Tag Archives: Bonds

Is your money going in the right direction?

An acquaintance recently asked me how his money should be invested.  With banks paying virtually zero on savings, it’s a question on everyone’s mind.  Should he invest in stocks or bonds? If it’s stocks, what kind: Growth, Value, Small Cap or Large Cap, U.S. or Foreign?  The same can be asked of bonds: government or corporate, high yield or AAA, taxable of tax free?  That’s a question that faces many people who have money to invest but are not sure of where.

It’s a dilemma because we can’t be sure what the future holds. Is this the time to put money into stocks or will the market go down? If we invest in bonds will interest rates go up … or down? How about investing in some of those Asian “Tigers” where economic growth has been higher than in more developed countries?

There is no perfect answer. We are not gifted with the ability to read the future. And what is this “future” anyway? Next week? Next year? Or 20 years from now when we will need the money for retirement?

We know that generally, people who own companies usually make more money that people put their money in the bank. Another word for “people who own companies” is “stockholders.” That’s why, over the long term, stockholders do better than bondholders. On the other hand, bonds produce income and are generally lower risk than stocks. So my first answer to the question I was asked is: invest in both stocks and bonds.

Choosing the right stocks and bonds is a job that is best left to professionals. That’s the benefit of mutual funds. Mutual funds pool the money of many investors to create professionally managed portfolios of stocks and bonds. They are an easy way of creating the kind of diversification that is important for reducing risk.

To circle back to the original question our friend asked: the answer is to create a well diversified portfolio. We know that some of the time stocks will do better than bonds, and vice versa. We know that some of the time foreign markets outperform the U.S. market. We know that some the time Growth stocks will do better than Value stocks. We just don’t know when. So we select the best funds in each category and measure the over-all result. With so many funds to choose from, the smart investor will get help from a Registered Investment Advisor like the folks at Korving & Company.

Call us for more details.

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Would You Make a 0% Interest Loan?

Did you know that the U.S. Treasury has sold $1 trillion (yes, trillion with a T) dollars worth of Treasury bills that pay no interest? Why would anyone lend out his or her money without charging interest? One answer might be because the alternatives seem worse. In fact, for a brief moment in 2008 investors were willing to earn negative interest and actually pay for a U.S. Government guarantee to get back less than they put in!

To understand the alternatives you have to realize that the people who do this are not mom and pop investors. They are the huge players who round to the nearest million and deal in billions of dollars. They don’t have the option of putting their money under the mattress.

These people don’t deal in physical dollars, so when they raise cash it has to go somewhere else. Not doing something with their money is not an option. When both stocks and bonds are going down, the only relatively safe haven is the U.S. Treasury market, and the safest part of that market is short-term Treasury notes. When there is not a big enough supply of notes but you need to buy anyway, you accept a negative interest rate.

Of course, individual investors have been willing to leave their “safe” money in money market accounts paying virtually zero percent for several years now. That’s a rational decision since literally putting your money under your mattress or burying it in the back yard leaves you vulnerable to thieves and robbers. But it may make the smaller investor feel better that the “big boys” with their billions are sometimes worse off than the retail investor when it comes to finding a safe haven.

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