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I made a similar post on an investor beginners board, but was suggested to ask my questions here. I’m new to asset allocation and fixed-income investing -- still got 30+ years until 401(k) distributions are penalty-free for me... OK, I'm new to investing period. But I have done and continue to do my homework and contribute to 401(k) + Roth IRA brokerage account.

My 401(k) has all kinds of products with bond holdings:
- target-date and balanced mutual funds
- money-market funds
However, there isn’t a long-term bond option. So to get some fixed income exposure I got into the money market type of a fund (currently yielding 4%). In the Roth, I have
- SSHYX (junk bonds) with a gain of 9%
- IPE (TIPS ETF) with a loss of 1%
I put in about $250 in each...

Lately, I've been looking at CEF’s such as MIN, ACG and a few others. They're trading at a discount as most CEF's do and offer 8% yields. But in many cases assets and dividends have been declining for the last few years. Knowing that some CEF's can be leveraged I wonder how safe they are and what their long-term prospects are. I'd like to establish a long-term position and reinvest dividends...

So... I’m hesitant to buy bond funds with yields at low levels and prices quite high. But do you agree? Are bonds individually something to consider now? Or that's out of reach for someone with very little to invest? Are funds a yay or a nay? What would be best for an aggressive long-term investor at this stage?

Thanks in advance!
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You mention you're in a money-market type fund currently yielding 4% ?? I'm guessing that is some fund just reserved for employees of your company?
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Right, it's not a mutual fund but an investment option available to the employees. Basically, it's a MM fund: stable NAV at $1 a share with monthly interest payments. The yield is now dropping below 4% on the annualized basis.
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…What would be best for an aggressive long-term investor at this stage?...

In normal times over the long term bonds are an important part of a retirement portfolio but these are not normal times.

There is a pretty good argument that high quality bonds are in a bubble right now just like the dot com stocks and houses were and bonds will have significant losses when interest rates eventually increase. Bond funds behave significantly differently than owning individual bonds since bonds funds are repriced daily they can loose value since unlike individual bonds they can’t just be held to maturity if interest rates go down.

With over 30 years until retirement and 60+ years until you some of the money is spent when you are 95, then it would be reasonable to underweight or skip bonds mutual funds in your 401k for the next few years until things become more normal. This will make you 401k more volatile but if you are making contributions then you will get the benefits of “dollar cost averaging” as the market fluctuates.

Greg
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Stas,

You will find that most of us here are not a big fan of bond funds and we recognize that is the only 401k option for many.

You mentioned that you have a Roth account. If you really want some exposure to bonds you could use your Roth for holding individual bonds and let the 401k do the heavy lifting for stocks. The general recommendation is that one should hold a portion of bonds similar to your age. So a 25 year old would hold no more than 25% bonds. Like all recommendations they can be taken or left. Like all generalities this recommendation is only generally true.

You say you aren't horribly risk adverse. That is fine, it makes sleeping easier at night because you aren't overly fretting about your money that is suppose to be working for you. Just keep in mind base jumpers and bungie jumpers aren't horribly risk adverse either but they make darn sure their equipment is good, the site is scoped out and they know what they are doing before they jump.

There is decent money to be had investing in individual bonds if one is patient enough to learn and diligent enough to do the work. The reward is an income stream and an asset with a fixed value at a fixed date. Individual bonds are repriced every day just like stocks. The difference is there is no maturity date for a stock, at the end of the life span of a bond you know what it is worth. That little feature is a nice bit of balancing.

Take your time and explore our weird little world. There are few places that you can talk about fixed income/bond investing around like this.

Before you jump, have a plan, not just a bond plan but a full investing strategy where bonds play a role. Once the role of bonds is bracketed then you can get more serious about you bond strategy.

jack
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<I have done and continue to do my homework >

The FAQs on this board are an important part of your homework. --->

Lokicious and others put a lot of work into them. They're good.
Wendy
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The FAQ's and the board have been really helpful so far. Good work, Lokicious and everybody! Thank you.
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In normal times over the long term bonds are an important part of a retirement portfolio but these are not normal times.

There is a pretty good argument that high quality bonds are in a bubble right now just like the dot com stocks and houses were and bonds will have significant losses when interest rates eventually increase.


