No. of Recommendations: 2
So can anyone tell me exactly why it would be better to invest in a bond fund than in high dividend stocks like NLY, which is tied to the mortgage market? Neither is safe from erosion of the initial investment, and NLY has much better dividends. What am I missing here? I am wondering because according to asset allocation we should drastically increase our bond fund or indiv. bond holdings.

And I am very hesitant to back up the truck and load up on bond funds right now, when we are within 6-8 years of retirement. No time to wait out a long down cycle.

Thanks in advance for any light you can shed on this.
Print the post Back To Top
No. of Recommendations: 0
I understand your dilema. Especially since interest rates are still relatively low (which means they can really only go UP).

The reason that you should consider a low expense bond fund is that it is managed by a professional. You get a portfolio of bonds instead of just one or two bonds.

What percentage does your asset allocation say should be in bonds?

JLP

http://AllThingsFinancial.blogspot.com
Print the post Back To Top
No. of Recommendations: 0
JLP

http://AllThingsFinancial.blogspot.com

I believe The Fool doesn't want you soliciting business on their web site, no?

cliff
Print the post Back To Top
No. of Recommendations: 0
cliff,

You're the first person to bring that up.

Yes, I have a blog and yes, I would like people to visit it. I have not received any "business" from it yet. I post the link so that people can check it out. I have tried to make it a useful information source for people.

I'm sorry if I offended you.

JLP
Print the post Back To Top
No. of Recommendations: 1
"I have tried to make it a useful information source for people."

And that it is. Keep up the good work!

-Kenny
Print the post Back To Top
No. of Recommendations: 0
Thank you, Kenny! I really appreciate that.

JLP
Print the post Back To Top
No. of Recommendations: 2

…No time to wait out a long down cycle. …

You should also consider a ladder of individual high grade or government bonds where they will constantly be reinvested at the current interest rates as they mature. A ladder of bonds behaves much differently then a mutual fund since your principle never changes as long as you hold the bonds to maturity.

Greg
Print the post Back To Top
No. of Recommendations: 0
So can anyone tell me exactly why it would be better to invest in a bond fund than in high dividend stocks like NLY

Asking why a bond fund is better than NLY is like asking why Oklahoma is better than Missouri. Neither is better or worse- they're different.

First, NLY is an individual security. I'd hold funds instead of securities for diversification purposes.

Second, NLY is a mortgage REIT. It's a good idea to have a small (~7%) portion of your portfolio in REITs, of which a small portion might be mortgage REITS (most REITs own real estate, not securities).

You can own anywhere from 0%-100% of your portfolio in bonds (and other fixed income investments), depending on your time horizon, risk tolerance, etc.

Neither is safe from erosion of the initial investment

No investment is totally safe from erosion of the initial investment in real terms. (even your TIPS will erode if the CPI number isn't accurate). Owning a bond fund is just like owning a bond/CD ladder. The "NAV" (current value) of your ladder will fluctuate, but if you wait until each bond matures this doesn't affect you. Same with a bond fund, except in extreme circumstances.

and NLY has much better dividends

If you ever wonder why one investment offers a higher return than another, the answer is usually risk. NLY is a high risk, highly leveraged investment. These guys can return you that juicy spread between short and long term rates as long as short term rates stay low, but what happens if they rise a couple of points? I'm not a mortgage REIT expert but I'd guess that div could be wiped out pretty easily. And then what would happen to the share price?

In short, there's no free lunch, which is why you should diversify.

Nick


Print the post Back To Top
No. of Recommendations: 0
but what happens if they rise a couple of points? I'm not a mortgage REIT expert but I'd guess that div could be wiped out pretty easily. And then what would happen to the share price?

I was actually wondering the same thing. One would think that it would be worse on a mortgage REIT if rates are dropping because people would refinance at lower rates. Right? Of course if rates go up, then it might deter people from taking on mortgages, so that would hurt them too.

Like you said "...there's no free lunch, which is why you should diversify." EXACTLY!

JLP

http://AllThingsFinancial.blogspot.com
Print the post Back To Top
No. of Recommendations: 1
I'm sorry if I offended you.

JLP

I don't care one way or another.

cliff
Print the post Back To Top
No. of Recommendations: 2
A couple of years ago (2002-03) NLY had to cut their dividend because all the refi's were killing the returns on their higher yielding CMOs. Their stock price plummeted as a result, but soon recovered.

The main risk with NLY is the way they use the yield curve to make money (borrowing at short term rates and lending at long term rates). I would be concerned that the flattening yield curve will make it hard for them to maintain their high dividend. If you believe that long term rates will soon go up faster than short term rates, then a company like NLY would be a good investment.

They are an interesting and fairly well run operation, but I suspect that the flattening of the yield curve will continue for some time (contrary to popular opinion), so I'd be concerned about the sustainability of their dividend and share price.

Adenovir
Print the post Back To Top
No. of Recommendations: 0
I have about 2% of my money in mortgage REITs. They use alot of debt. $12 debt to $1 assets is normal for NLY. If anything goes wrong you can be wiped out. The also write Enron style annual statements so you are really working off the reputation of the management.

The problem with bonds is the fact that you might never be paid back. This is also true of gov bonds as they can devalue their currencies, as the US seems to be doing now.
Print the post Back To Top
No. of Recommendations: 0
It appears that you think bonds are not good, and mortgage REITs are not so good. What do you suggest as an alternative?
Print the post Back To Top
No. of Recommendations: 0
I am just pointing out that government bonds can disappoint like all other investments. My largest position is GIM, fwiw.
Print the post Back To Top