Smart Saving and Investing

On this blog, Smart Saving and Investing, I concentrate on three financial tasks that many people can do:

1. Save money on a regular basis automatically by opening up an online savings account and linking it to your bank checking account to make sure the online savings account is funded every pay period automatically.
2. Participate in their employer’s retirement plan, which forces you to automatically invest because it most likely comes right out of your paycheck and you’ve been forced in away to live without it.
3. Open and invest in a Roth IRA. This takes some extra effort because you have to try and found out how you’re going to do this by opening up the Roth IRA somewhere and try and automatically fund it. Which also brings up questions like, “How am I going to fund my Roth IRA and where am I going to fund it at?”

Although these three actions sound simple, taking action to get these in place requires effort. It also takes effort to decide what to invest in. Which typically brings confusion and for a lot of folks, no action taken.

Well, depending on your age and your ability to stomach these markets that are going crazy lately, bonds can and do play an important part of your investment portfolio.

We’ve been taught that bonds are a more conservative investment because they are fixed investments and can ride out the markets ups and downs. While you watch your stock mutual funds go up and down, bonds sit there and provide stability. Which is kind of cool to watch when your stock mutual funds start falling.

I would start investing in Bond Funds at 50 depending on what I’ve accumulated in my portfolio over the years. However, I do know that some folks get queasy watching all the money they’ve invested over 10 or 20 years go up and down so dramatically no matter what age they are and Bond Funds would give them a more stable feeling through those times.

Therefore, if you’re going to invest in Bonds, invest in Bond Funds. Why? Because Bond Funds have the following benefits:

• professional management
• diversification of the different types of Bonds can be held in a Bond Fund
• invest in no-load Bond Funds to reduce expenses and transaction costs
• you can Dollar Cost Average* into a Bond Fund to build your Bond position over time
• it’s more convenient to buy Bond Fund than Bond individually
• with any income produced by the Bond Fund it can be automatically reinvested in the fund

* - Dollar Cost Averaging is when you invest the same amount on a regular basis to achieve the best average price. If you invest $50.00 every month and your bond mutual fund goes up, you buy less shares, if the bond fund goes down, your $50.00 involvement buys more. Over time, your average price is lower than if you tried to time the market and buy when you think it is right to buy.

There are a lot of Bond Fund types: U.S. Government Funds, Corporate Bond Fund, Municipal Bond Funds, Bond Index Mutual Funds, Multi-Sector Bond Funds, Convertible Bond Funds, Ultrashort Bond Funds, International Bond Funds, and Emerging Markets Bond Funds to name a few.

How to decide to include Bond Funds in your portfolio:

• Where are you at in life in terms of age and current portfolio holdings
• What is your risk tolerance (what makes you sleep at night)

Vanguard Group, Inc founder John Bogle recommends holding a bond position equal to your age. So if you’re 50, you’d own 50% of your portfolio in a bond index fund. When you turn 60 you’d have 60% in a bond index fund, etc. He also mentions that other investment professionals have called that too conservative. Mr. Bogle mentions you could also use your age minus 10 as well. So if your 50 years old then you’d have 40% in a bonds index fund.

I would suggest that when you’re in the accumulation stages of life, your bond fund exposure be 0% if you are under 50 years of age.

When you hit 50 years old, you might want to include one of the funds below. I’m more on the aggressive side of investing so I would hold something like 20% to 25% in bond funds or a balanced fund that owns a portion of stocks and a portion of bonds.

At 60 years of age I might look at 30% to 40% of my portfolio would be in bond funds. Even at 70 years old, I still would be involved with some aggressive investments but it would be below 40% of my portfolio, with bond funds occupying over 50% to 60% of my portfolio.

With all that out of the way here are the funds we’ve discussed and you can look at for your portfolio.

• Vanguard Total Bond Market Index, symbol VBMFX - A good one for the indexers out there
• T. Rowe Price Capital Appreciation, symbol PRWCX - roughly a 50/50 split of stocks and bonds
• Leuthold Asset Allocation, symbol LAALX - Note: Although this doesn’t have a long track record the manager does have a great track record at another fund he managed.

written by Bill Stevens

In part one of this series on All About Bonds, I covered the three main types of Bonds - U.S. Government Bonds, Municipal Bonds and Corporate Bonds.

I also introduced a fund that holds approximately 50% stocks and 50% bonds, called the T. Rowe Price Capital Appreciation fund, symbol PRWCX. I also included an index bond fund called the Vanguard Total Bond Market Index, symbol VBMFX.

For our purposes at this site, we’ll concentrate on Bond Funds and not purchasing bonds individually just like we’re not focusing on purchasing individual stocks at this site, but investing in Mutual Funds that hold stocks.

Interest rates play a big role in how bonds perform. So much so, that interest rates drive the bond market. You might have heard before, “When interest rates go up, bond prices go down and when rates go down, bond prices go up.”

As the S&P 500 is used to compare returns of a mutual fund, the 10-year treasury note has become the standard measuring stick for bonds for some folks.

There are many investment “Grades” when it comes to bonds. Grades include the following:

• Highest Grade - AAA - these bonds carry the smallest amount of risk and are the safest
• High Grade - AA - very small amount of risk but not as good as AAA
• Upper Medium Grade - A - still a very small amount of risk but might be sensitive to adverse economic changes
• Medium Grade - B - these are still acceptable bonds but might be sensitive to adverse economic changes

There are many grades but we don’t want to go below “B” grade.

