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Income Fund Management
Old 01-05-2012, 06:07 PM   #1
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Income Fund Management

Like many people here, I am considering putting some money into income funds that balance bonds with dividend paying stocks. I am concerned that an increase in interest rates will cause the value of the bond and stocks in the fund to drop. Since we are at historic lows in regards to interest rates, it is hard to imagine them not going up significantly at some point in the future.

So, let's assume we are invested in the Forum Income Fund (made up name). How comfortable are you with trusting the fund management to shield investors from a significant loss of capital when interest rates rise?
Do you think they will be reducing the longevity of their bond portfolio to decrease capital loss when interest rates rise? What about the dividend paying stocks? How do they protect us against falling stock prices>

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Old 01-05-2012, 06:25 PM   #2
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No investment is 100% safe, except for stuffing money under the mattress. Even then, the house might catch on fire and burn up the money and mattress too.

Look at the performance of the fund in question over a number of decades, and the consistency of the fund management team. Beyond that, I don't see what reassurances one can find. Make sure your portfolio is diversified.

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Old 01-06-2012, 07:31 AM   #3
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You need to find out what is in the fund, what the fund's objectives are, and who the management team is. I suggest you talk to a financial planner/stockbroker, or go with a fund company or brokerage's service to manage money for you.

Personally I think that there are other much more important things to consider when investing in the stock market right now than the rise of interest rates. I am concerned about what is going on in the world (trade and budget deficits, national debt, necessary cutbacks both here and abroad, job market, elections, etc.) and how those events will affect US stocks and bonds. My number one concern is the financial crisis in Europe. It seems that the euro cannot survive, we do not know how long it will be on life support, and we have no idea what will happen if it collapses.
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Old 01-06-2012, 08:19 AM   #4
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A lot depends on why interest rates are rising. If interest rates are rising because the economy is strengthening then while the bonds in your portfolio would decline in value due to rising interest rates the stocks in the portfolio should be rising. That's the theory at least and what has happened many times in the past.

Another view is that the rise in interest rates will be gradual rather than severe so the impact on unit values will be fairly modest as proceeds from maturing bonds are reinvested at higher market yields. At least that was Vanguard's view when I had my financial planning session with them a few months ago. Seems to me to be a likely scenario.
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Old 01-06-2012, 08:59 AM   #5
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For your objective, look at Vanguard Wellesley fund.
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Old 01-06-2012, 09:30 AM   #6
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Originally Posted by l2ridehd View Post
For your objective, look at Vanguard Wellesley fund.

Vanguard Wellesley is an excellent choice; also look at Vanguard Wellington. Both are from a top quality fund family that is set on keeping expenses low and both are actively managed funds that you can buy and forget about.
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Old 01-06-2012, 09:33 AM   #7
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Originally Posted by james7 View Post
...funds that you can buy and forget about.
Although I own both, I wouldn't go quite that far. Things change and watchful waiting is a prudent strategy with any investment, no matter how good historically or at the moment.
Numbers is hard.

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Old 01-06-2012, 09:35 AM   #8
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I believe stocks will initially do well as interest rates rise. Historically, when the rate on a 10-year Treasury is under 5%, stock prices track the rate. When the rate on a 10-year Treasury is over 5%, stock prices act opposite to rate changes.
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Old 01-06-2012, 10:17 AM   #9
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I'm OK with my bond funds taking a hit during an interest rate rise. Why? Because first of all the hit is TEMPORARY. The bond funds start paying out higher dividends and that helps them recover. Second, this is an opportunity for me to buy more bond funds at a better price when I rebalance from stocks in my diversified portfolio.

Larry Swedroe predicts that bond funds on average might see a 10% hit with interest rate normalization, and then take about 3 years to recover. That's fine with me. I expect that the market conditions that cause interest rates to normalize will also cause my stocks to appreciate, so rebalancing should help over the period, and anyway I expect my portfolio to go up and down over time. Fortunately, it seems to go up more than down, so I do eventually get ahead (knock on wood).

You'll drive yourself crazy if you try to preserve capital under all market conditions. You're also likely to mess up if you focus on one aspect of investing, ignoring others. Portfolios take hits from time to time, but again, those hits are usually TEMPORARY, and portfolios do recover unless you get scared and sell at the bottom which some people unfortunately do and miss the recovery.

The key is to have a diversified portfolio so you can rebalance when an asset class underperforms. Or invest in balanced funds so that you don't notice how individual asset classes are performing, but rather the aggregate effect.

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Old 01-07-2012, 06:25 AM   #10
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You could take a significant hit with the bond portion of the Wellesley Fund. If you are living off the int & dividends a rise in interest rates would be hard to overcome. With an avg maturity of 9.9 years and duration of 6.2 a gradual increase in rates would drag this funds performance down.
As a holder of this fund I'm hoping the 1/3 portion in equities would equalize this. However I'm not looking for anything like the last 10 years returns

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