Your Questions About How To Invest In Bonds

Helen asks…

Can it an actually good idea to invest in junk bonds, sometimes!?

How about junk bond mutual funds. Wouldn’t that help spread out the risk also.

John answers:

Absolutely. There are lots of mutual funds designed to do exactly that. The trade-off is higher yield in exchange for a higher risk of default. Such funds tend to do well in a strong or improving economy, when companies with poor credit ratings are less likely to default on their debt payment. On the other hand, they are likely to get slammed in a recession, since weaker companies are less likely to survive an economic downturn.

Amendment: As an illustration of the benefits and risks of junk bond funds, please take a look at Vanguard’s High-Yield Corporate Fund (VWEHX), which “invests mainly in a diversified group of high-yielding, higher-risk corporate bonds—commonly known as ‘junk bonds'”. It is Vanguard’s best performing bond fund for the past 1 year (11.10%) and 5 years (7.92%), but its 10 year return is a middle-of-the-pack 5.95%. The difference is that the economy was fairly strong in the past five years, but the last ten years included a recession.

Mary asks…

What are some very good websites to learn about things like the stock market, CDs, bonds and investing?

I would like to start looking up and learn about some good way to invest money. I need to know the ideas of how these work, and that will hive you good solid information on investing. So if you know of any please let me know. Oh and free ones, I don’t want to spend all my money learning about it then not have anything to put in a CD, bond, or stock. =) Thanks all!! =)

John answers:

Standard investment advice is that you should invest in a diversified mix of stocks, bonds, and money market funds. You want to buy a diversified portfolio of stocks as individual stocks are too risky. Most folks have a dificult time buying a properly balanced portfoilio of stocks on their own. They will misbalance their portfolio by buying all small stocks or all growth stocks, or some other misbalanced assortment of stocks. Unless you know what you are doing, it is best to buy mutual funds. I like Vanguard.com, other people like Fidelity, TIAA-CREF, and DFA. Buy no-load, low cost funds. If you are like most people you will invest part of your money aggressively in stock funds, and part conservatively in money market funds and bond funds. Vanguard.com has an on-line questionnaire which will give you an idea of how to do “Asset Allocation,” determining how much to put in each type of fund.

If your company offers a 401K plan at work, try to invest the most you can. The money grows tax free, and some companies will match your contribution. Investing in a mutual fund IRA is also a good idea. If you have children, you may want to consider a 529 plan or other college savings plan that grows tax free.

I like index funds. Because of their broad diversification, you are less likely to have a dramatic drop in value. They also have the lowest expenses. For stock funds, I would suggest putting ~70-80% of your money in the Vanguard Total Stock Market Index Fund. And ~20-30% in a foreign stock index fund. However, there are many different opinions out there on what the best mutual funds are. Read the links below and form your own opinion.

Buying a house instead of renting will save you a lot of money in the long run. You don’t have to pay rent and you build equity in your house instead. Buying rental property can also be a good investment. However, being a landlord can be hard work, and many people are not good at it. If you don’t know how to handle deadbeat renters, you can have trouble.

If you have high-interest debt, like credit cards, it is best to pay this off first before trying most of the investment ideas above. You should also have 3-6 months of salary saved up as an emergency fund in a bank or money market fund before trying more risky investments.

Believing advice you get on Yahoo answers can be risky, so read these websites for further information. If you find it too confusing, contact a professional financial advisor. They will charge you significant commissions, however.

Sources:

http://www.vanguard.com/VGApp/hnw/planningeducation
http://www.fool.com/school.htm
http://sec.gov/investor/pubs/assetallocation.htm
http://www.diehards.org/readsites.htm
http://finance.yahoo.com/education/begin_investing
http://finance.yahoo.com/funds/basics
http://bankrate.com

Asset Allocation Calculators
(Determining how much to put in stocks and how much into bonds and money markets is a personal decision depending on your financial status. These Asset Allocation questionaires give you a rough idea how to do this. I like Vanguard best, but try some of the other sites as well.)
https://flagship.vanguard.com/VGApp/hnw/FundsInvQuestionnaire?cbdInitTransUrl=https%3A//flagship.vanguard.com/VGApp/hnw/planningeducation/education
https://ais2.tiaa-cref.org/cgi-bin/WebObjects.exe/DTAssetAlcEval
http://www.ifa.com/SurveyNET/index.aspx

Web forum: http://www.diehards.org/
(Many investment web forums are overrun by scam artists. This one seems the most legitimate site.)

529 plans: http://www.savingforcollege.com

Donald asks…

I’m interested in investing in bonds?

I’m an 18 year old college student and I’m interested in investing in some bonds. Does anyone know how much the maturity is yielding right now? And should I invest on treasurydirect or should i go to a bank like bank of america? I am only interested in gov bonds as they are no risk. But I heard a bond with a 1000 face value is only yielding 10 dollars in interest for like a year, is this true?

John answers:

Yes, they are yielding 1% so they are pretty much a waste of time. Why not use a short term bond fund from Vanguard or American Century? They take care of all the legwork and are much easier to buy and sell. Plus with very little risk they are yielding about 2.36% year to date.

Check out http://www.AmericanCentury.com and look for their short duration fund.

The thing about bonds is you never want to hold them for the full term, so bond funds let you move in and out with ease.

Michael asks…

How to invest in Indian government bonds?

How to invest in Indian government bonds?

John answers:

RBI has designated a retail quota for its issues as they become available for subscription, you need to contact the intermediary appointee nearest to your location to access applications for subscription.
Get to know of the Fixed Income markets as they evolve here : http://www.fimmda.org/

Maria asks…

Savings Bonds and Investing,what is the best way to go?

I want to buy savings bonds for my children,what is the best way to go about doing that,through a bank like Bank of America,and how much is the minimum to put in there.I really don’t know anything about them i just heard it would be a good investment and that you can put a time limit to it like they can’t cash it out till they are 21 if you wish or older,what is the best way to start looking into that investment,or any suggestions on what i can set up like that?

John answers:

There are a number of savings plans for children 529 plans (for college funding) and UTMA/UGMA accounts (uniform Transfer/Gifts to minor accounts). They both have some tax advantages. As for savings bonds they generally earn a low interest. If you account for inflation and taxes they generally have a break even or negative return rate (example 4% interest earned -1% taxes and 3% inflation). So I suggest a mutual fund the easiest pick is an index fund one that owns some of all the companies in the index (Dow, S&P, Russell). Stocks over many years have earned 10 to 11% that means about every seven years your money doubles. The best thing then is to start saving now. Based on this formula in seven years $1000 becomes $2000, in fourteen years $4000 and twenty one years $8000. With the savings bonds example your money doubles in about 18 years.

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