Hello to all ,I am new to bonds and would like some ideas on what to do with 20k in the realm of bonds?Please help me understand why bonds can be good for retirement and beyond?In this present economy are you better off using a firm like AG Edwards or try and do it yourself? Thanks for kindness and help .
The rule of thumb is to buy Treasuries yourself but other types of bonds in funds. One reason is that you can buy Treasuries in $1,000 lots. You can also buy them at fixed short-term maturity dates of 4 weeks to "nearly" 30 years. To buy a stand alone GNMA, for example, you have to pay $25,000 and then you have the complexities of refinancing. As bonds had a bull market last year, now is not a good time to buy them as rates are likely to rise this year and bond prices go the other way to maintain constant rates (roughly). Tax-free bonds usually have to be bought in $5,000 lots so to diversify takes a lot of money. Corporate bonds can be good but you have to understand safety ratings. And such ratings can change. This is what pushed Enron into bankrupcy. Then, except for Treasuries, you have to find out about call dates, which is not always easy. Vanguard has a nice fund called the Total Bond Fund. A problem with funds is that they don't mature so you can't wait for the maturity date as you can with stand alone bonds. Hope this helps some rather than confuses one. Return to the first three sentences if I have gotten confusing.brucedoe
My point of view is different, but I've been buying bonds for 35 years and at this point wouldn't own a bond fund on a bet. Particularly not now if interest rates have bottomed. I'd use a full service broker, which for stocks I wouldn't dream of doing. I'd insist on corporate BAA or higher rated, and companies I have heard of and trust. I would divide my $20000 over 4 bonds, $5000 of each. Bonds pay interest every 6 months, so the choices are Jan-July, Feb-August, March-Sept, April-Oct, May-Nov or June-Dec. I'd pick four different for the first four bonds, and the next two bond purchases would be the remaining choices. I would not choose any two bonds maturing the same year. I insist on a discount; a small one will do. I will not pay a premium. As long as I am buying at a discount, I will ignore call dates. As I add to my portfolio, I'll continue to try to keep my monthly income about even for each month of the year, or higher in the month my house or car insurance or property taxes is due. When a bond matures or is called, I buy another one. Your bond commission with a full service broker isn't more than for a discounter. I was astonished to learn that the discounter may charge you an extra commission when the bond matures--the full service folks don't do that. If you buy at a discount, and the bond matures at face, you make a little capital gains. You know in advance what your investment will be worth at maturity--you have no such assurance with stocks. With bond funds there is no maturity date, and there is no assurance that you will get your principal back. Now you have different opinions, which you will evaluate and make your own decision! It's your money! Best wishes, Chris
Crosenfield,I couldn't agree with you more re: your opinion on bond funds.But, I do have a question for you. I'm perplexed regarding your position on bonds trading at a premium. For an investor planning to hold a bond to maturity - who cares where its trading? As long as the investor is happy with their yield (which, obviously factors in the premium) - why be so concerned re: premiums?Ken
Most of the bonds I buy have call dates. If I pay a premium for a 20 year bond, and the yield to maturity is 7.5%, but the bond can be called in 5 years, and this happens, then my premium must be amortized over 5 years rather than 20, and I'm not getting the yield I thought I was getting. Clearly premium bonds will pay a higher current yield. Currently there are few bonds available at a discount because interest rates are lower than when seasoned bonds were issued. Many people have told me I'm being ridiculous by insisting on a discount, and clearly I restrict my universe of candidates. Maybe so. It has seemed much cleaner to me to simply not pay a premium--then if they call the bond, welcome. It is always an inconvenience to have a bond called--you have to reinvest at an inconvenient time. I feel I should be paid a little extra for the inconvenience. Sometimes there is built into a bond the provision that if it is called in 5 years it is called at 101 cents on the dollar, something like that--then a par call at 15 years, or whatever. Clearly a less restrictive system may work better for you, particularly now. Another point is that if you buy a bond at a deep discount (defined, I think, as more than 1/4 of 1% a year) taxes must be calculated in a more awkward manner and tax paid on the increase in valuation to be expected as the bond approaches maturity. Thus I'm happy with a small discount where that doesn't apply. Best wishes, Chris
Thanks for a very informative and helpful post. Must we rely on brokers to ferret out potential bond purchase opportunities? Are they listed somewhere (Barron's?) so that we could do homework? I'm also interested in Convertible Preferreds, and find no Boards that seem to deal with them. Are they, too, listed somewhere? Thanks for any help and guidance you can provide.