Given that now is not a good time to invest in bonds, are laddered CDs the best alternative for the "safe" portion of one's investments?
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>> There is a pretty good argument that high quality bonds are in a bubble right now <<

Treasuries, I'd agree. There are some pretty decent high-quality corporates that got beaten up pretty badly in September and October which I wouldn't think are in a bubble. Some might argue that they still aren't priced cheaply enough for the "brave new economic world" and the perceived added risks coming with it, but "bubble" isn't how I'd classify them.

#29
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Kap,

Given that now is not a good time to invest in bonds, are laddered CDs the best alternative for the "safe" portion of one's investments?

What is true for the group may not be true for the individual. This makes many bond funds poorly priced to hold for an extended period. This doesn't mean there are no good bonds to hold. Finding and researching a narrow list of corporate bonds takes time and some understanding of financial statements.

If you don't want to join the hunt for good individual bonds a CD ladder would be a good alternative. With a bit of effort on you part you can find better CD rates if you poke around and don't mind having money spread over a bunch of different banks. Investing in CD's doesn't have to be limited to walking in the front door of your local bank. Many brokers sell CD's and there are a few web sites that post CD rates for various banks around the country. Why not get the best rate you can.

jack
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I’m hesitant to buy bond funds with yields at low levels and prices quite high. But do you agree? Are bonds individually something to consider now? Or that's out of reach for someone with very little to invest? Are funds a yay or a nay? What would be best for an aggressive long-term investor at this stage?

Stas,

Small money is the least important part of learning how to invest for the paradoxical reason that, no matter how much money one has, there will always investments that require too much money to be done prudently. Or as Keynes, a very bad economist but an astute market observer, once said, “The market can stay irrational longer than you can stay solvent.”

If you truly are the “aggressive, long-term investor” you describe yourself to be –and if you’ve been poking around CEFs, then your self-identification is credible-- then there are a couple paths you could take, which come down to Howard’s, Jack’s, Scott’s, Paul’s, Chris’, or mine. (And my apologies to anyone I’ve left out who is pursuing a distinctive, fixed-income strategy that is truly meets the definition of “investing”.) The differences among us amount to the asset classes we explore and the extent to which we use “fundamentals” and/or “technicals” in our decision making.

Par for a corporate bond is typically $1,000. However, the bonds of interest to an “aggressive, long-term investor” are typically selling at a steep discount to par, which can be as much as 70-80%. In other words, when markets are stressed and bonds are cheap, excellent investment opportunities can be found for as little as $200-300. E.g., years ago, I bought Internet Cap’s something of something in the mid-20’s. I was called at par three years later for a gain of 100% per year. I still own Xerox’s 8’s of 27 that I bought at 33. Within a couple years they had run up to par. Currently, they’ve backed off quite a bit. But meanwhile, my income stream is 25%/year. A couple of my cheaper buys this year have been Alcoa’s 5.87’s of 22 bought at 60.647 and up 52%; Hanson’s 6.125’s of ’16, bought at 44.555 and up 48%; GE’s 6.1’s of ’30 bought at 64.200 and up 42%. So not only can bonds be bought cheaply, their returns can be quite attractive.

Crummy bond brokers (Scottrade, Ameritrade, etc) require a minimum purchase of 5-10 bonds regardless of the minimum size set by the underlying desk actually selling the bonds. But the better bond brokers (chiefly, E*Trade and Zions Direct) follow the minimums set by the underlying desk. Often those minimums are a single bond. Thus, someone with enough money to meet the minimum to open a brokerage account (typically, $2,000), can begin to buy their own bonds. It does not take the $50,000 that is usually advised (which is bad advise in both directions, for being too low and too high, depending on the strategy one is pursuing).

In short, the problem a typical, beginning, fixed-income investor faces isn’t lack of money, but an over-abundance of choices: CEFs, ETFs, conventional mutual funds, corporates, preferreds, dividend stocks, interest-rate futures, etc. Furthermore, each of those “asset classes” can be dealt with in a multiplicity of ways, so that the paths one could choose are nearly infinite in their varieties. With bonds, “If there’s a will, there’s a way”. So it doesn’t much matter where you begin.

Enjoy your exploring, Charlie
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