Fixed income investments

T

TwoByFour

Recycles dryer sheets
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When I think of a fixed income bucket, I think of an investment that not only pays a steady income stream but also protects the principal from both loss and from inflation.

Bonds are the most obvious answer but the options these days are pretty thin, especially if you want something the can be liquified at any time. TIPS are not liquid enough and I Bonds have a 10k yearly limit.

Bond funds all have risk since the yield varies inversely to interest rates and it is highly likely that interest rates will climb when the Fed shuts down QE.

My investment strategy heavily weights equities, but still I need to maintain a stable, low risk, safe haven for 20% or so of assets. I want this safe haven to have 1, 3 and 5 year maturities. I just cannot get comfortable with any of the fixed income options. Well, for the 1-year bucket I will probably just get a CD.

Any thoughts on this?
 
I keep a modest allocation to bond funds but the current market scares me. As such, a bunch of my non-equity stuff is in alternatives: CDs, I bonds, closed end funds (like GIM, relatively short maturity foreign bonds), and merger arbitrage funds. You may wish to look closely at the last, specifically MERFX and ARBFX. How they work is explained in detail here: Life, Investments & Everything: Picking Up Nickels In Front Of A Steamroller
 
I know a lot you don't like annuities in any form. However, a VA or VA with Income Withdrawal will satisfy everything that OP wants. And OP wants to do a bond-income MF within the annuity he can do so. And he wishes to change the allocation he can do so.
 
In my trading accounts I have mostly sold off the utilities after acquiring the 4.2% div(annualize) and reacquiring on price dips.
 
LongPrime said:
I know a lot you don't like annuities in any form. However, a VA or VA with Income Withdrawal will satisfy everything that OP wants. And OP wants to do a bond-income MF within the annuity he can do so. And he wishes to change the allocation he can do so.
Click to expand...

You should read the OP again.

OP wants something that is liquid and short term (1-5 years). VA doesn't do that because of surrender penalties.

If all you have is a hammer, everything looks like a nail. :facepalm:
 
I have laddered CDs. The principle will vary during interest rate swings but at the end of the term the cash magically appears. They are liquid but can suffer from loss of principle if sold before maturity.

Back in 2007 I had a wonderful ladder out 5 years yielding over 5%. By 2009 all of those beautiful CDs had either matured or had been redeemed by the FDIC with interest and principle. Now, you have to go out past 2 years to get 1%. It's hard to believe we've had this artificial interest rate environment for over 5 years.

I don't understand your comment on TIPs not being liquid enough. They can be bought and sold in a few seconds like most government bonds.
 
why would they want to raise short term interest rates? it is a cash cow for banks and credit unions.
 
pb4uski said:
You should read the OP again.

OP wants something that is liquid and short term (1-5 years). VA doesn't do that because of surrender penalties.

If all you have is a hammer, everything looks like a nail. :facepalm:
Click to expand...

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

Upton Sinclair
 
OP-You are opining on the dilemma that many of us have been lamenting. Welcome to the club. I used to worry about buying a 5 year bond yielding 4 percent because I feared that rates would go up and I'd be stuck with a lower yielding instrument. Now I cringe when I see that 4percent bond maturing next month.
 
I hold some individual Tips; they are traded quite widely so I don't see any issue with liquidity. There was a brief period in 2008 when Tips were being dumped but there wasn't really anywhere to hide back then.
 
I move some into FFRHX the rest is in wellesley , SCHP and cds. FFRHX pays around 3% and is very short in duration but I am sure has some risk.
 
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I have a mix of things in the fixed income bucket: both intermediate and short-term bond funds (from Vanguard), a CD ladder and a bunch of I-Bonds. Each has advantages and disadvantages but in the aggregate I think it works.

I just sold some real estate and have a chunk of cash to redeploy. I have some thoughts on how I will do it but just for the fun of it I'm going to have Vanguard do a new financial plan for me and see what they come up with.
 
I'm not sure why people fear bonds and bond funds so much. It's equities that we have no ability to predict the returns of. We know exactly what will happen to the price of a bond if interest rates rise.

