investing in bonds
This Could Shake Muni Bonds to the Core
Editor's Note: Detroit is more than a sideshow. What's at stake here is bigger than most investors realize. It could take a Supreme Court decision to determine the viability of many municipal bonds. Regardless of whether you are a muni bond investor or not, what happens in Detroit will affect you. Shah Gilani has the whole story.
Detroit went bankrupt, but so what?
Its own decades-long gross political mismanagement, corruption and incompetence pushed the city over the cliff into bankruptcy.
Why should we care?
It could change the way investors look at muni bonds. And not for the better.
The largest Chapter 9 filing in U.S. history will reverberate well beyond this once- bustling city and its creditors.
But w hat's most threatening to muni bond investors, and in fact all investors, is whether the city's general obligation bonds are secured or unsecured issues.
General obligation bonds, backed by a city's ability to levy taxes to pay interest and principal, are thought to be the safest of all munis.
Detroit is putting this to the test.
These Four Simple Words Are the Key to Your Investment Success
If there's one single, indispensable key to successful investing, it's to go with the flow.
That's my distillation of well-worn market mantras that you're probably familiar with.
The trend is your friend;
Don't fight the tape;
Trade the market you are given, not the one you want;
And don't fight the Fed.
Go with the flow.
You can do all the homework and analysis you want - and be right - and yet still lose money. That happens when you own stocks you love, but the market isn't loving any stocks. It can happen when you try to pick bottoms, and you get in before the market heads a lot lower.
And while you won't lose any money by not being in the market, you're not going to make any money in it either.
That brings us to today. We've had a furious up-move in the market since March 2009. We're scratching at new all-time highs, and global markets are dancing to the same tune.
But the world hasn't changed since last May - or the May before, when markets swooned on fears about Europe, America's fiscal fiasco, a slowing China, or any of the other dark clouds that, at any time, can rain on the markets.
So, are we going higher? Are we going to get a wicked correction? Is the sun rising or setting?
We don't know if the market is going higher from here or if it's headed down. But, we do know that the sun rises and the sun sets... every day.
That's why, even if you could distill all of the unknowns that you don't know into a plan of action, the only sensible plan is to not guess, but simply to go with the flow.
If You're Investing in Bonds, Bill Gross Has a Message For You
If you're investing in bonds, Bill Gross just delivered you a serious warning.
Gross wrote in his February newsletter that the factors that contributed to last month's 1% loss for U.S. Treasuries - the biggest since March 2012 - aren't going away any time soon.
Total debt, which includes corporate, government and household, has expanded from $3 trillion in the 1970s to about $56 trillion today, explained Gross. He said that's left bond yields in the 1% - 2% range, instead of the historic level of 3% - 4%.
Gross said the staggering amount of debt in the United States has created a "credit supernova" that could crush the bond market as the global credit bubble "is running out of energy and time."
"Our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic," Gross wrote.
Gross warned that anyone investing in U.S. government bonds should evaluate their exposure.
And he isn't alone. Jim Rogers and Goldman Sachs have both been bearish on bonds.
"I'm short long-term government bonds," Rogers said Feb. 6 on Bloomberg Radio. "I plan to short more. That bull market, that's a bubble."
So what should bond investors who want yield do with their money?
Investing in Bonds: How to Build a Bond Ladder
With interest rates at near-record low levels it appears that the only way for rates to go is up.
As the U.S. economy moderately strengthens, that means the bond bubble will begin to leak. Even darker, the bubble might just burst altogether.
The prospect of yet another bursting bubble makes investing in bonds difficult. The same is true for stocks.
After all, stocks tend to underperform when rates head north, while gold will certainly drop back once interest rates begin to rise ahead of inflation (which may take a considerable time.)
However, there is one strategy that enables you to prosper even in this tough environment.
It is called the bond ladder. It works like this...
Bond investing in a rising rate environment can be a terrific way to lose money.
If you buy short-term bonds, the yields may well be less than inflation, causing you to lose money in real terms.
And if you invest in long-term bonds, your immediate yield will generally be higher, but you run a large risk of losing part of your principal as rates rise and bond prices decline.
These losses can be a large multiple of your interest payments.
For example, if 30-year bond yields rise from their current 3.11% to 5.11% over the next year, your principal loss on a 30-year T-bond will be $30 on every $100, far more than the $3.11 you will have received in interest.
Of course, if you hold the bond for the next 29 years you will get your principal back at maturity.
But meanwhile you will have spent 30 years locked into an investment at interest rates below the market, and probably below the level of inflation. Not a wise choice.
Investing in Bonds: Building a Bond LadderThe problem of investing in bonds then is one of reinvestment. You really don't know at what rate you will be able to reinvest your money when the time comes.
This problem is solved by buying bonds in a range of maturities, from short to long, and reinvesting the proceeds of each investment as it comes due.
For example, you could invest 10% of your money in each Treasury bond maturity from 1 to 10 years.
Then when the first bond came due in year 1, you would reinvest the proceeds in a 10-year bond, so you would again have 10 equal bond investments coming due in years 2 through 11.
Here's a concrete example.
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Money-Markets, CDs, and Bonds: The Ups and Downs of Stashing Your Cash
In today's volatile markets many investors are faced with the same troublesome question - "Where should I park my cash?"
In fact, investors have withdrawn a net total of $328 billion from the stock market since 2007, according to Strategic Insight.
Ever since, a big portion that cash has been looking for a home.
It seems simple enough, but investors are finding the answer to be more complicated than they imagined...
Thanks to our friends at the Federal Reserve, interest rates are at record lows. In fact, they're so low that most investors are getting practically nothing in returns.
Meanwhile, the stock market has put on a New Year's rally, rewarding those who were willing to jump in while leaving cautious investors wondering if they're holding too much boring old cash.
However, in order to have an adequate safety net, your cash on hand should be enough to cover about a year's worth of expenses, according to Shah Gilani, a retired hedge fund manager and Editor of the acclaimed Wall Street Insights & Indictments newsletter.
"That's a good safety net," Shah says.
But no matter how much cash you hold, you still have to balance your need for higher returns against your risk tolerance.
Because whether you're thinking "safety first" or are tempted to reach for a little more yield, the choice you make might determine whether you're able to sleep at night.
Three Places to Park Your CashWith that in mind, here's a look at three of the most popular places to park your cash.
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