Jan 28 2010

A Tale of 4 High Income Bond Funds.

Bonds have gotten a lot of attention over the past year and it’s easy to see why when you look at this chart.

A Tale of 4 High Income Bond Funds_chart

What you’re looking at is a relatively smooth ride up until the world collapsed in October of 2008. The investorspeak for that smooth ride is “low volatility”, and it’s one of the main traits of bonds in general, when compared to stocks. But 2008 was anything but usual, and once panic hit the markets bonds collapsed just like stocks. It was a sensible panic in many ways. After all, no one was really sure what the true debt picture was and bonds are nothing more than debt that the debtor has agreed to pay back in a timely, and consistent fashion with interest. But what if the debtor suddenly wasn’t as financially stable as you were led to believe? What if the bond ratings were smoke and mirrors, and your bond wasn’t worth the proverbial paper is was once printed on?

The good and the bad.

So, you see around October, 2008 the steep drop in the prices of these bond funds.

So far, so good. That’s the unusually bad angle. The unusually good side of the picture comes in the months after the market bottomed, around March, 2009.

  • BJBHX saw a return of approximately 45% from its March 2009 lows.
  • FRHIX saw a return of approximately 15% from its March 2009 lows.
  • PRHYX saw a return of approximately 40% from its March 2009 lows.
  • DODIX saw a return of approximately 13% from its March 2009 lows.

(More on the individual returns below.)

Bond funds don’t usually produce these kinds of returns, unless they’re junk bonds but they’re (usually) much riskier.

Are bonds still a good buy?

In a sense, all that stellar return was simple the market realizing the world was not coming to an end, and returning back to the norm. The chart above bears this out rather nicely.

So, it would seem that the major upside potential for bonds has played itself out and we have returned to something at least resembling normalcy. But that doesn’t mean that you should avoid bonds. You just shouldn’t be expecting the kinds of return seen in bonds over the past 8 months or so.

Meet the bond funds.

These bond funds come from 3 different categories, which in part explains their diverse returns. These categories are Municipal, High-yield (A.K.A. Junk), and Corporate bonds.

Municipal Bond fund.
My pick for municipal bond fund is the Franklin High Yield Tax-Free Income fund (FRHIX). This fund current yields about the same as 9.4% in a taxable fund (assuming a 35% federal income tax bracket). Tax free municipal bond funds don’t usually see a return of 15%, so this fund has definitely been a winner for those looking for tax free income because they’ve also gotten a very nice return on their investment along with the income.

High-yield bond fund.

Often times, bonds in this category are less than affectionately known as “junk”, but the Artio Global High Income (BJBHX) fund is far from junk. It boasts a 5 star Morningstar rating, and should be viewed more as a speculative, or higher risk bond fund than as junk. It currently sports a 7.4% yield, 1.00% expense ration and it delivered an eye popping (for a bond fund) 45% return from its March 2009 lows.

Another very good high yield bond fund is the T. Rowe Price High-Yield fund (PRHYX), which has a 4-star rating and a yield of 8.5%. It also delivered an eye popping return since its March 2009 lows – 40%. It has a 0.80% expense ratio, which isn’t bad considering its category.

Corporate bond fund.

My choice for corporate bond fund is the 5-star Dodge & Cox Income fund (DODIX). This fund has a 5.22% yield, 0.43% expense ratio and produced a relatively small 13% return. But remember – 13% is usually the realm of high-yield/junk bonds, but this fund is a corporate bond fund that targets only those rated A or better by either Standard & Poor’s Ratings Group or Moody’s.

Conclusion.

It would seem that the wild ride in bonds is over, at least for a while. So you shouldn’t expect such remarkable returns from these bond funds in the foreseeable future, but they are at the top of their class and should still provide a stable income in the years to come.


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Jan 27 2010

Is Apple Worth its iPad Tablet Hype?

Apple Inc has generated a lot of buzz recently with the hype over its latest geek-chic techno status symbol – the Tablet.
Is Apple Worth its Tablet Hype_mac_tablet_mockup_001_perspective

But is that hype really over-hype? Is Apple, and more important for investors – apple stock, going to benefit from this new gadget?

I personally don’t think so, and neither does Jeremy Glaser at Morningstar.com.

Apple stock looks overheated. Sure the loyal Apple fans will run out and buy the tablet because their social status depends upon it, but are they likely to have more demand than that? In this greatest of recessions, are people going to not only shell out big bucks to purchase the tablet but then pay to read book and newspaper content they can currently get online for free?

This just seems like another Kindle – another attempt to produce a new piece of technology to revolutionize our lives. But the technology that truly revolutionizes how we do things is typically never planned to do so, but rather happens by serendipity.