There's a list of convertibles in IBD. Best wishes, Chris
Chis,Forgive me for belaboring the point, but I'm still having difficulty appreciating your position."Most of the bonds I buy have call dates. "I think most bonds have call dates anymore."If I pay a premium for a 20 year bond, and the yield to maturity is 7.5%, but the bond can be called in 5 years, and this happens, then my premium must be amortized over 5 years rather than 20, and I'm not getting the yield I thought I was getting."Every bond is quoted with three yields: yield-to-maturity, yield-to-call (if callable) and yield-to-worst (the worst yield as calculated to some possible event in the bond's life - could be the call date, maturity, or something else). So, I would think you already knew the yield going in if they call the bond."Clearly premium bonds will pay a higher current yield."Not I sure I understand this - why would this necessarily be true?I'm only asking these questions as I have found your commentary to be some of the more interesting and educational here on the boards. And I just want to make sure I'm not missing anything.ThanksKen
20k is not enough money to make bonds a good purchase. go to www.vanguard.com. tyr the total bond market or the GNMA funds
20k is not enough money to make bonds a good purchase. Bogwan, I don't mean this as a personal attack on you, but blanket statements like that serve no one well except the bond fund managers and mutual fund companies who generally try to scare would-be bond investors away from buying their own bonds, suggesting instead the buyer opt for the ready-made products which they, conveniently, have to sell. In its usual form, the entry bar is stated: "No one with less than $50,000 to commit to the asset class should be buying their own bonds", which is horse feathers. I'll argue that $1,000 is plenty money to get started. What will that $1k buy? Treasuries in any maturity, through Treasury Direct, with no broker fee and excellent account tracking and timely and convenient payment of coupons to own's bank account by ACH, plus convenient rollovers if one chooses. Bought at the appropriate time in the interest-rate cycle, which doesn't require anything more sophisticated than being within a month or so current with the news, Treasuries are both a smart investment and a great confidence and experience builder. The downside risks are minimal and the upside gains are huge if one wants to do a capital gains play instead of hold to maturity, like an easy and safe 13-15% (after fees but before taxes.) I've done the trade and it's a no-brainer.That's the universally acknowledged safe end of on the bond market and it don't take no 20k to get started. What about the opposite end of the risk spectrum, junk bonds? What's the mimimum entry account there? Now things get interesting and it will typically take even less money to get into the game. I buy my junk bonds at an average price of 55 cents on the dollar, but in quantities under 10 bonds, a $40 commission is going to get imposed. So, theoretically, a person could get started with as little as $590, and even a lot more if they are shopping the low tier stuff that's priced in the 30's and even 20's. You know what I paid for ten Xerox 8's of '27 on March 1 of last year? Exactly $3382.50, which is a whole lot less than 20k. Do the math. How many years do I have to hold them before I'm in the money on that investment? Meanwhile, what's my current yield? (Try 23.7%, which beats stocks all to hell.)However, before anyone wants to spring board from that example and go rusing into the junk market, let's look at the downside, which is potentially a total loss on the speculation (It isn't an investment. Treasuries are investments. Junk is either a trade or a speculation.)More likely is a recovery rate of ~20 cents on the dollar should Xerox go under, as seemed a real possibility at the time and still is a possiblity. Again, do the math the same way you asses a stock buy. What's the upside/downside ratio?, which is half of the risk equation (the other half being the likelihood of each event.)Why could I buy those admittedly risky bonds responsibly? Because they represented a total portfolio exposure of under 2%. In other words, even if the whole postion failed, my loss would be sustainable. (In fact, it's a smaller fraction than that of my trading account.) And in an average case scenario, my risk is under 1/2%. That's the sort of numbers than determines whether an individual can buy their own bonds or not, whether they can manage the risks of the investment/trade/speculation responsibly. For some people a 2% stop loss would be too much. For some people 5% might be manageable, especially if their research were superb. It's risk management tha tdtermines whether bonds are suitable or not, not arbitrary entry numbers like 20k or 50k, both of which can be too much or too little depending on the kinds on bonds one is buying and lots of other factors.It's horse-feather statements like yours that kept me out of the bond market and in bond funds so long, and I won't let that happen to anyone else if I can help it. Bonds are a wonderful asset class and the function of this board should be to point out both the upside and downsides of bonds/fixed-income investing and to urge people to take a look for themselves rather function as self-appointed gatekeepers. Again, I mean no disrepect to you personally. Generally your posts are smart and thoughtful, reflecting a wealth of experience and common sense, and I'll apologize in advance if I've pushed harder on this issue than is polite. But the issue is important to me and crucial for the self-determination this website is all about. Charlie
