quote:
Originally posted by Cracker LarryI’ve only got a couple, don’t have time to let it ride. If I were young that’s what I would do. Need to figure out how to protect the gains now.
Capt. Larry Teuton
Cracker Built Custom Boats“Ships are the nearest things to dreams that hands have ever made.” -Robert N. Rose
Larry,
Check you PM’s
“People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.”
George Orwell
Also, to be frank, I don’t know a lot about bonds, but my question is, how can low coupon bonds be good to hold when interest rates are at all time lows?
I would think that bonds would be the worst thing to be holding when interest rates start to rise.
If I understand this graphic, it basically says this:
<> You buy a $1000 bond that pays out a 7% coupon each year…
<> When interest rates DROP to 6%, your bond becomes more valuable than what you bought it because now people are paying $1000 for 6% coupon and you have a bond that pays 7%. Therefore, your bond is worth $1166 on the market.
<> However, when interest rates RISE to 8%, who would give you $1000 for a bond that only pays out 7% when they could purchase a bond that pays out 8% for $1000? Nobody, so to sell your bond, you would have to sell it for $875 to get out from under it…
Okay, so with that knowledge and knowing that interest rates are at HISTORICAL lows, who on earth would be buying bonds? The only justification is if you plan on living off of the interest, and NEVER planning on selling them…
thread needs more charts. or a sidebar about home defense.
skinneej,
Where’d you get that chart? I might be useful in my business.
Thanks!
“People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.”
George Orwell
Dear Skinnee…You are discussing bonds in terms of trading vs. investing. This misconception is fairly common. Trading is based on short term allocation of capitol based on various market conditions and indicators, while investing is a long term allocation of capitol based on goals and risk tolerance. Bonds have maturity dates that offer return of principle at par value. Therefore a risk averse investor could buy $10K of a 2 1/2% ten year gov’t backed bond, hold it until maturity, receive back the $10K principle at par, and pocket, spend, or reinvest the 2 1/2% interest payments. That same investment in a portfolio of stocks, say the S&P 500 Index, may actually lose value over that same 10 year period. A riskier investment. Consider that adding bonds to a portfolio acts as a “hedge” against the volatility of stocks, and that cash provides liquidity in the event of an unforeseen event that otherwise would require you to sell investments at an inopportune time. Cash can also be dollar cost averaged into investments as a strategy to modify timing risk. Don’t confuse trading with investing.
Sol Mate
Mako 20B
225 Optimax
Would it be smart to invest in CBST - CUBIST PHARMACEUTICALS INC right now?
Redfish Baron Extraordinaire
quote:Most people don't have the ability to buy straight bonds in their 401K. Most have access to "bond funds" and a quick search of the internet will tell you that you can definitely lose value if you have to sell part of your bond fund investment during inopportune times!
Originally posted by bossdog1Dear Skinnee…You are discussing bonds in terms of trading vs. investing. This misconception is fairly common. Trading is based on short term allocation of capitol based on various market conditions and indicators, while investing is a long term allocation of capitol based on goals and risk tolerance. Bonds have maturity dates that offer return of principle at par value. Therefore a risk averse investor could buy $10K of a 2 1/2% ten year gov’t backed bond, hold it until maturity, receive back the $10K principle at par, and pocket, spend, or reinvest the 2 1/2% interest payments. That same investment in a portfolio of stocks, say the S&P 500 Index, may actually lose value over that same 10 year period. A riskier investment. Consider that adding bonds to a portfolio acts as a “hedge” against the volatility of stocks, and that cash provides liquidity in the event of an unforeseen event that otherwise would require you to sell investments at an inopportune time. Cash can also be dollar cost averaged into investments as a strategy to modify timing risk. Don’t confuse trading with investing.
Sol Mate
Mako 20B
225 Optimax
That being said, I could use your own argument against you. You basically said to recoup that initial $1000, you had to hold that bond until maturity. But if maturity is 10 years out, then it’s not much difference than me holding onto an S&P index fund for 10 years until
quote:Looks like you missed out...
Originally posted by 23SailfishWould it be smart to invest in CBST - CUBIST PHARMACEUTICALS INC right now?
Redfish Baron Extraordinaire
quote:
Larry, Check you PM's
Got it, thank you.
Capt. Larry Teuton
Cracker Built Custom Boats
“Ships are the nearest things to dreams that hands have ever made.” -Robert N. Rose
Sitting tight right now, bit believe I’m going to drop a chunk on crude oil stock.
Good perspectives on this thread. I’m getting closer to Larry’s problem/thoughts. Need a stable place to be.
