Wordless Wednesday

Buy Bonds! No, Don't Buy Bonds!

I read an online article yesterday that actually told people that they should buy bonds. Why is this unusual? Because most articles lately have been advising people not to buy bonds. Now who would do that? Do people who write these articles really care about your portfolio or are they just trying to make themselves look good if everything goes according to plan? Let's look at both sides of the argument. First, a little primer on bonds. If you own a bond and interest rates go up, the price of the bond will go down. But the coupon or interest you are receiving on the bond doesn't change. You will continue to get that until the bond matures. Oh and at maturity, you will get back the par value (generally $1000 per bond), so even if the price of your bond drops after you buy it, it will eventually come back to par when the bond matures. Still with me? So why do these writers keep telling people not to buy bonds? They are usually referring to bond funds when they write these articles. Mutual funds made up of bonds instead of stocks. So again, if interest rates rise, the value of the bond fund will go down. So the writers are trying to warn people, possible bond fund investors, that if they buy a bond fund now, and interest rates start to go back up, then you might lose money (on paper) in your bond fund. OK, so why should you buy bonds? The argument for buying bonds is this, bonds are generally considered a safer investment than buying stocks, meaning the probability for loss is generally less when you own bonds than when you own stocks. However, bonds do not have the upside potential that stocks do either. So bonds tend to be best for people who are looking for income, and people who are looking for better returns than one could get from buying CD's or money market instruments, yet do not want the possibility for the big losses that can come with stock ownership as seen in recent years. It boils down to this, if you want safety, don't buy stocks or bonds. Put your money in the bank in an FDIC insured CD or money market account. But if you are looking for interest rates higher than 2%, where are you going to get it? It may be 2 or 3 years before rates go back up and CD's are paying the 5 or 6% interest people want. On the other hand, if you want or need 4-6% interest, you can get it with bond ownership. You make the call.

Friday the 13th

Will today be another unlucky day in the stock market? Will the superstitious traders bring the markets down for a fourth day in a row? Follow me on Twitter @scottjwheeler or for those who don't know what this means, go to http://twitter.com/scottjwheeler and read my tweets and retweets, as we track the stock market today.

Does Friday the 13th make you nervous? Have you had an unlucky circumstance happen to you on a previous Friday the 13th? Will you be taking extra precautions and avoid doing certain things today? What is it about this day that makes people act weird? Share your thoughts on this day in the comment section.

Did you notice that my Twitter handle has 13 letters?

Wordless Wednesday

How much can you risk?

These days are some of the toughest for conservative investors. Those folks who would rather know that their savings are principal protected are faced with less and less options on where to hold their money and get a rate of return they can rely on. For CD shoppers, the interest rates continue to hold in the 1-2% range for people who only want or need to keep their money tied up for less than 2 years or so. For people willing to go a little longer to get a better rate, they can try structured notes, bonds, or longer maturity CD's. I had a client yesterday who told me he was going to put some of his money into a 10 year CD paying 3.75%. I asked him what he would do if the interest rates came up before the end of his 10 year period and he said it would only be a 6 month interest rate penalty to pull out his money early. Times change. This is the same client who told me just last year that he didn't want to tie his money up too long because he was certain rates would start going back up soon. I told him he should consider a bond or bond fund which could get him 4-6% interest with a shorter time frame, but he said he didn't want to take the risk on having something that was not FDIC insured. So he was willing to lock in his money for a fixed rate of 3.75% for 10 years, just to have the peace of mind that his money was insured. Now to his credit, he has a sizable portfolio, and he doesn't need the income off this CD, so he can afford to take a lower rate for now. This is not the case for most people. People who need to live off the interest and dividend income that their investments produce are having to put more of their money at risk for loss, in order to get the higher return they need. For those who need or want an investment paying 4-6%, they need to look at bonds or bond funds, or even dividend paying stocks. For those worried about bond prices going down soon because of rising interest rates, this is a risk that probably won't present itself for another 2 to 3 years down the road. But this type of risk can be managed by utilizing shorter durations or more diversified portfolio construction. Dividend paying stocks will have some price fluctuation, but if you pick a blue chip company with a long track record of paying dividends, you'll be fine. The key is to ask yourself how much you want to make and how much risk are you willing to take to get it. Will your financial goals and objectives be met with a 1-3% return, or a 4-6% return? Need more than that? Let's talk!

Wordless Wednesday

How much are YOU saving?

I recently read an article about saving for retirement. The article gave some basic rules of thumb for people of various age groups. For example, it said that people in their 20's and 30's should be saving at least 10% of their income for retirement, and people in their 40's (my age group) and 50's should be saving at least 15% of their income. Most articles these days, that are about investing point out what types of investments that should be in one's portfolio. This year's market volatility and especially the stock market disaster year of 2008 pointed out (to most people's chagrin) that even when you have a well diversified portfolio, you can lose money in your account. The basic plan for diversifying one's portfolio is to have a proper mix of stocks, bonds, and cash for someone with your risk level (meaning are you aggressive or conservative or somewhere in between?). In recent years, people have further diversified their accounts by also adding real estate and commodities to the mix. But in 2008, all of these investment asset classes lost money (except US Treasuries, if you were lucky enough to get in early). So what to do? Put all your money in cash? Bury it in a coffee can in your backyard? For starters, make sure you're saving enough. The real key to having money to spend in retirement is to save money for retirement. The average U.S. citizen is saving less than 3%! At that rate, most people will not even keep up with inflation and cost of living increases. So yes, it's important to periodically rebalance your portfolio, but it's critical that you save more than the average. Do what it takes to save that extra 7-12% needed to get back on track for your retirement. Unless, you see yourself wearing a spiffy blue vest and telling people, "Welcome to Walmart!"