Your Questions About How To Invest In Bonds

Sandra asks…

How to start investing???

My husband and I are interested in starting to invest. But we have no idea how! I’m 19, he’s 21– and none of our family invests. Where do you start? What to invest in? How much to invest? We have about $300 extra a month for investing. Bonds? Stocks? I’m so lost! If someone could lay it all out for me I’d really appreciate it!! Thanks!
If it helps at all my husband is in the military, and I do home day care. Thanks for all the advice!!!

John answers:

The following link is to a financial columnist’s website. I’ve been reading his articles for 15 years and follwing his advice. I’d highly recommend you read through his stuff, especially his “couch potato portfolio”.

You are doing good to start thinking about this at a young age. Here are some basics to consider.

Start with a savings account and put your $300 per month in there until you have 3-6 months of living expenses saved up.

If you have jobs and your employer has a 401-k with matching funds, put in enough to at least get the match.

Start with index mutual funds. Trying to pick individual stocks or bonds without a lot of time spent researching them can lead to bad decisions and you could lose money easily. Don’t pay a lot of attention to anyone who claims to have a “hot stock pick”.

Keep in mind that the market will have it’s ups and downs but over nearly all 10 year periods, it has returned a positive gain. You have 40 years to recover from any short-term down markets so don’t worry about them too much.

The website below has a lot of good information so spend some time reading. With 40 years of earning towards your goals, you have lots of time. Time is your most valuable asset so use it wisely.

Lisa asks…

what’s the bet way to invest money with no risk in ottawa canada?

with no risk i mean. i can’ take risks at this point in my life. how do i invest it. bonds, keep it in my account and get nothing. what do i do?i live in ottawa canada

John answers:

All investments involve risk but a lot of the risk can be canceled out with hedging. That was why there was such a demand for derivative securities. Derivative prices are correlated to that of the underlying security so various combinations of derivative trading could cancel out risk.

A simple example would be if you were to buy a call option on Apple stock with a strike of $310 expiring Jan. 21, 2011 for $16.08 and a put option on Apple stock with a strike of $300, expiring Jan. 21, 2011 for $19 then you would make money so long as Apple stock went above $310 or below $300 between now and Jan. 21, 2011. Worse case scenario is that the stock price stay the same. Of course, you should do more detailed calculations at which point I think you would find that those stock options are overpriced (too many people investing in Apple just for the sake of investing in Apple).

I would suggest that you decide on a percentage of your portfolio to keep liquid i.e.: money market or relatively reliable bonds like treasury bonds and the remainder in a reliable stock but a relatively safe stock i.e.: the company isn’t going to just disappear. Anywhere from 50% to 20% of the portfolio in cash would be good. That way, when the stocks drop, the percentage that’s cash would be higher than your target so you would buy shares till you reach your target again and if the stocks rose then the percentage that’s cash would be below your target so you would sell shares ill you’ve reached your target again. Decide on a criteria as to when to trade such as when the imbalance exceeds 10% of your portfolio value or $1,000 whichever is less so that you’re not rebalancing too often (trades costs) maybe also look at some technical indicators such as the force index to see if you’re buying or selling at reasonable times. The reason for keeping some in cash is so you can actually do something should the stocks go down, how many times have you heard people complain that they didn’t have any money to take advantage of the bargain prices after the stocks tumble? If you’re 100% invested you’re fully exposed to the market swings both up and down but if part of your portfolio is cash then you benefit from the bargains when the stocks drop and benefit from the stock appreciation when they rise. Most people lose money because they don’t have a strategy other than “invest”, you have to decide what you’re going to do if the prices go up and what you’re going to do if the prices go down.

There are actually equations to choose the optimal proportion for growth and they are rooted in information theory, the engineering that ensures the integrity of data in telecommunications, indeed the 50/50 algorithm where 50% is cash and 50% is in a single company has been proven mathematically at MIT by Claude Shannon to always make money in the long run assuming the company doesn’t go out of business.

It’s ironic but most of us are told to be fully invested in growth stocks while we are young but mathematically such an aggressive posture almost guarantees a loss over the long run just as betting everything you have with each bet however favourable the chances still results in total loss.

You want to avoid risk, do your math. There’s a lot of bad math in the financial world.

Michael asks…

How to invest in Brazilian Bonds from Canada?

Please be specific.

John answers:

Depending on what kind of broker you have, you can buy the bonds with them or you can buy the bonds directly from the government. If you don’t have a broker, check with local regulations. You may have to convert your CAD to BRL in order to buy the bonds. By investing overseas, you’re opening yourself to credit default risk as well as foreign exchange risk. Consider other alternatives as well, such as buying shares of a mutual or hedge fund that invests in emerging countries – for diversification purposes. In that way, you can still get income while not risking your shirt.

Good luck.

Charles asks…

Please help with Math problem interest type problem?

your grandmother needs your help. She has 50,000 to invest. Part of the money is to be invested in noninsured bonds paying 13% anual interest the rest of the money is to be invested in a government insured certifcate of deposit paying 8% annual interest. She told you that she requires a total of 4600 per year in extra income from these investments. How much money should be placed in each investment?

Amount in invest bond?=

Amount in Certificate?=

Thanks for helping

John answers:

Amount in invest bond 12000
amount in certificate 38000

William asks…

How do you best research and invest in foreign bonds?

I want to be just like Warren Buffet when I grow up. lol

John answers:

It is extremely difficult for a small investor to buy and sell bonds at a decent price. That is where bond funds earn their money. Dealers come to them rather than the other way around. GIM is a fund that invest in foreign bonds. Currently it is selling at a premium but wait a few days and it might sell at a discount. The discount was better than 11% back in November. When you figure in the interest rate it is paying that figures to almost a 17% yield. Not too bad. FAX is another. It IS selling at a slight discount currently about 3%. Yield is about 7%. Darn difficult to beat. Mostly Australia bonds.

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