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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: Re: supplement income Date: 9/18/2001 11:34 AM
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"I've been reading about "federally guaranteed mortgage securities"

By these you mean GNMAs or FNMAs. The GNMAs are guaranteed by the government as to timely payment of principal and interest. There is a rather thin market (big difference between buy and sell prices if you want to sell it before maturity. These are assembled by the government agency and pieces sold. You buy $25000 at a time, or multiples thereof. Usually interest rates are a bit higher than those on treasury bonds. However, instead of maturing the whole $25000 at one time at maturity, you get back bits and pieces over the whole 30 year life of the investment, commonly starting at a return of principal around $10 a month. It is difficult to reinvest, particularly in a period of falling interest rates when people are refinancing mortgages at a great rate. You may suddenly get $1000 or more of your principal back, and of course that cuts into your income for the next month and beyond unless you can reinvest that returned capital.

If you are getting a big chunk of money, like $250000 or more, to have a GNMA or two for monthly income is reasonable.
However, this is another fixed income investment and does not put any growth into your portfolio.
If you try to sell a GNMA before maturity, you can, but the large spread makes this not a profitable thing to do.
You can but a GNMA fund (Vanguard has probably the best one) but then net asset value will fluctuate and you may not get your money back when you sell.
If you buy a GNMA at issue, and do not pay a premium, and hold it to maturity, you WILL get your money back with interest at the agreed rate.
Do I own these? Yes. What % of portfolio? About 5%.
On the whole, bonds are easier to understand.

Best wishes, Chris
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