Dear Skinnee…You assume that my post was restricted to 401K accounts, and it was not. I discussed the basic difference between stocks, bonds, and cash with regards to risk. The account that an investor or trader manages is material to several levels of discussion, but I did not address that subject. Mutual funds are financial products, and as I discussed it is imperative that individuals due their homework and understand the financial products that they are offered. Individual stocks, individual bonds, and cash are not the same thing as mutual funds. Also keep in mind that a 401K account can be rolled over into an IRA that is “self directed”, and the account holder can access the stock and bond market without limitations. There is historical precedent for 10 year negative returns for the S&P 500, but more importantly, if you are nearing retirement, or your child is within 2 years of going off to college and your investment portfolio is heavy in stocks, then a short term collapse of valuations WILL HAVE A NEGATIVE EFFECT on your goals. Long term averages are little consolation when you lose 25% of your investment value in your early 60’s. Again, diversified portfolio’s, made up of a mix of stock, bond, and cash investments that is appropriate to an individuals RISK TOLERANCE is the formula for success. This approach REQUIRES annual re balancing, and assessment of risk relative to goals. It’s not “set it and forget it” lazy investing. It is NOT an argument of stocks vs. bonds vs. cash. It’s asset allocation, risk management, and knowing what you’re investing in(product). Trading vs. investing is strategical, and bonds are offered in many maturities from short term to intermediate term to long term. The effects of interest rate risk varies according to maturity. Holding a bank issued CD until maturity ensures return of principle at par, and no equity investment(stocks) can do the same.
Sol Mate
Mako 20B
225 Optimax
quote:
Originally posted by bossdog1Dear Skinnee…You assume that my post was restricted to 401K accounts, and it was not. I discussed the basic difference between stocks, bonds, and cash with regards to risk. The account that an investor or trader manages is material to several levels of discussion, but I did not address that subject. Mutual funds are financial products, and as I discussed it is imperative that individuals due their homework and understand the financial products that they are offered. Individual stocks, individual bonds, and cash are not the same thing as mutual funds. Also keep in mind that a 401K account can be rolled over into an IRA that is “self directed”, and the account holder can access the stock and bond market without limitations. There is historical precedent for 10 year negative returns for the S&P 500, but more importantly, if you are nearing retirement, or your child is within 2 years of going off to college and your investment portfolio is heavy in stocks, then a short term collapse of valuations WILL HAVE A NEGATIVE EFFECT on your goals. Long term averages are little consolation when you lose 25% of your investment value in your early 60’s. Again, diversified portfolio’s, made up of a mix of stock, bond, and cash investments that is appropriate to an individuals RISK TOLERANCE is the formula for success. This approach REQUIRES annual re balancing, and assessment of risk relative to goals. It’s not “set it and forget it” lazy investing. It is NOT an argument of stocks vs. bonds vs. cash. It’s asset allocation, risk management, and knowing what you’re investing in(product). Trading vs. investing is strategical, and bonds are offered in many maturities from short term to intermediate term to long term. The effects of interest rate risk varies according to maturity. Holding a bank issued CD until maturity ensures return of principle at par
Also, the part you forgot to mention… When I pay $1000 for a bond and wait until maturity, sure, I get that $1000 back. But 10 years from now, the dollar is going to be worth a LOT less than it is today… Therefore, the purchasing power of that $1000 dropped over that 10 years. Essentially, I got poorer.
Skinnee…You keep introducing variables and anecdotal examples that stray from the discussion of risk management. With regards to loss, you are correct that in one case it is unrealized if investments are not sold. But consider my example of funds invested for a college education that decline by 25% right before the 1st semester payment is due. That account IS going to realize a loss as it will require selling to generate the cash to pay the tuition. Another example is a retiree who needs to draw down investments to meet cash flow requirements when he no longer has a job with dependable income. Inflation and the value of the Dollar will always have an effect on purchasing power, but purchasing is a choice and can be controlled to an extent. To take on more risk than one is comfortable or capable of sustaining is not the solution to inflation. A pile of cash is never a bad thing. It might take a wheelbarrow of it to buy a loaf of bread based on runaway inflation, but if I’ve got a barn full of cash I’m not going hungry. As for 10% interest rates, consider what that would do to the payments on 18 Trillion dollars of US debt. Keep your passport current, and a sleeve of gold coins handy if that happens.
Sol Mate
Mako 20B
225 Optimax
My wife was given a T Bill about 10 years ago by her grandmother. It gets like 6% interest which we re invest. Using that method when the thing matures it will more than have doubled.
quote:So how do bonds help you through that? You told me that to guarantee to get my original principal back, I need to hold the bond to maturity.
Originally posted by bossdog1Skinnee…You keep introducing variables and anecdotal examples that stray from the discussion of risk management. With regards to loss, you are correct that in one case it is unrealized if investments are not sold. But consider my example of funds invested for a college education that decline by 25% right before the 1st semester payment is due. That account IS going to realize a loss as it will require selling to generate the cash to pay the tuition.
That being said, in that case, I would take out a student loan at 3% interest and sit on my stocks until they mature. I would have no problem sitting on a student loan for 30 years if I can borrow X at 2014 dollars and pay it back with 2044 dollars. Sign me up!!!
This chart says it all:
If you didn’t want to take out a student loan and you sleep better at night feeling “debt free”, then you shouldn’t have that money invested anyway. Any money that you need in the next 5 years shouldn’t be in the market. Common sense…
Heck, if I had college to do all over again, I would have borrowed the maximum money that the government allowed me, and I would have dumped it all into the stock market!!!
(**()! Everyone keeps stealing my graphics! Pretty soon, I won’t have any left…
