Individual Bonds or Funds?

A common misconception is that bond funds are more exposed to interest rate risk than laddered individual bond portfolios. The truth is that they have identical exposure.

The logic for the standard view basically starts and ends with the observation that an investor can hold individual bonds to maturity while bond funds don’t necessarily hold all bonds until they mature. Most bond fund managers trade their assets periodically.

How to Handle Diversification

Diversification is harder than you think, beyond figuring out which places to put your money and how much for each. By definition, diversification means that you always dislike a portion of your portfolio. And the psychological challenge of dealing with that is tough.

Higher Rates Ahead? Maybe Not

The 2014 outlook for fixed-income is the most complex in a long time, sparking worries for this year and beyond. Investors tend to believe bonds are a “conservative,” mostly stable investment. Not really. Expect volatility ahead, and don’t bet that interest rates will rise.

The best advice: Avoid bonds, and especially bond funds, until the direction of rates becomes clearer.

Trouble in Plain Sight

Economic and market weaknesses abound, but few see them. At some point in the not-too-distant future, there may well be plenty of heated discussion over how investors and the Federal Reserve could have been so blind.

The Odds of a Good 2014

It is foolhardy to think that 2014 market returns will be like 2013, but great years are often followed by good years. The odds favor a positive performance this year, although of course that’s far from assured.

Clean Out the Financial Closet

Cleaning out your financial closet may be long overdue. Sure, it’s a hassle. Don’t put it off, though, even though that is tempting.

Things change all the time. Over the last 25 years, my waistline grew bigger and then smaller. Styles of clothing go in and out of fashion. Things wear out or lose color. I should have cleaned old clothes out of my closet long ago. I did not and today the task appears daunting.

Thus, I delay doing anything. The task is so tedious and time-consuming. Nothing has happened to create a sense of urgency for me to take action today.

How to Play Bonds in 2014

Here’s a good New Year’s resolution for you: Make bonds a strong part of your investment portfolio. That seems counter-intuitive. It’s a good bet that bonds face a challenging 2014, amid Federal Reserve policy changes and climbing interest rates.

Boring old bonds don’t have the flash that stocks do, they lack the immediate thrill that cash provides because of its liquidity and they’re not as mysterious as alternatives investments like derivatives. Yet if you give them a chance, bonds can play a major role in ensuring that your retirement will be secure.

Pension Woes & Muni Bonds

Public pension underfunding at the state and local level is a big concern for municipal bondholders.

Most public pension funds are significantly underfunded when their liabilities are valued using economically reasonable assumptions. In fact, the Pew Trust estimated that total underfunding was roughly $1.4 trillion as of 2010. That means the total value of pension fund assets is roughly $1.4 trillion less than the amount these funds owe to current and future retirees.

The Bullish Case for 2014

Statistically, 2014 looks good. On average since 1926, the Standard & Poor’s 500 total return, which includes dividends, advanced by roughly 11.5% the year after a 20% or greater advance. Absent a steep and unlikely late-December slump, this year is on track to finish well above 20%.

China and Its Debt Woes

If the United States relies on China as its main lender, what happens when China is having difficulties with its debt? Perhaps the world’s second largest economy is not as inexorable as advertised.

We may soon find out how the debt problem will evolve. As the Financial Times reported, “several banks have had to delay or dramatically reduce Chinese bond issues as the impact of a tight onshore credit market begins to be felt.”


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