the equities risk cut way way down from what i used to do.
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Old 12-30-2010, 02:41 PM
 
Location: Ponte Vedra Beach FL
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Quote:
Originally Posted by mccarley View Post
Good topic. Buy corporate bonds, always investment grade , arrange maturitys as a bond ladder, hold till maturity. This has worked for me for 14 years, except for the bonds I bought from Leman. But like anything , no risk equals no yield
What's the lowest rating you'll buy? Longest maturity? What spread over treasuries is your minimum?

What brokerage firm do you use to buy your bonds?

On my part - I gave up on corporates for the most part quite a while ago. Not enough yield over treasuries for really high grade corporates (I don't mind interest rate risk - but I dislike credit quality risk). And I sold bonds in the past at the slightest hint of trouble (sold GM bonds maybe 4 years too early - but that's better than 1 month too late ).

I do trade a bit of my portfolio in junk bonds (funds only) when the spreads really blow out - like they did in 2008. Not recommended for beginners in fixed income.

The firms I use the most these days for bonds are Zionsdirect - E*Trade and Fidelity. Robyn
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Old 12-30-2010, 02:55 PM
 
Location: Ponte Vedra Beach FL
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Originally Posted by TuborgP View Post
Great thread, I was thinking about asking you to start one. Glad you did.
Now that interest rates are going up again - I'm starting to shop a little again. So - for me - it's kind of a useful exercise in "thinking out loud".

Also - most people don't know a whole lot (if anything) about bonds. Some got into the market for the first time in the last 2 years - probably buying the wrong flavors for the wrong reasons. So if I can help some people a little in their learning process - that would be nice.

Note that I think one very important issue is bonds versus bond funds. Many people think they're the same - but they're very different animals. The only bond funds I ever buy are junk bond funds. Because I don't have the time or expertise to pick individual issues myself - and - since I trade them - I want liquidity. Plus - I like the name of the ETF I use - JNK .

Anyway - I started this thread on the theory that the only dumb question is the question you don't ask. And that there's always something new to learn - whether you know a little or a lot. I spent a lot of time this year learning about Build America Bonds. Robyn
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Old 12-30-2010, 03:02 PM
 
Location: Ponte Vedra Beach FL
10,822 posts, read 7,345,377 times
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Quote:
Originally Posted by Ulysses61 View Post
Buy silver. It is going to go through the roof in the coming years and is still under-valued. Buying gold is not something I'd recommend because the train has already left that station (unless you have A LOT of disposable income). Sinking $10,000 in silver right now will earn you a hefty profit in 5 years, because silver is only going to go up as China gobbles up more and more American debt, real estate and other assets.
I'd like to keep this thread limited to fixed income. With precious metals - you do fix your income - at zero . But it isn't usually thought of as a fixed income investment . This is in no way meant to be a negative comment on that asset class (or a positive one either). Robyn
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Old 12-30-2010, 03:19 PM
 
Location: Ponte Vedra Beach FL
10,822 posts, read 7,345,377 times
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Quote:
Originally Posted by mathjak107 View Post
Well i held heavy fixed income positions right up until this past month when the newsletter i follow dumped all our intermediate term bond funds and our emerging market bond fund... some of the money went into an international equity fund but the bulk went into a short term high yield bond fund.. we went from about 20% equities in november to about 35% now.

at this stage our pre-retirement portfolio has had the equities risk cut way way down from what i used to do.
Why do you follow what a newsletter says? If the person who writes the newsletter was such a genius - he wouldn't have to write a newsletter - he would be rich and in St. Bart's on his yacht. (Note that I am not sexist - so "he" will always include "she" in my messages - otherwise - the he/she writing starts to sound a bit tedious).

Do you know what methods this newsletter uses to make its recommendations. Is it technical - fundamental - quant - or just throw darts and see where they land?

There's an old saying. No one cares about your money as much as you do. Also - as we get near and into retirement - we tend to have more money - more time to learn about investing - and a lot less tolerance for big portfolio hits. Also - on my part - if I'm going to make a mistake - I want it to be *my* mistake - not a mistake caused by relying on someone I don't know.

Why do you use bond funds? Why are you in emerging market bonds at all? Why would you dump (presumably) high quality intermediate term bonds and buy short term junk bonds?

I will leave all questions about equities out of this. Let's stick to fixed income.

BTW - I don't mean to pick on you. But what you wrote raises a lot of interesting issues.

And anyone feel free to question what I say or do. If I can't explain things in writing to my satisfaction - maybe I'm doing something wrong (wouldn't be the first time). We don't learn if we don't question things. Robyn
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Old 12-30-2010, 03:42 PM
 
Location: Ponte Vedra Beach FL
10,822 posts, read 7,345,377 times
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Default Bonds Versus Bond Funds

A very important issue. One that should be addressed at the beginning.

Bond funds are different than bonds in 2 important ways. First - a bond has a fixed maturity date. That means - unless the issuer goes belly up - you will get par (100) - or sometimes a little more if the bond is called before maturity - if you hold the bond until maturity. I have had high quality bonds go from about par into the dumps at various times. During the 70's - when interest rates soared. In 2008 - when the municipal bond market tanked. In 2008 - which most of you remember - I had AAA munis lose 20% of their value over a period of weeks when hedge funds were throwing them out the window to meet margin calls. Still - unless there was something wrong with the issuer - there was no reason to sell (and a lot of reasons to buy). And - when those bonds mature - I will get par for them.

Second - if you own an individual bond - you will in general always get the same amount of interest (unless you're talking about something like a step coupon bond or a fixed income instrument whose return depends on something like the CPI).

Remember the phrase - FIXED INCOME. Most individual bonds "fix your income".

Most bond funds (open end and ETFs - closed end funds are - again - another animal) have neither of these characteristics. To take a simple example - an intermediate treasury bond fund might have target holdings of 7-10 years. When bonds in its portfolio get shorter in term - it will sell them and buy new intermediate bonds. Your bond fund portfolio has no maturity. It may go up or down in value - but there is no guarantee you will get that par value at the end of 7-10 years after you buy the fund.

Second - assume you are lucky enough to buy the fund when interest rates are high. Your interest rate is not fixed. It will vary not only based on what interest rates do (go up or down) - but on whether more people buy into the fund. The first case scenario isn't so bad if rates go down. The value of your fund will go up. If rates go up - and people dump funds - the fund value will go down - perhaps more than it should (especially with ETFs) if fund managers are forced to dump bonds. And if more people buy your fund when interest rates are down - well both you and the newcomers will get the same interest rate. IOW - the fund that you thought might have a yield of 5% might 6 months later have a yield of 4%. [to be continued]
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