Bond Exposure

[Berkshire_Bull]

I recently sold 2500 of my Health Grades shares (about 14%) and received $10,500 for it. I am 21 for those of you that don't remember, but I have no bond exposure. What would you guys suggest for a bond investment, if any. I would probably put about $11,000 into a bond investment if I chose to, and this would represent about 6% of my total investments. Thanks.

 

[charlie]

You might want to wait until May 1 to check out the
new I-bond rates. I expect they will raise the real
rate a little and I believe the CPI part will be up.
Currently I-bonds pay 3.67% but don't be surprised
at 4+ after May 1.

Otherwise, Penfed is paying 5% for 3 year CD's.
Best in show I believe.

Cheers,

Charlie

 

[BUM]

BB

Dont forget to check out muni bonds. I bought FNYTX over 20 years ago and I still have it and have no intention of selling it. A small amount of GM bonds my be worth a look.

BUM

 

[wildcat]

BB -

I am doing a pretty interesting research paper on Fed policy and investments as we speak. I don't know but your interest in bonds kind of got me thinking about it. According to the research it may not be a bad idea to get some exposure to bonds, regardless of your age, especially if the Fed continues to raise int rates. I thought it was pretty amazing how stocks & Fed policy move in opposite directions (almost like clockwork) even though it may seem obvious. Standard deviation for equities increases substantially during times of increasing int. rates. However, we are still historically low but it is something to watch.

But to answer your question I started to throw a little money in Vanguard Wellesey Fund (not a true bond fund but still). I am young as well and I wanted some bond exposure but I also like the fact that it includes some high div paying equities for a lil cap appreciation over time.

 

[BUM]

Good move wildcat. I'm impressed when the younger generation makes responsible investment choices instead of buying a new bong.

 

[wildcat]

Thanks BUM...I did some ROI calcaulations on stocks/bonds vs. bongs & stocks/bonds came out on top.

 

[Martha]

I bet bongs from the 60s are collectables now. Antiques Roadshow here I come!

 

[cute fuzzy bunny]

Yeah but you care less about your investments if you include the bong asset class.

Last time I looked, having less than 20% bonds in your portfolio increased volatility without increasing returns, while having less than 20% equities reduced returns without reducing volatility.

So somewhere between 20/80 and 80/20 is the sweet spot.

Of course, the types of equity and bond make a big difference. Look at Wellesley with a 35/65 mix of large cap value and intermediate bonds...has similar long term return rates to the S&P500 and other all or high equity funds...

Besides bond terms, credit quality and interest rate sensitivity, each type of bond 'moves' quite differently from others...high yield, muni, treasury, financial, etc. Good bond asset allocation is just like good stock asset allocation...some are more appropriate for accumulators, some more for those already in retirement.

Several pundits suggest that the only bonds you ever need to own is something akin to vanguards short term investment grade fund. I dont necessarily disagree with them, although I also own some GNMA, High Yield and until recently some california munis.

 

[tryan]

... don't forget John Bogle says include SSI and pension $$ as bond exposure (14x annual payout). That's enough for me!

So we all have more bond exposure than we realize (if your a Bogle fan).

 

[cute fuzzy bunny]

...and if you actually receive any SS payments or pension outlays...

 

[laurence]

After not having any bonds for some time, I am now 10% in Wellington (20% of my 401(k), my wife's doesn't have that choice), so I guess I have bond exposure now.

I was in a head shop once, they had a sign up saying "WE SELL WATER PIPES, ASK FOR THE B WORD AND YOU WILL BE AKSED TO LEAVE."

...who are they kidding?

 

[Berkshire_Bull]

I don't know a whole lot about the intricacies of bonds, so at the risk of sounding silly I'll ask anyway.  GM bonds may prove to be a very smart purchase, especially the bonds maturing within the next three years.  Most people would agree that GMAC bonds/notes are safer than the regular GM bonds.  What is the difference between these securities: General Motors Acceptance Corp, and General Motors Acceptance CPS SMARTNBE?  