Besides, the tablet has been hyped for so long now, it’s already priced into the stock so the upside is limited.

Mr. Glaser goes on to argue that the market in general is over valued anyway, and so Apple is already close to fair market value and hence carries limited upside potential. Of course, that’s a value-oriented approach and many investors in the market today are focused on growth, so in the short term Apple may get a bit of a pop.


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Jan 26 2010

The 6 Biggest Investing Mistakes Warren Buffett Avoids – and You Should Too!

According to Burton G. Malkiel, a Princeton economics professor, and Charles D. Ellis, author of ‘Winning the Loser’s Game,’ Danger-keep awaythe only difference between them and Warren Buffet is that Warren Buffet hasn’t made these mistakes.

Of course, it’s more than that but since you and I (or Malkiel and Ellis for that matter) don’t have any chance of acquiring Buffet’s DNA, we’ll focus on this list – in the spirit of accepting what cannot be change, and having the courage to change the things that can be changed. ;-)

6 investing mistakes to avoid:

  • Overconfidence
  • Following the Herd
  • Timing the Market
  • Assuming More Control Than You Have
  • Paying Too Much in Fees
  • Trusting Stockbrokers

By way of proof of Buffet’s unique investment acumen and, more importantly, his ability to focus and remain true to his core investment philosophy, Malkiel and Ellis cite two prime cases when Buffet was tested by the markets and prevailing “common knowledge”.

Case number One was when Buffett avoided the dot com bust of 2000, simply because tech stocks fit neither his investment style, or his philosophy. But he held firm to his approach, even when it was called outdated by the rest of the investment world. As a result, his portfolio avoided much of the carnage that befell those more “enlightened” investors.

Case number two was when Buffett avoided mortgage-backed securities and derivatives in 2005-2006, because he found them too complex and “opaque”. As a result, he avoided the worst of the damage caused by the economic collapse that ensued.

In regards to the list above, you can see how Buffett’s sense of humility, and discipline have kept him from making many of the mistakes out lined in more detail in Malkiel and Ellis’ original article.

Burton G. Malkiel, Princeton economics professor and author of ‘A Random Walk Down Wall Street,’ and Charles D. Ellis, author of ‘Winning the Loser’s Game,’ have teamed up to write ‘The Elements of Investing.’


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Jan 25 2010

Mutual Fund Monday – How to Compare Funds.

The Mutual Fund Monday post this week is a highlight of a recent post from Kyle over at Amateur Asset Allocator .

Millions of Americans own mutual funds in their 401(k) plans, and many others own them in their IRA’s or even in a taxable, non-retirement account. But many people don’t have any idea of how to really compare the funds that are available to them. Here’s a hint – it goes beyond simply finding the highest return for a given time period (Ex: 1, 3,5 or ten years).

Kyle’s post is a great explanation of how to compare mutual funds, and their associated indexes. He explains how to compare apples to apples, and not apple to oranges (all mutual funds are not created equal!). He also explains the basics of knowing which index to compare a fund’s performance to, and why. And lastly, he explains how to compare two mutual funds – and more important, how not to.

So what are you waiting for? Head on over and give him a read. ;-)


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Jan 21 2010

3 Tips to Make Your 401(k) Work for You.

Morningstar has a terrific article (available to free members) titled Three Tips to Make Your 401(k) Work for You and I love it! Here’s a brief sample of why:

It’s surprising there aren’t many calls in the press to ditch the automobile. After all, think of all the dumb things people do with them. They drive much too quickly and sometimes after drinking lots of alcohol. They even drive while sending text messages, putting on makeup, and reading the newspaper. The consequences can be dire: More than 40,000 Americans die in auto-related deaths each year, with nearly 3 million suffering injuries of some kind.

Few things in the financial media annoy me more than the recent calls to 86 the 401(k) plan. And the above paragraph illustrates the absurdity of the move to end 401(k) plans quite nicely.

The article goes into greater detail about the push to eliminate the plan, but it also offers some real actions that investors can take to help get their 401(k) balances back on track, or to keep them on track so that they will function as intended – as a means to save for retirement, not get rich in the stock market (as too many seem to think).

Tip #1. Save More.

Yeah, I know, this sounds trite but it’s important not to simply gloss over it. My 401(k) balance dropped by about 30-35% from its 2008 high by the time the market bottomed in March of 2009 – and this was also at a time when my company canceled 401(k) matches! Things looked not so good, to say the least. But I didn’t get discouraged and start blaming the system. Partly because I have over 20 years left until I need that money, and partly because I know the stock market ebbs and flows. True, the market doesn’t usually drop by as much as it did by early 2009, but that also meant that there was near unprecedented opportunity for big returns in the coming months.

