It’s often said that one’s ability to delay gratification is an important factor of success in personal finance. When you don’t buy that new whatever until you have enough money to pay for it, you save on interest you would otherwise pay. When you save a portion of your current pay for retirement, you are […]
Tax Efficiency: Relative or Absolute?
Tax efficiency becomes a factor when you have investments in regular taxable accounts (versus a tax advantaged accounts such as a 401k or IRAs). Because you have to pay taxes on interest, dividends, and realized gains, an investment that loses less of its returns to taxes is said to be more tax efficient. Tax efficiency […]
Stocks or Bonds in Roth?
[This is a guest post from Bogleheads investment forum participant Bob’s not my name.] A number of spurious arguments are made for holding riskier assets in your Roth IRA as opposed to a Traditional IRA. Let’s examine them. For simplicity, we’ll refer to risky assets as stocks and less risky assets as bonds, but the […]
5 Stages of Grief and Low Interest Rates
I heard about the five stages of grief but I hadn’t really looked into it. When I read about it on Wikipedia, I thought the model fits very well how savers grieve about low interest rates. Denial "Rates have nowhere to go but up." "The Fed only controls short term rates. Low short term rates […]
What Would Happen When Interest Rates Go Up
By now you probably heard that bonds, and in particular long-term US Treasury bonds, did the best in 2011 among all major asset classes. Here are the performances of select Vanguard mutual funds in 2011: Vanguard Long-Term Treasury Fund (VUSTX) +29.28% Vanguard Long-Term Bond Index Fund (VBLTX) +22.06% Vanguard Long-Term Investment-Grade Fund (VWESX) +17.18% Vanguard […]
What to Do When Interest Rate Is So Low
Princeton University professor emeritus Burton Malkiel and the author of the popular book A Random Walk Down Wall Street wrote in the Wall Street Journal The Bond Buyer’s Dilemma. Professor Malkiel suggested some reasonable alternatives to long-term U.S. Treasuries. “The first is to look for bonds with moderate credit risk where the spreads over U.S. […]
Bonds Bubble vs Gold Bubble
PIMCO’s founder and star manager Bill Gross called the bonds bubble too soon. He got a lot of flak for getting out of Treasuries before Treasuries had a good run. Many people point to this as a case-in-point for the failure of active management. He had to issue a mea culpa saying he was wrong. […]
Bond Yield and Risks Triangle
There was an article on Washington Post by Robert Pozen and Theresa Hamacher about bonds: A bond backfire after racing to buy long-term Treasuries and sell tax-exempt funds Although I don’t agree with everything they said, especially their error about a TIPS fund in taxable accounts, on balance it’s a good article about the yield […]
Muni Selloff: A Preview of Deflating Bond Bubble
In case you haven’t noticed, the municipal bonds market had a small earthquake. It offers a preview for what can happen when a bond bubble deflates. The epicenter of the earthquake is in California. Although its budget trouble has been known for a long time, investors didn’t mind until last week. What made investors pay […]
Negative Real Return Is the Price for Safety
The price to keep our money safe finally hit our face: five-year inflation indexed bonds yield from a recent auction produced a negative number, -0.55%. It means investors in these bonds are guaranteed to earn a return at 0.55% below inflation in the next five years. As absurd as it may sound, investors don’t have […]
Target Maturity Bond Funds and ETFs
Bonds or bond funds? For anyone who has more than a slight interest in bonds, that’s a perennial question. Money guru on TV Suze Orman says you should buy bonds not bond funds because a bond fund doesn’t have a set maturity date. When you sell from a bond fund, you can get back less […]
You Should Still Beware of A Bond Bubble
As interest rates go down and down, people have raised warnings for a possible bond bubble. Vanguard, being a major provider of bond mutual funds, has published several white papers and articles trying assure investors they should stick to bond funds and not worry about a bond bubble. Unfortunately the arguments put forward by Vanguard […]