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URL:  http://boards.fool.com/i-usually-dont-read-this-board-but-have-been-24784819.aspx

Subject:  Re: Advice to SIL Date:  11/5/2006  10:07 AM
Author:  Lokicious Number:  18743 of 35362

I usually don't read this board, but have been going through it today to get some insight on what to do with a 30 yr GNMA bond I inherited. I get the feeling on this board that everyone is down on the stock market (I know I am on a "bond" board). Words like "speculating" or "dangerous". Going to work in the more is dangerous (esp if you live where I do).

Also, the comment above, "...why most attempts to beat the stock market lose..." (sorry I can't figure how to italize.)

I thought the Motley Fool was built on beating the stock market? I have a stock advisor subscription and am very happy with what I have been able to do with their help. And if their figures are correct all of their services e.g. Stock Advisor, Hidden Gens are stock based and beat the market. So why so down on the market? Is it really such a horrible beast?

That said - I deeply respect most of what I have read on this board. You guys are a lot smarter than me - that is one of the reasons I am here and also why I am puzzled.

Back to my original reason for being here - I am reading through this board is to figure what to do with a 30 yr $40,000 GNMA bond at 5.25% I have inherited. With the market historically getting a 10 to 11 % return why do I settle for a 5.25% return on a bond?



I don't think most of us on the bond board view prudent investing in the stock market as speculative. The view Wendy posted is the standard doom and gloom scenario we hear from "perma bears," whether the stock market has been hot or cold, backed up by questionable statistics. I would say on the whole, those of us interested in bonds and fixed-income are on the whole more conservative about investing, which makes us less prone to either the doom and gloom scenarios or to the gung-ho stock market scenarios. I would also say that most of us follow broad economics, not to be confused with financial markets economics, and that means we are aware of issues about debt and falling real wages and aging demographics, which make us concerned about long term economic conditions, which is very different from predicting imminent crashes on the stock market.

Most of us would advocate a portfolio that fits your age and goals. You will find that this board has an older demographic than most boards (other than those specifically oriented to retirees and seniors), because those of us approaching or in retirement need more conservative allocations, in case the stock market does fall when we need to live off our investments.

My comment that most attempts to beat the stock market lose is absolutely true, based on substantial statistical research. All this is saying is that, if we take the returns (for the US) on the Total Stock Market Index as an abstract average, actual average returns for investors will be the abstract market average minus expenses and taxes, and since a (low-cost) Total Stock Market Index Fund has minimal expenses and taxes, it will beat, on the average, those who have higher expenses and taxes, which is what happens when you try to beat the average, whether a fund or an individual. The more controversial claim from the research, which I accept, is that the basic statistic that trying to beat the market on the average loses applies whether you know what you are doing in stock picking or you don't. For years Wall Street pitted a dart throwing monkey (i.e., random stock picking) versus the professional stock pickers for brokerages, but the monkey kept winning, and with the growth of index fund investing (which is betting on the monkey), they decided it was too dangerous to keep poking fun of their own failures. There have always been schemes for beating the stock market average, including TMF (which was a lot more supportive of indexing before it became financially dependent on selling the same kind of advice it used to pooh-pooh from Wall Street). The basic view from people like Bogle and Malkiel ("random walk down wall street") is that there is no verifiable body of knowledge about successful stock picking that can be mastered (like learning how to be an auto mechanic) and the evidence for success in stock picking is purely anecdotal and it cannot be proven that consistent success over time is based on skill, rather than random luck, and it cannot be proven that past successes can be reproduced or taught. That's not going to stop most investors from being convinced they are smart enough to beat the market or those who sell market beating schemes from trying to convince them from trying—accepting average instead of trying to win is fine for those wimpy Canadians, but completely un-American. Some will even succeed. In fact, a lot will. A lot more than half won't.

Now, to your question about your GNMA bond. Well, first of all, just because the stock market has historically gotten 10% or more returns doesn't mean it will in the future, but the general expectation would be that over a long enough period of time, like 30 years, it will probably do better, especially after taxes, than 5.25%. I presume you inherited your bond from somebody older who needed the income and couldn't wait out bear stock markets. If you are younger, a heavy bond allocation is probably not appropriate. What you need to do is figure out a sensible allocation plan for your age and goals and see what makes sense for a bond/fixed-income allocation, including making sure you have enough of an emergency fund in cash/liquid investments.

The other thing with your GNMA bond is if you sell it, you will probably be selling for a loss. We'd need more specifics about the bond to look it up and see how much of a loss, but a quick check shows a 5.5% GNMA maturing in March 2036 at about a .5% loss and a 5% GNMA maturing in January 2036 at about a 2.7% loss, so I'd estimate you'd get back around $39000-$39500, not including commission/trading costs, which would probably make $39000 closer.
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