So, I looked at what I could do to change my situation and decided to increase my contributions. I knew that this would maximize my ability to buy more stock at those low levels, and also help offset my employers decision to break their promised benefit to me (i.e. contribution match).

I saved more. And the result was that my balance was over its pre-crash value in September, 2009.

Tip #2. Invest Wisely.

Most 401(k) plans are quite limited in the options open to investors, but that doesn’t keep them from screwing it up! For example, some employees “play it safe” and put all of their money in the money market equivalent. That’s stupid, unless you’re looking at retiring in the next 2 year, but even then you shouldn’t have all of your money in cash equivalents because you’re not going to suddenly withdraw all of your saving upon retirement. You need to keep some of it in stocks for long term growth so you don’t run pout of money in retirement.

So, basically, examine the options open to you in your plan, and diversify properly according your time away from retirement and other factors such as other assets available upon retirement – ex: home equity, pension plan, etc..

Tip #3. Be Flexible.

The best laid plans can often fall short due to factors beyond your control, so while it’s important to have a plan and stick to it, it’s also important to remain flexible and be ready to adapt to new realities as the economy (both U.S. and global) enter uncharted territory. This may mean working longer than you originally thought, or working part time jobs in retirement. Regardless, don’t get caught up in the way you think things ought to be and lose sight of the way things are.


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Jan 19 2010

Investing Term Tuesday – January Barometer.

The January Barometer is based on the theory that the performance of the S&P 500 during the month of January is indicative of how the market will perform for the year. For example, if the S&P 500 is up for January, the January Barometer states that the stock market as a whole should end the year up as well.january barometer

In practice, the January Barometer produces a slightly better than 50% success rate. However, if an investor simply uses the January Barometer when determining whether to invest, he is doing little more than timing the market.

Even worse, he’s timing the market with a very insensitive timing mechanism, since the theory bases the prediction of market performance for an entire year on the performance of a single month.

Also, any gain that may be had by blindly following the January Barometer theory can be quickly erased by a false prediction of a bull market for the year ahead.


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Jan 18 2010

Mutual Fund Monday: Morningstar Announces their Choice for Fund Managers of the Decade.

These managers were chosen by Morningstar as the best of the decade because the “deftly steered investors through good times and bad“.

That’s saying something. Investing in the ’80’s and 90’s was pretty clear cut, but the 1st decade of the 21st century was anything but easy.

As with the best Fund Managers of 2009 award, the Best Manager of the Decade award is not just about overall returns, but rather the risks assumed by the manager to get those returns, as well as their stewardship of the funds.

Size is also a consideration, since it’s more meaningful (and challenging) to earn big returns with a large asset pool, than a small one.

Fixed Income

Bill Gross
PIMCO Total Return: 7.7%; Category Average: 5.5%

The winner for the Fixed Income category is legendary investor Bill Gross. As Morningstar puts it: “No other fund manager made more money for people than Bill Gross.”

The PIMCO Total Return Fund was $32 billion large at the start of the decade, but Gross didn’t let that hinder him. By the end of the decade, the fund held over $200 billion in assets but Gross was still able to outsmart the market and is still doing so today.

Domestic Equity

Bruce Berkowitz
Fairholme: 13.2%; Category Average: 0.01%

Winner of the Domestic Equity category is Bruce Berkowitz, who was a practical unknown when he started the Fairholme (FAIRX) fund in December of 1999. Back then, technology and telecom growth funds were the “new economy” and the thought of starting a value fund was laughable. That didn’t stop Berkowitz. His ability to stick to his value oriented philosophy has earned him not just great returns over the past decade, but the award for Best Domestic Equity Fund manager of the decade.

Foreign Equity

David Herro
Oakmark International: 8.2%; Category Average: 3.2%
Oakmark International Small Cap: 10.1%; Category Average: 6.1%

David Herro is not only an eclectic contrarian, he’s also been right more often than not over the past decade, or at least right when it counts. He’s another value investor (notice a theme here? ;-) ), but he focuses on only 50-60 stocks, and isn’t afraid to dive in when others flee – provided he sees value selling at a bargain.

His relatively small number of holdings mean his funds don’t also track the relevant benchmarks and peers, but that’s not always a bad thing. It can however, mean some additional risk and his funds have had poor performance in some years, but have always bounced back quite well.

Read more at Morningstar.


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Jan 15 2010

Investing for free in 2010 with ING Direct!

Here’s a freebie for your Friday…

Open an IRA & invest for FREE in 2010!

ING Direct is offering a year’s worth of investing credits if you open an IRA with them before April 15, 2010.

