Too Much Income Can Be Hazardous To Your Financial Health
Keywords: bonds, stocks, maturities, junk bonds, investing, financial plannin
Bonds have higher yields then stocks. Bond funds have higher yields then stock funds. This means more current income for you. Bonds and bond funds are safer then stocks and stock funds, according to conventional wisdom. Bonds fluctuate less in value. That’s good, too. So what’s wrong with this picture? The interest paid on bonds doesn’t grow (they’re called fixed income securities for a reason), nor does their principal value. As a matter of fact, the real value of their principal declines over time due to inflation.
Now, before you jump all over me, yes, there are inflation-adjusted Treasury securities that increase in value with inflation and floating-rate bank loan funds whose yield should increase if interest rates go up (although, bank loan funds are much riskier than Treasuries). Also, you can realize a (usually modest) gain in principal value if you buy a bond at less then its face value and hold it until maturity.
There are some managers who through astute analysis, forecasting and trading, add value and outperform a simple buy and hold strategy. However, superior relative performance becomes harder to achieve as you go up in quality, think: High yield (”junk bonds”) at one end of the scale and U.S. Treasuries at the other. The same is true for maturities. There’s not much a manager can do to create relative value with short term bonds. Value can be created by correctly forecasting (good luck!) interest rates and buying, or selling, long term bonds or through astute credit analysis to determine which companies financial strength will improve, leading to a rating upgrade (if you can do this, you can also pick stocks that will go up in value).
Bond funds do have a place in your portfolio. It’s always wise to have a cushion for unforeseen expenses or just to be able to take advantage of an opportunity in the market or elsewhere. If you’re going to need cash at a certain time for events such as buying a house, college education, or the like, having the safety and certainty of a bond fund is a smart investment. Caveat: if you need funds at a not too distant date don’t speculate with a risky (non-investment grade) bond fund, you’ll be unpleasantly surprised with its volatility.
I fear that too many investors put too much money in bond funds and do so too soon in their investing careers. The income may be reassuring, or even seductive, but the limited appreciation and cumulative effects of inflation must be considered. The current income is nice but neither the income, not the principal increase over time, absent a good fund manger. So what’s an investor to do?
Find a good conservative mutual fund which invests in high quality dividend paying stocks. Why? Because dividends paid by good companies tend to increase over time. Take Bank of America, for example. (I’m using a stock rather than a mutual fund for this illustration because it avoids having to talk about purchases, sales and capital gains distributions.) In 1997, Bank America paid a $.70 per share dividend. If you bought the stock near its high for that year, you paid $40 per share. Today, Bank of America pays a $2.24 dividend and its stock sells for around $50. Notice, the dividend has increased 3x in the past ten years. The price appreciation hasn’t been nearly as exciting, but it has kept pace with inflation.
There are a lot of stocks out there, like Bank America, which increase their dividend every (or almost every) year. The investor who bought Bank of America stock in my example has an investment currently yielding 5.6% and I would expect the yield to continue increasing. You can find many mutual funds that invest in high quality, dividend growing stocks. Start by looking at Big Cap Value funds. Many such funds have the word income or dividend in their name.
There are lots of good reasons to invest in bond funds, but if you have a time horizon of ten years or more, you’ll be better off investing in a high quality equity mutual fund. You’ll end up with more principal and more income.
Bill Byrnes is a co-founder of MUTUALdecision (www.mutualdecision.com) A former investment banker and finance professor, he has been CEO, chairman and served on the boards of a number of public companies. Bill is a CFA with over 30 years investment experience.
Previous Articles Highlighter:
'Stall' Noted In House Price Rises (1)
However, the analyst stated that the base rate could yet increase to six per cent in the future as a result of rising retail sales and higher oil prices, despite there being a risk of "monetary overkill".
How To Choose The Best New Hardware To Upgrade Your Computer (2)
There are buttons that will immediately log you onto the internet and ones that will bring up the start menu for Windows. There have been advances in voice recognition that might make the key board and mouse obsolete in the future.
The Difference Between Pre-Settlement And Post-Settlement Funding (3)
Post settlement funding transactions are legal throughout all states while pre settlement funding is not legal in some states. Post settlement procedures are convenient to both attorneys and clients because it provides the means to solve legal and financial issues and also allows clients to pay medical bills diminishing the effect of such debts.
