Bond Basics: Bond Price And Yield Relationship
One of the more confusing aspects of bond investing is the relationship of bond price and yield. As bond investors we want high prices and high yields but it’s just not possible. At least not at the same time. This is where the confusion begins. In a time where interest rates are at all time lows, understanding the bond price and yield relationship is important.
Bonds play an important part of every portfolio. The basic asset allocation strategy says to have your age as the percent of bonds in your portfolio. I could argue for more or less based on risk and current yields, but that’s a post for another day. The bottom line is we should have some bond exposure in our portfolio. For now, lets just stick to the basics of the bond price and yield relationship.
Bond Yield
New bonds are issued at face value (par), with a time to maturity, and a yield (coupon rate) that involves several factors including risk. Bond yield is the return you will receive if you hold the bond till maturity. It’s in annual percentage form. So a bond with a 5% yield, will pay a 5% return each year until the bond matures. Read more…
Build Your Own (Cheaper) Mutual Fund
Two of the biggest arguments against mutual funds are high costs and poor performance. When your mutual fund starts under performing and increasing costs, instead of finding another mutual fund money sink, build your own.
When a mutual fund is started, it’s built around a goal. Something that easily explains to investors how all that money will be invested. There’s a hitch, though. With an active manager you just never know how much they veer off course from that goal. And when they fail, it only costs you more. Which is just one of many limitations.
Costs limit your investment performance. There is no way to cut costs entirely. So we have to focus on keeping it to a minimum. This keeps more money invested and growing over the years.
Then there is the performance issues. Your money has a goal (at least it should have a goal). So you search through all the possible funds to, hopefully, find a few that sync up with your goal and don’t eat away too much of your profits.
It all works out for a while until the cost and performance of those mutual funds don’t live up to expectations. So you look for another fund to put your money in and the cycle starts all over, compounding the costs.
Of course, there is another, cheaper option. Read more…
What Type Of Investment Strategy Should You Use?
People are constantly on the lookout for the perfect investment strategy. That Holy Grail of constant profitable returns. Unfortunately, no strategy is perfect in the sense that it will guarantee good returns. In fact, I’ll argue that only having one strategy limits our ability to invest profitably.
Currently, investment strategies are a popularity contest. The strategy with the best returns last year or the one most recently written about, tends to get the most attention. Good for the strategy and book publishers, but is it best for new investors just starting out? Hardly! Because what works for me may not work for you. Instead, it should come down to your comfort level, knowledge (hopefully), time, and your financial situation.
Trading Strategy
Trading is definitely not for everyone. It’s time-consuming, stressful and short-term oriented. Trading can have a timeline of seconds, days, weeks or a couple of months. But the goal is to reach a target price, sell, and walk away. Traders take advantage of short-term trends, news, and speculation to make fast money.
An extreme example of this, Read more…
The Benefits Of Tax Free Bonds
Tax free bonds can be a great investment that lowers your tax obligations while still maintaining a fixed passive income. These bonds generally come in the form of municipal bonds or Treasury bonds. The tax advantage comes into play on the interest earned. Which can be exempt from your state, local, or federal income tax. Making tax free bonds a favorite investment among retirees and individuals in higher tax brackets.
Municipal Bonds
Municipal bonds are bonds issued by states, cities, and counties for funds to build public projects. That new school, hospital or highway being built in your area is probably funded through a municipal bond. The local government gets the funding up front which usually gets the project started and finished sooner.
The interest income from tax free municipal bonds is exempt from federal income tax. Depending on the state you live in, it may also be exempt from state and local taxes, too. Generally, the higher your tax bracket the more benefit you’ll get from a tax free municipal bond. One thing to note, you’ll get no added tax benefit by holding these bonds in an IRA or retirement plan. Since the IRA or retirement plan already offers tax exempt status, you’re better off looking into taxable municipal or corporate bonds. Read more…
Protect Your Portfolio With A Little Defense
When you see market corrections or moves like we have the past few days, things have a tendency to look more ominous than they really are. The markets don’t like uncertainty and that is exactly what they’re getting. With uncertainty you get high price fluctuations in stocks, bonds, and commodities, which is great for traders but tough to watch for the average investor.
On top of all this is the looming inflation rise. One of the most overlooked aspects of investing is inflation. In the past year inflation has become a daily discussion on all the major business news sites. If you listen to the experts you get a multitude of opinions about inflation and where it’s heading. All the economists have there own opinion as to when a rise in inflation will occur, but rather than waiting for it to happen, we should be protecting our investments from the coming inflation rise and uncertainty. Read more…