 

[wildcat]

GM bonds are prob a safer bet than the dang stock too

 

[brewer12345]

I don't know a whole lot about the intricacies of bonds, so at the risk of sounding silly I'll ask anyway.  GM bonds may prove to be a very smart purchase, especially the bonds maturing within the next three years.  Most people would agree that GMAC bonds/notes are safer than the regular GM bonds.  What is the difference between these securities: General Motors Acceptance Corp, and General Motors Acceptance CPS SMARTNBE?  

Its hard to tell from what you have posted, but I strongly suspect that they are basically the same thing. Smartnotes is a retail platform for selling corporate bonds to retail customers. There is no real difference between SmartNotes and GMAC unsecured bonds. Its probably an attractive opportunity if you keep the maturity within the next two or three years.

 

[laurence]

I'm confused, the bonds are yeilding something like 9% right now, right? Do you only have to pay face value, or is the market "pricing up" the bonds to reflect the high yield? Do you have to pay $110 for a $100 bond, for example. Sorry, I know nothing about direct bond purchase, tried to figure out how to do it with my on line broker and got totally confused.

 

[Mr._johngalt]

I'm not confused (or if I am I don't know it)

My GMAC bonds are giving me 7.25% on average.
If I had some available funds I would buy more
(no kidding). The borderline junk status doesn't bother
me much. I have some other "junk" too, but you
shouldn't put all your eggs in any one particular basket.

JG

 

[Berkshire_Bull]

Are GMAC bonds safer in the respect that GMAC is profitable and should GM declare bankruptcy GMAC would remain solvent and continue to pay on their bonds? The spread between GM and GMAC is about a full percentage point. I would assume it's because of the risk.

 

[cute fuzzy bunny]

I would question the length of happiness GMAC would experience should GM declare bankruptcy.

A whole giant heap o' their business is from GM subsidized loan deals and heavy rebate programs from the mother ship.

GM goes bankrupt, all those rebates and subsidies may not be available anymore. Then GM isnt netting a bazillion no-competition 0.9%, 2.9% etc deals. They're slugging it out with your credit union and the local small bank for your business...

A lot of people like to say the market is efficient. When bonds are paying at this price point, theres a reason. The reason is that you're quite likely to lose your capital.

Look at vanguards high yield...its considered fairly 'safe' by below investment grade standards. I think the last number I saw was that they're seeing a 25% default rate on their holdings. These GM bonds are paying about 25% higher yields than the vanguard fund does.

Do the math...

 

[Berkshire_Bull]

So you think the Vanguard High yield is the way to go? Some guys were talking about GIM a while back. GIM looks more unstable than VWEHX though. It's more volitile. Any thoughts, VWEHX vs. GIM?

 

[Mr._johngalt]

Jumping back to GM briefly. As you know I don't expect
GM to go bankrupt in my lifetime, but let's suppose they did. It is possible for GMAC to sail on even without GM
support. Obviously it wouldn't look the same, but there
is plenty of history to support basically healthy
companies continuing on after the parent organization
has folded or reorganized. I don't believe it will ever
come to that though.

JG

 

[charlie]

Hi Bull,

IMHO you should stay with the safe stuff like I-Bonds
and CD's while you are building up your FI account.
You can always branch out into High Yield and GIM
later on.

At your age you never know when you will want the
down payment for a house, etc. You can always
count on getting your money out of I-bonds and
CD's when you need it. The volatility of High Yield
and GIM might cause you some heartburn if you
wanted to sell them at the wrong time.

Cheers,

Charlie

 

[cute fuzzy bunny]

Sorry if I gave the impression that I liked vanguards high yield. In fact, you arent getting paid well enough to take on the risk of most high yield right now. I cant see a single high dividend paying bond thats worth the capital risk.

Johnny...not one captive finance company that i'm aware of has survived the demise of its corporate sponsor. I'm still praying for ya.

 

[Berkshire_Bull]

Thanks for the responses. It seems like we're between Vanguard Total Bond VBMFX and Global Income GIM. What would be best for me? I am really torn between the two. I see advantages and disadvantages to both.

 

[Berkshire_Bull]

I was snooping around on the Vanguard website. Anyone like VFIIX, Vanguard GNMA Fund? They look a little less volitile than the Vanguard Total Bond and yield a little higher.

 

[Spanky]

Several pundits suggest that the only bonds you ever need to own is something akin to vanguards short term investment grade fund.

This seems too conservative to me.