What Is The Present Value Of Future Money? (4)
Learn how to use these concepts to cash out settlements. Get more info from an expert and reputable company which specializes in annuity buy out. Visit us at www.prosperitypartners.com
Taxes And The Home Business (5)
Businesses are more likely than individuals to be audited and its in your best interest to have an attorney with you. Obinna Heche: Delivering the best home based business ideas and opportunities so you can work at home successfully..
Getting Into The Real Estate Business (6)
If you want to be next, jump into the real estate business today. You never know what could happen. Obinna Heche: Delivering the best home based business ideas and opportunities so you can work at home successfully..
How To Fund Your Business (7)
If you have some real estate properties, you can use these real estate properties as collateral for the loan. ust be very careful about using your home as collateral for your loan because you might end up without a roof over your head if your business fails.
Home Business Expenses (8)
Once you start mixing up your funds and using them for different purposes other than what they were originally intended, you may not be able to replenish it fast enough to beat the billing period.
How To Obtain A Business Loan (9)
Make sure that you find a way to diminish risk over a certain period of time. Your business plan should include a detailed financial study of your business. If you are not very good when it comes to projected sales and everything, it might be a good idea for you to hire an accountant to do your projected financial statements based on feasible assumptions.
How To Save For Retirement (10)
This might be fine if you are only running your home business for a few years and then planning on going back to work but if you want this home business to be what you are doing for the rest of your life, it is going to be very important that you save for retirement.
Debt Consolidation Financing - Pros & Cons Of Secured And Unsecured Loans (11)
Importantly only you can decide in your particular circumstances whether the advantages outweigh the risks and additional costs and interest. Ian Wilkie is a published author of many debt consolidation financing articles and owner of - www.mydebtconsolidationsolution.com your one-stop online resource for Debt Help.
Home Business Financing (12)
Also, you need to make sure that both you and your spouse, as well as your children, understand that money is going to be tight for awhile. There are probably lots of ways that your family can cut back on costs, so you should discuss this with your family as well to see what they think they might be able to do and to see what they think they might save while doing it.
Keeping Records Of Your Work From Home Business (13)
What are these records? Well you should have a record of everything that you have done with your business and how successful it has been. You need to make sure that you are keeping track of how much money you have made and how much product you have sold.
The Science Of House Buying (14)
A broker will have lots of terrific deals that you might not have found on your own. So it would be a good idea to consult someone who has adequate knowledge of house-buying if you are somewhat ignorant in that area.
Unearthing Discounted Mortgages (15)
That is your ultimate weapon. If there is such fierce competition, there are going to be discounts. If you want to find the best mortgage, you have to sniff out the best discounts.
The Right Place And The Right Type (16)
IPO's carry a low buy-in and a moderate risk. An experienced broker's guidance is helpful to new traders as they invest in IPO's as a major part of their portfolio.
Ordering Personal Checks Online (17)
This offers total convenience especially since personal checks are easily forgotten and only remembered when you run out of them. There are several considerations when searching for sources online.
Advertisements That Drive You To The Stores (18)
So relax. Start looking out for cheap unsecured car loans to assist you in paying for this new luxury of yours. Finding auto finance is quite a piece of cake these days.
Secret Loopholes Of The Due On Sale Clause (19)
Richard Reichmann is internationally known as a millionaire maker. He's a leading consultant in real estate and internet marketing strategies that are profit proven. Subscribe to our FREE newsletter Value $147.00 www.InstantRealEstateWealth.com
Changing Attitudes Towards I.O.U.s (20)
Gender issues have also been impacted by the changing ideas. Women are no longer limited to being at home. They now have the freedom to venture out in the world to find their fortunes.
Newer Articles Highlighter:
Brits 'Willing To Carry On Borrowing' (1)
Meanwhile, funding the purchase of a car, motorcycle or another vehicle was reported to account for just over a third (35 per cent) of borrowers' spending intentions as they look to take out a typical amount of 6,570 pounds.
North Cyprus Property - Is It Safe To Buy ? (2)
Some of these title deeds refer to land which was either owned or occupied by Greek Cypriots prior to 1974. North Cyprus title deeds fall into several categories. These are, firstly, internationally recognised pre 1974 title deeds issued to Turks, Britons etc.
