Bonds -- want a few opinions

[Carl_William]

Subject: wanted: a few opinions.

I have a much diversified portfolio – probably too many items. I have about 30 stocks (all types) and 10 mutual funds. I am currently letting all of my short term Treasury Bills & Notes mature because of the almost nothing yields. I’m retired & I estimate that I got maybe 12% of my invested dollars in about 5 bond mutual funds. I looked at charts for these funds and noticed that they are all up about 20% for the last three years. What I am concerned about....

The current interest rate(s) are low which is buoying up the bond mutual funds. But when the rates start to reverse (go up -- who knows when): I figure the bond funds will initially probably drop like a rock. I guess you young guys know better than to mess with bond funds. But maybe some of the older guys have some advice.

Thank you

[Ray Zee]

if you think rates are going up,move your bond funds to ones with shorter maturites, say one to three years. then the funds will only go down in value aproximately what the interest rate goes up.
if you feel rates are going to rise, then a money market fund gets you safety and the rise of the rates, but no appreciation.
you can also short rates some to protect you, but that may not be for you.

you should know are length of maturity for all your funds, as you can get blasted by being lazy.

make sure you are comfortable with the % of you total assets that are in financial markets. i personally would sweat having more than 30% in them.
good luck old timer.

[adios]

From what I understand one of the favorite hedge fund strategies over the past 3 years is long treasuries short stocks. In general bonds have slaughtered stocks performance wise over the last 3 years. You've got 5 bond mutual funds but didn't say much about them. Personally as far as treasuries are concerned I think you've seen the vast majority of the capital gains you're going to see. I don't think the Fed is inclined to lower rates any time soon even though the economy is kind of weak. There is a fair amount of talk about what the Fed can do to spark the economy and one of the things that I'm hearing about is the Fed buying treasuries like they're going out of style. Then on the other hand the government is going to be selling a lot of treasuries to finance the war and the deficit. Higher grade corporate bonds have done fairly well I believe over the past six months due in part to companies deleveraging their balance sheets. Haven't done a complete survey but yields seem rather low. Lower grade corporates and junk bond funds have done well I believe but some knowledgable folks tell me that there's still a lot of default risk in that sector. From what I understand the hottest bonds are Mortgage Backed Securities (MBS) right now as there is a decent spread between high grade MBS and treasuries. Depending on your risk tolerance you might want to move those bond funds to MBS type funds. If you've wanted to speculate a little I'd recommend mortgage REITs AHR, NFI, and IMH. Disclosure: I own all three. Also if you're in a taxable account I'd look at muni bond CEF's which I posted about awhile back. In the past 2 months since I started tracking them, they're up 3.65% on a total return basis which is annualized to about 20%. The yields are basically between 7% and 7.5% as the yield is tax free.

I found this great sight for CEF's called:

Exchange Traded Funds Including CEFs

There are a lot of these CEF's that are income oriented and selling at a discount to Net Asset Value.

[GeorgeF]

1) If you are worried about inflation pushing interest rates up buy TIPS. Either the www.vanguard.com fund or the I-bonds from treasury direct. (If you are Canadian I beleive they have their own TIPS bonds)

2) You should consider currency diversification. I use GIM TEI FCO FAX. An internation bond mutual fund (try www.PIMCO.com) would work here too. www.everbank.com is also worth a look. www.cefa.com or www.etfdirect.com for ideas.

3) A vanguard GNMA fund would yield more. You could also buy mortgage REITS like NLY. These are volitile and dangerous so don't get greedy. PIMCO total return might be worth a look.

4) Consider other income investments like REITs and dividend stocks, maybe a precious metals or natural resources fund.
4) Other posters suggested hedging strategies, I doubt that individual investors can implement those, you are better off diversifing away your risk.

5) consider subscribing to www.bobbrinker.com or just listening to the radio show.

6) look around www.vanguard.com and www.pimco.com for fund ideas.

[Wildbill]

One thing I would say is you might be a good candidate for just buying bonds themselves and forgetting about bond funds. Your time horizon isn't long like most people that discuss these matters here and you haven't gone crazy with only 12% of your money in them. Despite the fear of rising interest rates, the time hasn't come yet and the long rates have creeped up somewhat so if you look longer-term then even if rates go up somewhat I doubt you will be hurt that bad. Put simply its hard to lose 20% of your capital in bonds, while it happens over periods of time often in equities. To be safe, you should take your maturing t-bills and go into short-term and medium-term bond funds. A little more risky, but almost always worth it for the good sized kick they give to your returns.

At your position I think the best advice I have always heard is to stagger your money with a long horizon just as working people are told. If you plan on living 20 years from now, you will be best served to have some equities investment and treat it as a 20-year investment. Figure out what you need for 5 years and put that in short-term investments. For the 10 year phase go about 50/50 bonds and short-term stuff. For the 15 year phase go 70/30 with the 70 for bonds, 30 for stocks. For the 20 year and beyond go 50/50 bonds and stocks. In the end you will get a balanced portfolio, but without paying a broker or fund company to do it for you. Even better it puts your horizon of funding in better perspective and forces you to set realistic budgets.