20k is not enough money to make bonds a good purchase. go to www.vanguard.com. tyr the total bond market or the GNMA funds <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<Another alternative is a "bond" unit investment trust. This type of investment allows you to invest in 5 or 10 bonds, with amounts as little as $1,000. These bonds are named, rated, and have fixed maturity dates; so you know exactly what you're investing in. Typically, there are different types of trusts; some holding treasuries, corporates, muni's, etc.Check out these sites for more info: nikesec.com & ranson.com.Good luck,Richard
In my opinon 20k does not justify the time it would take to select and invest in individual bonds. Hte 0.2% vangaurd charges, which pays for all documentation and telephone support are well worth the money. "You know what I paid for ten Xerox 8's of '27 on March 1 of last year? Exactly $3382.50, which is a whole lot less than 20k. Do the math. How many years do I have to hold them before I'm in the money on that investment? Meanwhile, what's my current yield? (Try 23.7%, which beats stocks all to hell.)"Thats nice but,1) you got lucky, let's see if Xeroz lasts till '27, you have not won with junk bonds until you get your priciple back.2) bond funds offer diversification, with 20k you can only invest in 5 or so such positions, that will make it easy to loose money fast. It is very clear to me that the origial poster should not be buying 5 junk bonds series. 3) The person who posted originally was unlikely to be the type of person who had the time and knowledge to research individual bonds, for that kind of person deligating to fund managers is a good idea.4) My guess is that if you bought the vanguard junk bond fund and then worked a second job instead of researching and investing (no doubt succesfully) small amounts of money in junk bonds you would actually end up with more money in the end.
Bogwan wrote: In my opinon 20k does not justify the time it would take to select and invest in individual bonds. Hte 0.2% vangaurd charges, which pays for all documentation and telephone support are well worth the money. One of the the advantages to buying bonds, is that you assure yourself of a fixed income stream, with a return of your investment at a specified time in the future. Neither of these is true for a Bond Fund.Take the Vanguard Total Market Index Bond Fund that you mentioned previously. In just a relatively short period of time, Since January, 2000 monthly payments have ranged from $0.054 to $0.049 per share, while the price has ranged from $10.48 to $9.46. As far as the time involved in selecting individual bonds, I would look at it as an educational process. Why not learn now, rather than wait. Learn about the advantages of laddering maturities, decide whether it is adavantageous to invest in AAA or AA ratings, or in government issues. $20,000 is enough to buy 4 or 5 different issues. Schwab charges a minimum of $35 for online bond purchases, and of course, if the bond is held to redemption, there is no further fee.You also wrote:1) you got lucky, let's see if Xeroz lasts till '27, you have not won with junk bonds until you get your priciple back.You miss the point with junk bonds. They do not have to be held to maturity. Suppose Charlie sells the bonds after a year and receives his $600 per bond. He will have received $80 in interest, plus $270 in capital gains for a total return of over 100% in one year. Why should he continue to hold for a potential yield to maturity from this point of about 13%. He would be better off reinvesting in a different issue with potential for larger gains.Dan
As far as the time involved in selecting individual bonds, I would look at it as an educational process. Why not learn now, rather than wait. Learn about the advantages of laddering maturities, decide whether it is adavantageous to invest in AAA or AA ratings, or in government issues. Thank you, Dan. That summarizes well the trust of my suggesting why people look at buying their own bonds. So that with what they learn in the process, about securities and, more importantly, about themselves, they can make informed decisions about buying any investment and think "process", not "product." As Fools, we're in this game for the long haul, and "the longest journey begins with the first step." Once such an individual has taken a good look around for themselves, they may well decide to turn over the process to someone else, because they don't have the time, interest, or skills they discover it takes, nor do they want to acquire them. Wow. What has just happened? They are thinking for themselves, making an informed and rational decision rather than following second-hand advice. They are being Fools, rather than fools, and that is always a win.Charlie
you got lucky, let's see if Xeroz lasts till '27, you have not won with junk bonds until you get your priciple back.No, I did not get lucky. Though I've described my buying of Xerox and a couple other issues I mentioned in another posts as "luckier choices", namely Friendly Ice Cream and Tommy Hilfinger, to put a light-hearted air on the matter, my buying Xerox, as one of the 40 junk bond issues I'm holding, is no more lucky than Peter Lynch owning Dunkin' Donuts as one of the issues in his portfolio. Some investments/trades are going to be losses, for sure. Some are going to be scratches, and a few, a very few, are going to be ten-baggers. What is important is the process and whether the process, on the whole, is profitable, which it is for me, and it is manageable the way individual stocks never were for me, except haphazardly so. (E.g., India is a market I've always made money on.)When it comes to junk, I'm admit right up front I'm an amatuer and the smallest of small players in this very institutionally dominated market, but I