Bonds

When I look at the stock market today, I feel as if many of the investors around me are willfully deluding themselves. The market’s advance is due to some extent to Federal Reserve support, not basic economic improvement. Stock investors should be wary.

It feels fantastic to reach new highs. I am glad that is happening and even expect the rally to continue a bit further, but this makes it no less an illusion. A reckoning over the country’s high levels of borrowing is coming. Ignorance is bliss, but only until reality catches up with you.

Today, investors are increasingly diversifying their portfolios by investing in foreign markets, and American businesses are finding opportunities overseas. The fastest growth is taking place in emerging markets, but you need to be cautious to make sure that you don’t run afoul of their regulations or get fleeced.

With our economy in slow-motion growth, will investors continue to see good gains? You hear different scenarios all the time, but on balance, the case for cautious optimism is the most compelling.

We end each year with a plethora of fearless forecasts from gurus and sellers of books and newsletters. As we move into a new year, much ink and hot air is expended explaining why or why not certain prognostications did or did not come to fruition.

A market that goes up in a straight line, like the current one, sows the seeds of its own grief. Momentum investing, where a rising market encourages investors to push shares even higher, can be dangerously seductive and make you think that investing is easy.

All you do is put your money into the machine and it goes up. If the needle drops for a moment, just drop in some more cash and it goes back up again.

Stimulus, whether from low interest rates or high government spending, has failed to produce robust economic growth. Its one accomplishment is to keep hope alive, however ill-deserved, and that occasionally spurs market upturns. This is true in the U.S., where the recession hit six years ago, and also in Japan, which has endured this phenomenon for more than two decades.

Japan’s experience may show us our future: economic stasis despite stimulus, but some occasional stock market growth. There are, to be sure, some crucial contrasts between the two nations.

It’s easy to overpay or underpay taxes on your bond income and not even know it. Bond taxation is complex and there are several considerations that require different tax treatments. You need to be careful to avoid surrendering too much to the tax man, especially if you invest in zero-coupon or state bonds.

If you purchased a bond at par, also known as face value – 100 cents on the dollar – and held it to maturity, it is fairly simple. If it’s a taxable bond, you pay income tax on the coupon (interest) income. If it’s a tax-free municipal bond, you don’t.

Successful golfing and successful investing are similar. The key to both is determining how much risk is appropriate to accomplish your goals and when it is not.

Watching the different styles of the golfers at the Masters reminds me of an analogy that I sometimes use while talking to prospective clients. While each of the golfers tries to complete the four rounds of golf in the least amount of strokes, the way they accomplish this varies. That is also true for investors.

Diversifying your assets is a time-honored way to ride out tough times. The theory is that, if one investment type falls, another rises to offset it. But that is less and less the case these days. So how can you protect yourself?

The nation’s persistent unemployment problem worries many investors. A sluggish jobs outlook is a big reason for our slow economic growth. Can investors prosper during a lethargic, jobless recovery? Potentially, yes.

Does socially responsible investing mean lagging returns? Not at all. Contrary to popular belief, you can do well as you do good.

More and more investors opt to use their capital to encourage a company to abide by their personal values. Fortunately for them, socially responsible mutual funds deliver returns on par with or better than the markets in general.

Socially responsible investing (SRI) is an approach that takes into account environmental, social and corporate governance criteria, in addition to the typical investment and portfolio construction goals.