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)
Research from the firm also showed more borrowers are opting to take out a fixed-rate product to help keep their monthly outgoings consistent as the MPC is forecasted to raise the base rate further in the coming months.
How To Choose The Best New Hardware To Upgrade Your Computer (2)
Computers often have extra ports in the front and back to allow you to connect many different devices. One of these devices is a digital camera. Digital cameras are great, they allow you to take pictures, put them on the screen, and edit them to your liking.
The Difference Between Pre-Settlement And Post-Settlement Funding (3)
Also, pre-settlement funding is somewhat restricted compared to post settlement funding where the money can be utilized "at will" by the plaintiff. Post settlement funding transactions are legal throughout all states while pre settlement funding is not legal in some states.
What Is The Present Value Of Future Money? (4)
Ten years latter the interest that could have been earned (opportunity cost) is lost and since prices may have gone up by the effects of inflation now less things can be purchased with the same capital compared to ten years in the past.
Taxes And The Home Business (5)
If you had a 401K or an IRA when you were working, you can take the money and roll it over so that you do not have to pay taxes on the distribution.
Getting Into The Real Estate Business (6)
Keywords: real estate, real estate investing, buy real estate, make, money, resell, rent, income, real estate agent You have probably heard that getting into the real estate business is a great way to make money.
How To Fund Your Business (7)
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. In case you do not have any properties that you can use as collateral for the loan, explore the possibilities of getting a government guaranteed loans.
Home Business Expenses (8)
If you happen to be engage in a home business that requires you purchase large amount of supplies, you need to have a system to track down purchases and other expenses.
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)
If you do not do this, you might not know how much money you have in there and you might not know what you need to survive. So, you have to be sure that you are taking responsibility on yourself for saving for your retirement.
Independent Living Post-Retirement (11)
There are other methods that can help you make the most of your finances. In fact, just the other day, I found an interesting article about a type of mortgage that was specifically for senior citizens who owned property.
Debt Consolidation Financing - Pros & Cons Of Secured And Unsecured Loans (12)
Pros & Cons of Secured and Unsecured Loans. A secured loan is one in which the money borrowed is guaranteed to be repaid or some asset will be forfeited by the borrower.
Home Business Financing (13)
This might mean working harder than you thought you have to work and taking more time out of your life to work on both of your businesses but it is going to be worth it in the long run.
Keeping Records Of Your Work From Home Business (14)
You should evaluate your product every few weeks and see what is selling and what is not. It might take some messing around with the things that you have for sale before you are sure that you are getting everything done that you need to be getting done to make a profit.
The Science Of House Buying (15)
Keywords: home refinance loans Buying a house is quite a tough job. There are many things that can be purchased in a few moments. Batteries, toothbrushes, chicken, and even watches can be picked up off the shelf within a matter of minutes.
Unearthing Discounted Mortgages (16)
Whether you are buying a yacht or a plasma TV or a state-of-the-art laptop, you would want to spend as little as possible, wouldn't you? After all, everybody hates to have to pay up with large amounts of money.
The Right Place And The Right Type (17)
Mutual fund groups combine the investments of many people to create a large enough fund to invest in a diversified stock portfolio. Mutual funds offer many benefits including ability for small initial investments, more opportunities for top stocks because of the buying power of the combined investments, and relatively low risk because of the ability of the fund to diversify stocks and balance out the portfolio from ups and downs.
Ordering Personal Checks Online (18)
Show a little bit of your personality through the checks that you issue. Another concern would be the speed of processing. You would want to receive your check on a timely manner in order that it will be available when you most need it.
Advertisements That Drive You To The Stores (19)
Now all that remains is to get out there and drive home that car. How do you do it? Most likely you are not as well off as the characters in the ad.
Secret Loopholes Of The Due On Sale Clause (20)
Keep in mind that the assignment of Sammy Seller's interest under the trust to you does trigger the due-on-sale, but who is going to tell the lender? In reality, the lender will discover the transfer of an interest in real estate in one of three ways: 1) Change of name on the deed.
