{"id":27958,"date":"2012-03-05T10:10:59","date_gmt":"2012-03-05T15:10:59","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/03\/05\/investing-in-bonds-three-steps-to-smarter-bond-investing\/"},"modified":"2012-03-05T10:10:59","modified_gmt":"2012-03-05T15:10:59","slug":"investing-in-bonds-three-steps-to-smarter-bond-investing","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/03\/05\/investing-in-bonds-three-steps-to-smarter-bond-investing\/","title":{"rendered":"Investing in Bonds: Three Steps to Smarter Bond Investing"},"content":{"rendered":"<div align=\"left\"><script type=\"text\/javascript\">\ntweetmeme_style = 'compact';\n<\/script><br \/>\n<script type=\"text\/javascript\" src=\"http:\/\/tweetmeme.com\/i\/scripts\/button.js\"><\/script>\n<\/div>\n<p>At our <em><a href=\"http:\/\/oxfordclub.com\/video\/oxf\/OCSP0212.php?code=WIUPMA05&amp;n=IUP\" target=\"_blank\">Oxford Club<\/a> Chairman\u2019s Circle <\/em>conference at The Ritz-Carlton in Naples last week, I noted a decided optimism about the outlook for the bond market. This enthusiasm is almost certainly misplaced.<\/p>\n<p>We\u2019re at the tail end of the biggest 30-year rally in bonds the nation has ever seen. Recall that three decades ago, Fed Chairman Paul Volcker pushed the prime rate all the way up to 21.5% to squelch inflation. Long-term Treasury yields reached 16%. But from that pinnacle, long-term yields have plummeted to around 3% today. Bond prices have soared accordingly.<\/p>\n<p>It isn\u2019t just unlikely that today\u2019s bond buyers will see annual double-digit returns going forward, it\u2019s mathematically impossible. And yet I sense that many fixed-income investors don\u2019t understand this.<\/p>\n<p>It\u2019s not unusual to meet an investor who has plunked money in a <a title=\"High Yield Bond Funds\" href=\"http:\/\/www.investmentu.com\/2005\/January\/20050131.html\" target=\"_blank\">bond fund<\/a> because \u201cits long-term track record is excellent.\u201d They don\u2019t seem to realize that it\u2019s also irrelevant. Never has the old saw, \u201cPast returns are no guarantee of future results,\u201d been more apropos.<\/p>\n<p>This doesn\u2019t mean you should avoid bonds altogether, of course. But if you\u2019re going to buy bonds, now more than ever you need to be smart about it. Here\u2019s what you should do:<\/p>\n<ol>\n<li>Ladder your maturities. You should buy two-year, five-year and 10-year bonds. If rates go up \u2013 as they will eventually \u2013 your bond prices will fall, temporarily. But you will get your principal back at maturity and be able to reinvest your principal at higher rates. And paltry as bond yields are today, they still beat the heck out of the 0.05% that the average money market fund is paying.<\/li>\n<li>Keep a close eye on expenses. In the world of fixed-income investing, keeping a Scrooge-like eye on expenses is essential. Why? Because it\u2019s difficult to work magic in the button-down world of fixed-income investing. Managers rarely earn their fees. And 12b-1 fees can eat away at your returns like termites in an antebellum house. My advice is to stick with individual bonds, Vanguard funds (whose expenses are one-sixth of the industry average) and low-cost ETFs.<\/li>\n<li>Avoid leveraged bond funds. Ever wonder how bond yields can be so low and yet the yield on your closed- or open-end bond fund is higher, even after expenses? Open your eyes. Unless you\u2019re holding <a title=\"Junk Bonds: Why One Man\u2019s \u201cJunk\u201d Is Another Man\u2019s Treasure\" href=\"http:\/\/www.investmentu.com\/2007\/November\/junk-bonds.html\" target=\"_blank\">junk bonds<\/a>, your fund manager is using leverage, the fixed-income equivalent of buying stocks on margin. By borrowing cheap, he or she is leveraging the portfolio to add yield. This works just fine while bond prices are flat or rising. But when bond prices fall \u2013 as they will when interest rates rise \u2013 these shareholders will take a shellacking. Consider yourself forewarned.<\/li>\n<\/ol>\n<p>Some <a title=\"2012 Predictions for Income Investors\" href=\"http:\/\/www.investmentu.com\/2011\/December\/2012-predictions-income-investors.html\" target=\"_blank\">fixed-income investors<\/a> tell me they feel safe for now since Bernanke has pledged to keep interest rates low through 2014. Think again. The Fed has only announced its <em>intention<\/em> to keep rates low. (Future economic conditions could quickly change that.) The Fed is also keeping long-term bond yields artificially low by buying these instruments to goose the economy.<\/p>\n<p>Inflation could tick up. The Fed could raise rates and\/or quit buying <a title=\"Long-Term Treasury Bonds: Consider Yourself Warned\u2026\" href=\"http:\/\/www.investmentu.com\/2010\/July\/long-term-treasury-bonds.html\" target=\"_blank\">long-term Treasuries<\/a>. In the end, the Federal Reserve sets short-term interest rates, but not bond yields and prices.<\/p>\n<p>Know this. Understand it. And act accordingly. Bond investors today should be in a defensive posture, capturing higher yields than what\u2019s available in cash instruments, but prepared for that point in the future when bond yields will rise and prices will fall.<\/p>\n<p>Good Investing,<\/p>\n<p>Alexander Green<\/p>\n<div>\n<a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=BvLNtjhavgk:zHVkFn2Lc-8:yIl2AUoC8zA\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=yIl2AUoC8zA\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=BvLNtjhavgk:zHVkFn2Lc-8:V_sGLiPBpWU\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=BvLNtjhavgk:zHVkFn2Lc-8:V_sGLiPBpWU\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=BvLNtjhavgk:zHVkFn2Lc-8:qj6IDK7rITs\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=qj6IDK7rITs\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=BvLNtjhavgk:zHVkFn2Lc-8:gIN9vFwOqvQ\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=BvLNtjhavgk:zHVkFn2Lc-8:gIN9vFwOqvQ\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=BvLNtjhavgk:zHVkFn2Lc-8:F7zBnMyn0Lo\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=BvLNtjhavgk:zHVkFn2Lc-8:F7zBnMyn0Lo\" border=\"0\"><\/img><\/a>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/InvestmentU\/~4\/BvLNtjhavgk\" height=\"1\" width=\"1\" \/><\/p>\n<p>Article by <a href=\"http:\/\/www.investmentu.com\/\" target=\"_blank\">Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"<p>At our Oxford Club Chairman\u2019s Circle conference at The Ritz-Carlton in Naples last week, I noted a decided optimism about the outlook for the bond market. This enthusiasm is almost certainly misplaced. We\u2019re at the tail end of the biggest 30-year rally in bonds the nation has ever seen. Recall that three decades ago, Fed &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/www.investmacro.com\/fx\/2012\/03\/05\/investing-in-bonds-three-steps-to-smarter-bond-investing\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Investing in Bonds: Three Steps to Smarter Bond Investing&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-27958","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/27958","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=27958"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/27958\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=27958"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=27958"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=27958"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}