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Subject:  Re: Ladder vs. Active Management Date:  5/21/2009  2:48 PM
Author:  Crosenfield Number:  27580 of 36670

When investment managers give you percentages like that, THEY pick a time frame that makes them look good.
Last year bonds were volatile. Pick a starting point when the bond market was down and an ending point when it was up, and the numbers will look very good.

If you are buying bonds issued by entities that will faithfully pay their coupon on time, and return principal when the bond matures, that really is all you ask. If you go to a site like e-Trade and look at all the bonds, and make choices--they will help you if you ask--you will do very well. Buy bonds issued by companies you trust.

In an IRA, you will not be buying municipal bonds as a rule. The situation where you might would be very unusual.

The good thing about bonds is that a future date will come when they promise to give you back your principal, plus interest at a stated rate. With stocks you don't know that. With bond funds you don't know that either, because bond funds do not mature. Fund managers must buy when they have available cash, and that will tend to be when prices are high. People flee bond funds when prices are low, too, so the fund manager is saddled with a bias to buy high, sell low. You don't have to do that. You buy XYZ bond paying 6% until 7/1/2020, you are convinced the company is not going out of business and in fact will use the proceeds from the bond offering to grow its business, and forget about it. Daily price fluctuations can drive you nuts. Sit back and collect the coupons.

Spread your 300K over 10 or more bonds. $25000 for each issue is a big enough chunk that the bond dealers will give you extra service.

You will be ahead by 0.5% annually.

That isn't a bad fee, as investment advisors go, but your purpose is not to trade bonds--it is to generate income for your retirement.

Note that there is no guarantee what your annual income will be from a bond fund. If interest rates go down, many bonds in the fund will be called, and the manager must buy--at the wrong time. If interest rates go up, the net asset value will go down, some fund owners will panic, and the manager must sell--at the wrong time.

You can do better.

Best wishes, Chris
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