overcame or ignored the objections of the gatekeepers (such as yourself) and elbowed my way in and liked what I found, and I'm in the game for the long haul and my buying Xerox was no lucky accident. The bond market opens at 6AM Pacific (9 Eastern) and every day at 5AM Pacific (8 Eastern) I'm up and awake, reviewing the offering lists and doing my research. Junk is the pond I go fishing in. When Xerox came to my attention, I did my DD and bought. Time will tell whether the choice was shrewd or not, but I made the choice, not anyone else. I take resonsponsiblity for my losses, and I'll take credit for my wins. Luck plays no part.My point in touting Xerox was simply to point out that, on a risk-adjusted basis, there is serious money to be made in bonds, comparable to stocks, with the added benefit of structural price protections due to one's position in the credit line. I'm not and would never argue that any investment is appropriate, or not, for any individual. #1, legally I can't, because I'm not a registered financial advisor. #2, I favor self-determination, i.e., people doing their own leg work and making their own decisions. As for your comment about getting my "priciple" [sic] back, I'd again urge you to do the math. Use a calculator that will do time value calculations for you, or do it by hand under various infaltion-rate scenarios. Exactly what will that principal be worth in '27? (Almost nothing.) But, what will the intervening income stream have been worth? That's the value of long-term bonds, which Xerox is, though it is callable in '07.The bottom line, Bogwan? You're scared of junk, as are most people and for reasons that are both rational (This stuff is admittedly risky) and irrational (How risky is it truly?) But until you have a rational basis to determine the latter, the former belief is also irrational. Investing is a numbers game. The skills one acquires by looking at spec-grade bonds in a serious and responsible manner are valuable anywhere in the investing world. I'm not saying the original person should buy junk bonds, only that, all things considered, the 20k might not be a barrier to entry and that other factors, which you ignored, are far more important, like the abilty to measure Risk, Diversification, etc., which are the tools with which one builds a portfolio, a dollar at a time, one investment at a time, which might be a junk bond or not."The longest journey begins with the first step." Charlie
Why should he continue to hold for a potential yield to maturity from this point of about 13%. He would be better off reinvesting in a different issue with potential for larger gains.Dan, A small correction, or better, a different spin on continuing to hold the issue, which is my intention. My current yield on my investment will continue to be 23.7%, as, co-incidentally, will be my yield to maturity, also 23.7% because of the huge purchase discount.If this were two years ago, when bargains were like Fall leaves, I'd seize the cap gains and move on, but right now there's nothing offerred that's nearly as attractive to me. You're right, though, I won't buy more Xerox where it's trading at, around 60, with a YTM of 13% or whatever, especially since I already own two other Xerox lots, the 5.25's of '03 and the 5.5's of '03. Enough is enough. Junk is risky and I size my individual positions and my industry weightings to keep my losses managable.My intuition, though? I make money on this one, which is more than I can say for Polaroid, which I also bought at the same time, but less, fortunately. Charlie
bond funds offer diversification Bogwan, At the risk of beating dead horses, though the point is essential, how are you measuring "diversification"? How can you be sure that any particular bond fund is providing diversification when added to a portfolio, rather than an overlap? Terms that are used as screens, but aren't quantified (or carry with them a process by which quantification could be obtained), aren't screens at all, but mere ghosts and beliefs. There's no doubt that markets are complex, if not partially chaotic, but being sloppy about definitions and procedures only compounds the problem of obtaining investment success. The function of a message board such as this should be the discussion and development of tools or viewpoints to put rationality into the investment process, not to propagate what amounts to folklore. These days any off-the-shelf computer comes pre-loaded with a basic spreadsheet program, which is a sufficent tool for measuring diversification. If the computer didn't come with such a program, very good free ones are available all over the web, especially from the Open Source people. (i.e., the Linux crowd, some of which can even be run on top of Windows.) Historical data for stocks and mutual funds, as well as interest rates, economic reports, etc, are also readily available and free. In others words, all the data and tools necesary to make rational investing decisions is readily available. My point? Free advice, this post included, is generally worth what was paid for it, at best. Our function as members of this board shouldn't be to pass out free fish - to appeal to an apt maxim - but to teach questioners how to fish for themselves, however that is best accomplished. In short, how to determine for themselves when they are truly diversified, or not, and the costs, efforts, and consequences of making changes. with 20k you can only invest in 5 or so such positions, that will make it easy to loose money fast. Again, just what is the logic or evidence supporting that assertion?Again, don't take my questions personally. Think of them as impersonal discussion topics and I'm a newbie investor who is considering your words and wisdom carefully, trying to understand