Newer Articles Highlighter:
Brits 'Willing To Carry On Borrowing' (1)
Findings from the firm also indicated that people who choose a variable-rate lending product were advised to prepare their finances sufficiently in advance to cope with a rise in monthly repayments should the Bank of England's monetary policy committee choose to increase the base in the coming months.
North Cyprus Property - Is It Safe To Buy ? (2)
Under the provisions of the Annan Plan, any land which has the benefit of TRNC title deeds, and has been developed, is safe from restitution. This is true even if a Greek refugee has credible title deeds.
Potential House Buyers Forced To 'Lower Their Sights' (3)
Consumers were also reported to be increasingly buying homes with friends, family members or partners in an attempt to afford increasing mortgage costs as they look to be "creative" on entering the housing sector.
Cherie Blair, The Orams Case, And Cyprus Property (4)
This is a powerful argument, as the Greek Cypriot administration, by its own admission, has no effective power to enforce a ruling made by a Greek court in Nicosia on a property in Lapta, which is some 25 miles away.
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)
If you like, you can separate this into more or less fixed bills, which are things such as rent/mortgage payments, water bills, electrical bills and so forth, versus other expenses such as groceries.
Make Money On Property Purchase By Stage Payments (8)
This means that an investor needs to feel confident that he can finance the full price of $200,000 if need be. An investor who only has access to say, $100,000 of funds would be ill advised to contract to purchase a $200,000 property.
How To Use Mortgage Refinance To Help With Your Debt Consolidation Solution (9)
One drawback is what was just alluded to in the opening paragraph, it is a big step, refinancing your current mortgage loan involves most of the steps required to take out the loan in the first place.
Different Kinds OF Hedge Fund Strategies (10)
Market neutral: Typically, equal amounts of capital are invested long and short in the market, attempting to neutralize risk by purchasing undervalued securities and taking short positions in overvalued securities.
Some Pros And Cons Of Owning Real Estate (11)
This article examines the pros and cons of owning real estate. Con: It goes down. Just as nothing is completely certain, whether your real estate will be as profitable as you'd like depends on a variety of factors.
Get Draped In Insurance Plans (12)
There was a time when the only available insurance plan was on life. These days, everything is insured. From diamond jewelry to pets to footballers' feet, any and everything is subject to being insured.
Your Finance Options For Home Renovations (13)
4) Home equity: If you have enough equity you can opt for a home equity line of credit for your home renovation. Since this a secured loan, the interest rate will be low and the interest will be tax deductible.
Emerging Hedge Fund Manager Sentiment Survey Declares Technology As Best Investment (14)
Issues such as independent valuations and good risk controls are essential but that is just the tip of the iceberg." Wall Street Journal- Hedge fund JANA Partners has agreed to pay 1.01 billion yuan, or about $132 million, for the equity stake in Shenyang Machine Tool (Group) Co., China's largest lathe maker.
Preparing For Vehicular Breakdowns (15)
What about the time when the annoying boy from next door makes a huge scratch on your car's side? It is at those times that you are glad that you took out an insurance plan.
Purchase Order Funding Provides Instant Cash From Invoices And Contracts (16)
The quality of the sale and the creditworthiness of the buyer are the prime factors of risk to be considered in giving the firm 100% financing including related shipment costs.
The Hedge Fund Manager Evaluation And Transparency (17)
Keywords: hedgefund, investment, hedge funds, money, venture, ipo, hedge fund news According to Lionel Barber, editor of the Financial Times, "Hedge funds are the vanguard of a financial revolution. Once little known and secretive fringe forces, they have become leading actors in reshaping the corporate world.
Enticement For Unsuspecting Customers (18)
Just look at all the discounts that they offer to make sure that more and more people do business with them. First of all, credit cards are no longer the privilege of the wealthier sections.
The Truth About Real Estate Financing (19)
A lease-option on the property will allow you to establish a good purchase price now, and then apply a portion of the rent each month toward your down payment, building equity in the process.
Comparison-Making In The New Millennium (20)
If you want to have the best of everything, you have to get rid of all the rubbish first. Seeking credit? Remember to compare! Compare credit cards at www.comparethem.co.uk compare loans at www.comparethem.co.uk compare mortgages at www.comparethem.co.uk
Permalink to Too Much Income Can Be Hazardous To Your Financial Health