This book by Stein & Demuth is a great read on conservative investing for those near retirement.
I totally enjoyed its concise description to make market principles easier to understand.Here's a few pearls for my future memory:70% of stock gains are from the dividends!
Buy when there is blood in the streets!
As Buffett has said, "Be fearful when others are greedy, and greedy when others are fearful."Be on the hunt for above average dividends!
The Yield = Payout / Share PriceRisk:If you buy a bond (an I-Owe-You, or IOU) the rate paid to a more current bond buyer could fall, making your bond more valuable.
Interest Rate Risk: If you buy a bond and the rates of payout RISE, yours is worth less (if you had to sell it). So interest rates and bond returns USUALLY are on a teeter totter.
Bond trading then is guessing that rates will fall, and your bond will be worth More.Fidelity has a listing of a bonds last sale price.
Credit Risk: the risk the issuer of the bond could default, highest in junk bonds and some low rated corporate bonds. The best ground is a portfolio or a mutual fund of individual bonds.
Sector Risk: The risk a portfolio of bonds all in the same sector could suffer a demise together.
Marketability Risk/Liquidity Risk: the risk of resale, which is least in Treasury bonds. Its the difference between owning 1000 house you would have to resell, or owning part of a fund which owns houses which is more easily traded.
Callable Bonds: Meaning the issuer of the bond can recall the bond and "refinance" if rates drop, right when you'd like to have the interest you invested for.
Reinvestment risk: Means bond returns rise and your money is tied up, the opportunity costs of other investments during your bond maturity period.Event Risk: the corporation goes under.
Lehman Brothers Aggregate Bond Index: the gold standard to beat by other bond issuers, like the S&P 500 index for Stocks. This was 7.1% for the 21st Century. Use AGG or VBMFX.
Best Ways to Avoid Risks above: DIVERSIFICATION, LADDERS, TREASURY bonds
Bond Ladders:You can spread your bond rates by creating a ladder over years so that a five year ladder would mature 20% of your investment every five years. The same can be done for annuities but takes more shopping and effort on part of the buyer.
TIPS:Treasury Inflation Protected Securities:Deflation is hardest on corporate bonds to repay, because companies have a harder time paying you back. Deflation makes Treasury Bonds the investment of Choice, the government can always print more money to pay you back.
Short term interest rates correspond to Fed. When long-term loan rates are cheaper than short term bonds beware of a pending recession!
INVESTMENT OPTIONSUltra Short Bonds: 90-180 days, will give you 1% above a money market fund return usually.
Money Market Funds: try bankrate.com or ibcdata.com. Returns were 1-2.5% in 2004.
Corporate Money Market Funds: 1.5-2.5% returns but most not FDIC insured. Ford, GE, & Caterpillar are four large corporate finance divisions that do this. "GMAC bank" is the only FDIC insured fund here.
Short Term Bonds: 2 years, 2-3% return, 5 year ladders you can set up yourself at treasurydirect.gov and no charge or expense.
TIPS: These have no Purchasing Power Risk! Immune from Inflation! But their return is reduced by the expected inflation the Fed decides it anticepates at the outset, and so overall returns are reduced by this. Best during Inflation when stocks tank, because the TIPS still go up. Also good in deflation because the rate of return is locked in. These are best in tax-deferred IRA's or you'll pay tax on the phantom income the Fed calculates from inflation! Some Good TIPS Bond Funds are = VSGBX, VIPSX, or try TIP, ACITX, FINPX, TCICX.
Corporate TIPS can be cash flow friendly as they payout every 2 weeks, adjust by their CPI every payday, and have shorter maturity at 5,7,or 10 years, shorter than government TIPS (pay every 6 months, adjust for inflation at the end).I-Bonds: these bonds are not taxed until redemption, but they are not practical so do not use them.
Municipal bonds (Munis) High Grade buy for taxable accounts (federal and maybe county or state tax free)3-6% return, risk that congress might repeal their tax exemption.National munis diversify away local risks. (FSTFX, VMLTX, FLJMX, USATX, VWITX)
Mutual Funds Closed Funds: Shares issued only once, trade anytime market is open, same manager may have many similar funds, trades high initially, then discounted usually a few months later. Do not compound dividends.ETF's: low management fees, trade very close to underlying securities value, closed funds but hybridized. Morningstar.com is useful to find open end funds information and stats easily. Closed end funds require digging to find their stats, yields, leverage, P:E, but try on ETFconnect.com & cefa.com. Most are closed-end Muni bonds.Higher Yielding Bonds: have more Tabasco (can give spicy returns or can burn)
Foreign Bonds: Sovereign Risk means their government can fail to repay you.Currency Risk: Means their currency can fall relative to the dollar, and the worth is less.
Currency Risk is the Joker in the Deck in Foreign Bonds Trading. If you think the dollar is going to get weaker then buy more foreign bonds now, but the dollar is already weak relative to the Euro, but ?
Chinese currency may get stronger in the future?
Hedged Foreign Bonds means their returns are lower but equivalent to US dollar payout, and US Bonds trade almost the same anyway. Unhedged foreign bonds can have much higher returns.
UK, Can, Aus, New Z, Japan are some friendlier foreign bonds. If the dollar slides, these bonds act like a play on the dollar b/c their value is stable relative to that. Consider RPIBX, CIFIX, FCO, yields are 3-6% and 1-2% expense. FCO is a large global income fund, uses alot of leverage to raise the yield.
Carry Trade: means to borrow at short maturity, repay at long maturity, and make money on the difference in rates. This will magnify gains or losses much quicker either way!
For aggressive fixed income investing, the monthly price volatility should be acceptable for the increased returns as long as higher yields remain constant. Time diversification occurs with largely leveraged funds because in high yield environments many sources of high yields abound and in low yield environments the higher rates leveraged can improve quality of life and pays you more when you need it more.
Closed-end municipal bond funds can go on margin to buy tax free securities but you legally cannot borrow money to buy tax free bonds. Compare NUV vs NMD for leveraged vs unleveraged example from 1990-2003.Emerging Market Bonds: Uruguay, Nigeria, Bulgaria.10-25% yields with extreme volatility, repayment risk.
Open: FNMIX, PREMXClosed: GHI, MSD, EDF, EFL, LBF, TEI 7-10%
Leveraged Municipal Bond Funds:Too much risk for the long-term yield return.
Bond returns rise when interest rates fall. Now the rates are so low and bond returns are low, so there is not much room for bond returns to be affected from a rate reduction.
Overall, avoid Bonds in a low interest rate environment.
Junk bonds are bad and municipal junk bonds are toxic. :)
Stocks for IncomeStock yields since 1918 are 6%, but now are 2% for the S&P 500 (in 2004).
C-corp dividends are taxed twice, so companies buy back their stock and hold dividends in order to increase the "relative" payout to shareholders.
Taxes on dividends decreased under Bush from 39% as income to 15% as a capital gains.
Now that dividends are taxed at the same rate as capital gains, companies may increae their dividends.
Some good open end dividend stocks: VWINX (4%), BERIX (5%), HIEFX (2%)
Closed end stocks did better here: DVY (3%), BDV (6%), BDT (6%).BDV buys the 60-80 highest dividends
BDT buys the small and mid cap dividends on the BDV list.Stein-Demuth Strategy: put 20% of your portfolio into dividend bearing stocks, and half of that in DVY
Pick the remaining half as different sector dividend stocks, perhaps a dozen.
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