What we need to think about is how much will rates rise from their current environment and how quickly. At the current federal fund lending rate of about .25%, a 1% increase in rates would bring the rate up to 1.25%. That is a substantial increase. It's highly unlikely that in the next couple of years that we will see more than a 1% increase in rates. Even if we model a worst case of 2%, the losses on short or intermediate term funds is not that substantial.

If a intermediate term municipal bond fund pays about 2% tax free and has a five year duration, it could lose either 5 or 10% if rates rise by 1 or 2%. You can calculate exactly how long the higher yields will offset the drop in NAV of a fund. So why the fear? We should fear things we have no control over. We know exactly how bond fund prices respond to interest rate changes.

And if you really don't want to see the NAV go down, buy individual bonds. But it's just a myth that they don't "lose" money the way bond funds do. The principal may not go down, but you are stuck holding a lower yielding bond until maturity to avoid the loss.
 
pb: we didn't put everything into annuities. I won't even guess at how much OP2x4 should consider. We laddered annuities by amounts so we could take money out by amount needed. Further, upto 10% of annuity, annually can be withdrawn without restriction-I forgot if the surrender charge is imposed.

We maintain a considerable cash reserve, liquid trading accounts, and a son who has considerable liquid assets we could tap, if the situation ever got there.

Both our Guaranteed Income annuities, VA and Fixed Indexed, have a guaranteed 5% growth in the income account so that even in down markets, the Income Account increased. And with this guarantee, I can use this "conservative" account to be more aggressive in other areas.

OP is searching for alternatives to "safe" but low yielding products. I don't know how much investigation he has done at looking at alternatives, So I am offering annuities as an alternative. I looked at Ibonds and TIPS, etc and didn't understand the risks I would be taking inorder to get such a low ROR and ROI.
:cool:
 
LongPrime said:
Both our Guaranteed Income annuities, VA and Fixed Indexed, have a guaranteed 5% growth in the income account so that even in down markets, the Income Account increased. And with this guarantee, I can use this "conservative" account to be more aggressive in other areas.
Click to expand...

Is the 5% before or after the high (upwards of 4% usually) fees?
 
There are two accounts within this type of annuity. You will need to see a dreaded investment/FA salesperson. I have seen presentations from FA and from the bank's/creditunion investment person.

^Your question indicates you are unfamilar to how the two accounts work and how this type of annuity works. The 5% goes to the Income Account which resets or stepups (distinct terms) on anniversery. The fees comes off of the Actual Account. The 2013 fiscal year, the Income and Actual increased 27%. In 2011, the Income Acct increased 5% but the Actual Acct decreased over 2010.

For me, this type of annuity is far superior to any CD, bond fund, treasury, etc. even with the higher fees. :rolleyes:

Let the OP decide for himself and you yourself.:cool:
 
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LongPrime said:
There are two accounts within this type of annuity. You will need to see a dreaded investment/FA salesperson. I have seen presentations from FA and from the bank's/creditunion investment person.

^Your question indicates you are unfamilar to how the two accounts work and how this type of annuity works. The 5% goes to the Income Account which resets or stepups (distinct terms) on anniversery. The fees comes off of the Actual Account.

For me, this type of annuity is far superior to any CD, bond fund, treasury, etc. even with the higher fees. :rolleyes:

Let the OP decide for himself and you yourself.:cool:
Click to expand...
Tell us again what your commission schedule is when you sell this stuff?
 
This stuff could be for some be worthwhile. For some this stuff is bad. I don't make opinions on what you need or even want.

Even if I sold this stuff, so what. Some will and some won't. I was like you, once, and it cost me a couple of hundred :angel:
 
Ready said:
And if you really don't want to see the NAV go down, buy individual bonds. But it's just a myth that they don't "lose" money the way bond funds do. The principal may not go down, but you are stuck holding a lower yielding bond until maturity to avoid the loss.
Click to expand...

+1 opportunity loss
 
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