Potential House Buyers Forced To 'Lower Their Sights' (3)
According to Paula John, editor of Your Mortgage, consumers in the capital are having to wait an average of five years before they are able to save up enough cash to purchase their first home - a rise of some 11 months from a study conducted last year.
Cherie Blair, The Orams Case, And Cyprus Property (4)
If a Greek court cannot enforce a judgement on a property some 25 miles away, how can a UK court be expected to fare better? However, there is a hidden agenda in this matter.
Financial Shelter, Status, And Earnings (5)
However, a lot of house owners have recognized the need for apartments on rent. More and more people are moving from their hometowns for better education and jobs. They need places to stay.
A House To Secure The Future (6)
Having lived in both rented apartments and homes owned by my family, I recognize the essential difference between the two. On the superficial level there are not that many differences between living as a tenant and living as an owner.
Can Your Family Live On A Single Income? (7)
Then before you are actually a single income family, try living on it. Put the extra into savings. It makes a nice cushion for if things don't work out and for when those extra bills that you really can't plan for hit.
Make Money On Property Purchase By Stage Payments (8)
The minimum time period is unlikely to be less than 11 months, and it can be considerably in excess of that. Once the buyer has made a deposit, then the developer is contracted to build the property.
How To Use Mortgage Refinance To Help With Your Debt Consolidation Solution (9)
When rates are low, you can lower your monthly repayment and/or the total amount of interest you will pay over the life of the loan, you may also want to take out some equity to finance home improvement projects or pay off other debts, but as a method of adjusting or lowering debt it has some drawbacks that should be considered before making that big step.
Different Kinds OF Hedge Fund Strategies (10)
Convertible arbitrage: This involves going long in the convertible securities (usually shares or bonds) that are exchangeable for a certain number of another form (common shares) at a preset price and simultaneously shorting the underlying equities.
Some Pros And Cons Of Owning Real Estate (11)
What good things are happening in your area? Are there aspects that worry you? Make a list. Also consider how long you want to be there. While flipping is possible, most of the time you need to be patient before your home sells for the amount you'd like.
Get Draped In Insurance Plans (12)
Keywords: motor insurance, house insurance We are living in changing times. There was a time when bullocks and horses were our only modes of transport. In today's world, bullocks and horses are themselves transported between places by mechanical engines.
Your Finance Options For Home Renovations (13)
2) Credit cards: This is a very convenient way of arranging for finance but the disadvantage is that it carries a very high rate of interest. 3) Refinancing: You can refinance the mortgage of your home to get finance for the home renovation work if you have sufficient equity.
Emerging Hedge Fund Manager Sentiment Survey Declares Technology As Best Investment (14)
These results were released after VanthedgePoint Group Inc's second annual Emerging Hedge Fund Manager Sentiment Survey. The hedge fund managers believe a continued "Real state market slowdown" (29.5%) and "inflation" (21.3%) will play the biggest role in how the U.S.
Preparing For Vehicular Breakdowns (15)
That might just be true. However, what about the times when your car starts acting up? What about the times when rain water seeps into your engine. What about the time when the annoying boy from next door makes a huge scratch on your car's side?
Purchase Order Funding Provides Instant Cash From Invoices And Contracts (16)
In fact, the need for immediate financing help often arises because the supplier has reduced or changed the terms of supplier financing. The unfortunate result is that the company has a solid contract or sales opportunity and no way to perform due to lack of financing.
The Hedge Fund Manager Evaluation And Transparency (17)
5. Documentation - Review the hedge fund or separate account documentation, including ADV, offering memorandum and disclosure documents. For US plan sponsors, Employee retirement income Security Act qualifications, SEC and CFTC registrations and filings, and SAS 99 fraud checks also if necessary.
Enticement For Unsuspecting Customers (18)
Middle income groups also have access to them these days. Moreover, the options of cash back credit cards make it a viable option for people who tend to spend no more than a certain amount on their credit cards.
The Truth About Real Estate Financing (19)
And the interest rate for an adjustable rate mortgage may be adjusted up or down at predetermined times; then the monthly payment will increase or decrease. The disadvantages of a fixed-rate mortgage include a possibly higher cost because these loans are usually priced higher than an adjustable rate mortgage.
Comparison-Making In The New Millennium (20)
We are trying to unearth the best among a million things that are only run of the mill. Of course, shopping is not merely limited to clothes and groceries.
Permalink to Too Much Income Can Be Hazardous To Your Financial Health