them so I can put them into practice. Is there something magic about 5? What if I had 40k to spend on bonds and could buy 8 positions at 5k each? Would it still "make it easy to loose [sic] money fast?" Would 20 or 40 positions be a sure-fire cureall? What about 100, or better, 1000? Arbitrary cut-offs serve no one well. Rational, carefully reasoned, well-documented discussions of what have historically been shown to be useful norms or guidelines, and why, do serve questioners well, as well as provide a basis for making conjectures about the future.You're smart, you're experienced. Think before you fall back on folklore to fashion investing advice, because if you can't conduct the demonstrations and prove the theorems for yourself, how can you, in good faith, offer advice to others? And mind you, I'm not saying there is a right way or only one way to do any of this stuff. Markets are as pluralistic as their participants. In fact, they are virtually infinite, and furthermore, of one's own creation, meaning, each person is going to have to build their own map. That's a soft-facts belief, I'll freely admit, but the risk and diversification stuff are hard-facts tools that suggest that arbitrary, 20k cut-offs are nonsense.It's not what the numbers are that matters, but the meaning of the numbers. That's my point. Charlie
"You miss the point with junk bonds. They do not have to be held to maturity. Suppose Charlie sells the bonds after a year and receives his $600 per bond. He will have received $80 in interest, plus $270 in capital gains for a total return of over 100% in one year. Why should he continue to hold for a potential yield to maturity from this point of about 13%. He would be better off reinvesting in a different issue with potential for larger gains."I believe the original position was less than $3500. Is it really worth the effort to flip junk bonds for such a small gain (assuming the junk bond flipping strategy works). You might so better getting a part time job and saving money until you have enough to make it worth it.You seem to assume that you can enter and exit you junk bond positions and make a consistent profit. Although it maybe true, few other people share your talent.
I've been busy the last several days and not on the boards, but will get back to your questions. I carry a full time job and have a lot of other interests. Having self imposed rules about investments keeps me out of trouble. Most municipal and corporate bonds have call dates. Treasuries for the most part do not. Yes, yield to call is quoted. The bond may or may not be called. If it is, I get a discount back quicker, so I'm only interested in yield to maturity. A call is gravy. "Clearly premium bonds will pay a higher current yield." Current yield, that is. That's why the bond sells for a premium. You can pay a premium, if you wish. I won't. The rule has kept me out of no end of trouble. Currently I have a bond called. The face value will drop into my account tomorrow. Three years ago I paid 96c on the dollar for the bond. Now I can't find a bond at a discount that I can buy at the present time. Bummer. So what will I do with the money? The same thing happened a month or so ago. I paid down the mortgage on my house. That call was in a taxable account. This time the bond called is in an IRA. I could withdraw the money and do the same thing, and I'm old enough not to be penalized for taking a distribution from the IRA, but I'd rather wait until I retire and will be less taxed. I might buy a stock and sell a covered call. I will check out what is available in a CD. I might possibly buy a preferred stock in a company I believe in. For sure I'll call my Merrill Lynch broker and find out what they've got currently. I might buy a stock that pays a small dividend, wait awhile, and sell a call some months down the road, which is a strategy that has served me better than doing a buy/write. I will not buy a bond at a premium. When there is nothing to be found at a discount, we are likely to be at a point in the interest rate cycle where it would be better to be buying something else. Definitely, I will NOT buy a bond fund, junk, short term, or even international. I love Vanguard and have a bunch of their health care fund, have owned it for years. Their REIT fund is also of interest. But I won't own a bond fund. Period. Some candidate stocks I may consider: SVU, JNC, KRON. KRON dropped a bunch today and I don't understand all of why. These things must be researched before making a decison. You don't have to follow the same rules for bond selection that I do. Maybe you'd rather have ALL your interest payments in two months. I like 'em spread out. When it's your money, it's your choice. The original question had to do with how some of us make that choice. You don't have to agree or do it the same way. Best wishes, Chris
Crosenfield,I found this in the Boston Globe today, I have found your posts extremely helpful, just trying to give a little back.http://www.boston.com/dailyglobe2/046/business/Business_in_brief+.shtmlKronos stock drops on negative reportChelmsford-based Kronos Inc., a maker of software for scheduling plant workers, fell 12 percent after the company's sales and earnings were questioned in a report by the Center for Financial Research and Analysis Inc., an analyst said. Kronos's shares fell $6.20, or 11.6 percent, to $47.25. CFRA said Kronos's internal growth in the first quarter ended in December was 11 percent and not the 17 percent reported by the company, Adams, Harkness & Hill analyst Charles Trafton said. The report also said revenue from independent distributors had fallen to $17 million last year from $31 million in 1999, Trafton said. (Bloomberg)
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