As you compare buying bonds individually to buying stocks individually, you find that you would watch some of the same attributes of stocks as you do bonds. Some of those attributes include:

• Risk - there is some risk with bonds even though they are considered safer than stocks
• Inflation
• Bond Market
• Trading Bonds
• Tax Issues
• Interest Rates
• Capital Gains and Losses
• Economic Indicators

With all the above similarities as stocks, I would pursue Bond Funds instead of owning Bonds outright. There are many different aspects to the three types of bonds that would fill a book, so I’ll defer to, well, books and websites that specialize in bonds.

For a more indepth view on Bonds visit the Investing In Bonds website.

The final Part 3 of this bond series will discuss Bond Funds and Bond Strategies.

written by Bill Stevens

The New Home Run King!!

Barry Bonds is all the talk lately with his record setting home runs now at 756, 1 better than the great Hank Aaron. Barry Bonds now stands alone. Bonds set this record Tuesday night, 8/7/2007, in San Francisco against Washington.

Well, one Bond fund that doesn’t stand alone but ranks in the top 1/4 of all Corporate Bond funds is the Westcore Plus Bond Fund, symbol WTIBX. From our All About Bonds - Part 1 series we know that corporate bonds are higher risk and provide corporations to pay for large projects such as new plants, acquisitions and other major investments.

Another top notch Bond fund is the Loomis Sayles Bond Fund, symbol LSBRX. Manager Dan Fuss has done an excellent job with this bond fund.

These two Bond funds you would hold for down markets and is a smart part of asset allocation. When your equity (stock) mutual funds are reacting with big swings due to these market ups and downs both these funds in your portfolio will help balance it and provide you some peace of mind.

These Bond funds are going to hold their value when we have a down turn in the market but not go up as much when you see your equity (stock) mutual funds go up as if their on steriods. You’ll also see the value of your Bond funds rise as interest rates go lower, whenever that might be.

But again, even though these Bond funds are considered aggressive as far as Bond funds go, they also provide balance for our over all portfolio. If you own an all equity (stock) mutual funds portfolio and you get sick when you see the value of your portfolio plummet with these markets lately, then that means you should be looking at Bond funds to help give that non-sick feeling of the wild swings we experience in the markets.

Asset Allocation, Asset Allocation, Asset Allocation. I’ll provide a definition on this site soon.

Below are the stats on the Westcore Plus Bond Fund (Morningstar):

written by Bill Stevens

So what are Bonds anyway?

Bonds represent a loan. For example, if you lend the U.S. government some cash in the form of a U.S. Government Bond for the amount of $xxx.xx, they will promise to pay you $x,xxx.xx sometime in the future as determined by the bond.

There are a variety of Bond types that come from various issuers. An issuer is an entity. An entity is a…, well you get the point, I hope. Issuers include the U.S. government, state and local governments, and corporations.

Bonds create a balance in our portfolios and are typically viewed as a conservative investment. Bonds tend to provide you with a steady stream of income and react differently to how stocks react to market conditions.

A lot of investment pros will tell you, “When interest rates go up, the value of bonds go down.” Likewise, “When interest rates go down, the value of bonds go up.” We’ll discuss this in a future article for this series on “All About Bonds.”

Depending on what makes you sleep at night or how you handle watching the markets go sky high one day and fall to earth hell another day, helps you determine if and when you should invest in Bonds.

Through years of investing, I wouldn’t look at bonds until you’re 50 years or older because prior to that age, you should be in the growth stage of investing by way of Mutual Funds, that is, stock mutual funds or what they also call equity mutual funds.

As a reminder, this site promotes three actions, open and contribute monthly and automatically to an online saving account paying 5.05% at the current time, 2007. Participate in your employer’s retirement plan and open and invest in a Roth IRA. See the About page for what context I’m writing in.

Ok, back to bonds. Here’s a quick list of bond types.

U.S. Government Bonds include:

• Treasury Bills
• Treasury Notes
• Treasury Bonds
• Savings Bonds
• Treasury Inflation-Protected Securities
• Agency Securities

Government bonds are considered the lowest risk and safest of bonds because they are backed by the United States government.

Municipal Bonds (”munies”) include:

• General and
• Revenue

They provide for state and local governments to fund projects like building stuff - roads, bridges, etc. These are attractive to high tax bracket folks because they are except from federal income tax on the interest the bonds pay. As an added benefit, if the municipal bond is withing your state, it could be exempt from state and local income tax.

Our good and well respected friend Suze Orman invests in Municipal Bond:

What does Orman do with the rest of her money? Solomon asked, and was told: “Save it and build it in municipal bonds. I buy zero-coupon municipal bonds, and all the bonds I buy are triple-A-rated and insured so that even if the city goes under, I get my money. I take a little lower interest rate to make sure my bonds are 100 percent safe and sound. “ Source

Corporate Bonds include, well:

• Corporate Bonds Companies can finance many different projects by way of Corporate Bonds. These are considered the more higher risk bonds.

That’s it for the types of bonds we’ll discuss in this post.

A great resource for U.S. Government Bonds is the website Treasury Direct. This site is also helpful for folks who might have parents who have passed away and held EE Bonds from years ago. You can find out what they are worth by entering the bond serial number and issue date at the website. This is something I had to do this year.

To end, here is a fund for those folks who can’t stomach or don’t want to stomach the huge swings in the market. The fund is the T. Rowe Price Capital Appreciation fund, symbol PRWCX. It holds approximately 50% stock and 50% bonds. The fund has never had a down year in the last 10 years. It has averaged 12+% the last 5 and 10 years time horizon.

For the indexers out there here is an index bond fund.  The Vanguard Total Bond Market Index, symbol VBMFX.

written by Bill Stevens