Here are the details:

  • no-fee IRA
  • free Automatic Investment Plan (AIP) credits to use all year long, if you open your account before April 15, 2010.
  • ING IRA accounts offer more than 7,000 stocks and ETF’s
  • Automatic investment plans can be scheduled on a weekly or monthly basis
  • Online AIP investments only occur on Tuesdays
  • Real-time trade fees apply to all sales. (i.e. automatic buying is free with the credit all year long, but all sales with cost you)

An IRA is a great way to grow you retirement savings tax-deferred, and this promotional mean that even more of your contribution goes toward your investment, instead fees.

To take advantage of this ING Direct IRA promo, visit: www.sharebuilder.com/2010ira


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Jan 13 2010

6 Tips For the Beginning Investor.

Here’s a list of some investing insight I’ve learned over the years that I hope will help accelerate the beginning investor’s road to wealth.

1. Don’t go all in at once.

If you have a lump sum of money to invest and you are doing so when the market is going down, don’t just use it all at once to buy shares. Instead, split that lump sum into 3rds and buy at periodic intervals as the market goes down. The idea is that you simply cannot time the market effectively, so don’t bother.

Instead, you’re dollar cost averaging on the way down and spreading your money out like scatter shot instead of a single bullet. By doing so, you will improve the chances of hitting near the lows with at least some of your purchases.

2. Don’t be paralyzed by taxes.

Often times, individual investors hold on to a winning stock because they don’t want to pay the taxes on it, only to have waited too long and find they rode the stock back down to loser territory.

It’s an understandable course of action, after all when an activity is taxed, people do that activity less than when it is not taxed. But you have to get past that and realize that even at a 42% tax rate, you still have a 58% profit.

But let’s be clear – I’m not saying you could ignore taxes, only that you shouldn’t allow their implication to paralyze you into inaction.

Taxes should be an important part of your investment planning. For example, you want to be aware of the kinds of assets you hold so you don’t keep tax free, municipal bonds in a tax deferred account.

3. Broken stocks are OK, broken companies are not.

A stock’s price is a function of the quality and value of the underlying company, over the long term. This means that if you are looking to hold onto a stock for the long term, say 5-7 years, you should avoid stocks of broken companies and instead look for stocks of good quality companies that have suffered a temporary decline in stock price. Eventually the market will recognize the superior quality of the company and reward the stock price. Conversely, stocks of broken companies become broken stocks over time. An example of this might be Johnson & Johnson in the fall of 2008. The stock price suffered because the market as a whole crashed, not because the company was in poor shape. GM stock on the other hand suffered because the company was bankrupt and has no upside potential.

4. No one ever got rich panicking.

The key to success is simple to understand, difficult to practice – have a plan. You will never be a successful investor if you “just wing it”, “play by ear” or perform in a host of similar colloquial cliches.

Instead, you need to have a plan for when to buy and when to sell each and every stock you hold. Once you have your plan, use Stop Order and Limit Order to take the emotion out of your buying and selling.

5. Diversification is essential.

There have been a lot of pundits pointing out that diversification didn’t help in the 2008-2009 crash, but that while that is true, it’s not as important as it may at first seem .

Firstly, the 2008-2009 crash is not the norm and you’re far more likely to encounter situations where diversification would protect you than you are to experience another such crash.

Secondly, the only things safe in the 2008-2009 crash were cash and (maybe) commodities. If you want to prepare for a 2008-2009 style crash you should diversify some of your holdings into these asset types. But if you held most of your portfolio in them most of the time, you would lose in the long term.

6. Buy and hold is not “set it and forget it”.

Buy and hold investing is great for retirement savings, but even then you need to pay attention. Too many people mistake “Buy and Hold” for some similar sounding marketing gimmick from Ron Popiel.

“Set it and forget it” in the investing world is simply neglect, and it will catch up with you sooner or later.

Instead, you should periodically create a list of your holdings and rank them , that way you will have a course of action and always know where your holdings stand regarding buy, sell or hold.


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Investing Term Tuesday: Commodity Index.

A commodity index is an index that tracks a collection of commodities in order to measure their performance.

Commodity indexes are often traded on exchanges, such as the Chicago Board of Trade (CBOT). By being traded on an open exchange, investors gain access to commodities without having to deal in the futures market.

The value of a commodity index changes daily and is based on the value of the underlying commodities.

There are many commodity indexes on the market, all varying by the types and weightings of commodities being tracked. The Reuters/Jefferies CRB Index, for example, is comprised of 19 different kinds of commodities which range from wheat to aluminum.

As with stock and bond indexes, some commodity indexes weight all their holding equally , while others have a fixed weighting approach.


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