Editor’s Note: The following is a guest post by J. Tyler Matuella. J. Tyler Matuella is the Publishing Manager at the University of Virginia’s Center for Politics. He also is the author of “Unsustainability in Today’s Sustainable Development” published in Development and Cooperation Magazine, Verge Magazine, and World Review of Science, Technology, and Sustainable Development. (more…)
Most people invest in bonds because they want to have stable fixed income. Because the performance of bonds are very stable, they also serve to reduce the volatility of the overall portfolio. Depending on the weighting from 0% to 100%, you can reduce your stock volatility correspondingly. With regular re-balancing between your stocks and bonds, you should be able to “sell high and buy low” in your stock portfolio, and use your bonds as a stable source of income.
Everything sounds good so far, but the most attractive feature of fixed income is also its greatest drawback — the income is FIXED. It does NOT increase as time goes on, and inflation keeps reducing your principle and interests into nothingness. Since inflation is almost always there, you’ve got a real problem especially when you’re investing long term in long term bonds.
Devaluation of currency is not uncommon in other countries, but so far has been moderate in the U.S (in part because the dollar is the world’s currency). I recently discussed this in an article titled Speculating on the Future of the Dollar. But given our massive debt, budget deficit and trade deficit, a significant drop of the dollar against other world currencies (and corresponding increase in inflation as all types of imports become more expensive) becomes a possibility.
How can you protect your portfolio from a significant slide in the dollar?
Becoming wealthy is a full-time job. Successful entrepreneurs have worked for years to build a deep knowledge base in areas as diverse as sales, marketing, accounting, stock investing, real estate investing, leadership, team building and personal finance. For someone who is still laying his foundation, finding a mentor can help him avoid potholes he otherwise would not have seen, and is an invaluable asset as both a friend and a counselor.
A mentor is someone who has already done what you have set out to do. Whether that means becoming a successful stock investor, or real estate mogul, your mentor is an expert and is willing to share his experiences. Just as professional baseball players have pitching coaches and managers have leadership coaches, so should budding entrepreneurs have a mentor that can help steer them down the right path.
In my last article, I discussed starting my portfolio, and a strategy for allocating assets efficiently while keeping the number of accounts and fees manageable. As I stated in that article I think it’s very important for those of us who want to eventually become more involved with individual stock investing to have only a small portion of our funds in a brokerage account. Because we’re very inexperienced, risking too much of our portfolio with individual stocks can leave us open to a lot of unnecessary risk. That’s why I advocate starting simply by learning the basics then building a foundation of a few stock and bond mutual funds, before allocating more to individual stocks.
This strategy may not be exciting, but to paraphrase Ben Graham, author of The Intelligent Investor, true investing should be boring. By learning the basics we can understand the full range of investments available and how to maximize their returns. We can then invest in relatively safe but consistently well-performing mutual funds. Not only do mutual funds provide instant diversification, but they also give us focus as we continue to learn about more advanced investing topics. As I will mention again, we have a lot to worry about when we’re just starting out. There’s no need to add risky investments to that list before we’re ready.
I woke up this morning wanting to answer one question more than any other. Why is the yield on a 2-year bond (4.37%) higher than the 10-year yield of 4.35%? [1]
After some research, I have to admit I’m still a little lost. Understanding how our economy runs is not my strong suit (you’d be better off reading Chris’s posts). But I’ll take a stab at this.
In The Intelligent Investor, Benjamin Graham encourages investors to divide their holdings among two broad types of investment: bonds and stocks. He recommends dividing an investors’ portfolio between them from 25% to 75%, depending on the investors’ financial goals. Because stocks provide all the glitz and glamour of Hollywood the most investors understand how they work (or at least they think so). However, bonds are the ugly understudy and as a result can be misunderstood.
Because bonds are supposed to play such an important role in our portfolios, this series of articles on bonds will take us through the basics of bonds, describe the type of bonds available, provide links to resources and lay the groundwork for us to begin investing in them. To begin the series we’ll start at the beginning: what are bonds? We’ll go over what they are, how they make money, and basic pricing considerations.
Frank, Jason and I were having dinner this past Saturday and we were discussing future markets. Jason brought up Biotech and was talking about some of the possibilities for future advances, and how they may affect the industry. Now, Biotech is something I know very little about — in fact, I know almost nothing about it. As a result I probably am not going to invest in Biotech in the near future.
