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Thread: Opinions on best place to online invest.

  1. #1

    Default Opinions on best place to online invest.

    My portfolio is probably skewed incorrectly.

    55% cash/liquid
    25% physical silver / gold
    20% 401k ( 97% which are stocks )
    --> 40% large cap
    --> ~31% international
    --> ~26% small cap

    My bank partners will Merrill Lynch for additional online tools for investing, so not sure if I should go that route.

    Are there any online sites ala scott-trade etc.. in which I have a bit more leeway in what I invest in?
    I figure to move some of my liquid into that.

    Thanks.
    Last edited by Lord Xar; 08-08-2013 at 11:43 PM.



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  3. #2

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    The 25% physical silver/gold is great. Depending on the size of your portfolio, you might consider selling some of the silver for gold. Silver is not really a monetary metal. As such, it does not behave the same way as gold. But, for worst-case scenarios, one could imagine silver coins coming in very useful. But then, so would food storage. I would consider silver coins, food storage, camping supplies, gasoline, ammo, and other such things to be emergency supplies rather than investments. Mentally, it should be in a different pile.

    Having the cash is actually great. Everyone in the investment world will tell you "cash is trash". It's not. Cash is great. Having a big store of cash can provide the needed liquidity to do rebalancing in a more tax-advantageous way, and it also smooths out some volatility. During recessions, it can even be the best performer in a portfolio! That said, you may consider holding your cash in a different form. Holding cash in a bank account, or under the bed, both have some risks (banks are inherently bankrupt, and burglars can break into your house), and currently neither will give you any real return, so you are falling behind inflation. If you instead hold your cash in T-Bills, then you often may get a (slightly) better rate of interest, and you eliminate many of the risks. Many brokerages can even set it up so you can write checks and etc. on this T-Bill money market account, using it for living expenses just as you would use a bank account. It's something to look into.

    Second thing to consider: again, depending on the size of your portfolio, you very well may be holding too much cash. I believe you want a good-sized slush fund or emergency fund. One year of living expenses might be prudent. That should be in cash (T-bills, or maybe bank account if that is really much more convenient in your situation). That, again, is a separate thing than your investment portfolio. It's in the "emergency supplies" pile, conceptually, along with the silver coins and 72-hour kit. If your 55% represents less than one year of expenses, I'd just keep it as is, or maybe even add to it. If it is much more than that, though, I would say you are holding too much cash and thus hindering your portfolio's ability to safely and steadily grow.

    You do not own any long-term bonds, meaning that in a deflationary situation, you would be unprotected and could lose a lot of your savings. I would recommend fixing that. Long-term U.S. bonds should be 25% of your investment portfolio.

    Your 20% stock exposure is good. 25%, more or less, is the ideal, but you are not far enough off of that to worry. You don't need to modify that at all. Except for: you should switch all of it into a Total Stock Market index fund (the top 3000-5000 US stocks), if your 401k will allow it. If not, into a S&P500 index fund. If neither of those is available, do the best you can. You want to choose the fund with:

    The lowest fee
    No active management, only passive management, or as passive as possible
    Broad as possible, trying to get as close to the ideal of an index fund
    Low turnover
    100% stocks. Get that 97% up to 100%. No switching between stocks and bonds and cash at the manager's will. Which brings up,
    As little manager discretion as possible. You don't want these stupid managers messing around, doing unpredictable things with your precious money.

    You also want to always consider tax consequences. Taxes, taxes, taxes. If your portfolio is sizable, you should probably talk to a tax adviser and figure out how to do things in the least-taxing way. It would be beautiful, for instance, to get the (new-found) bond portion of your portfolio under your 401k's umbrella so the taxes aren't killing you. But I have no idea your situation, how close you are to retirement, etc. I do not think you should want all of your money locked up in a 401k until retirement, even if it is tax-free. But how much to lock up in tax-deferred accounts is a personal decision.

    I recommend browsing through www.crawlingroad.com , and listening to the Harry Browne radio show archives.

  4. #3

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    vanguard.com
    Waiting for the day the classical liberals drive the hateful alt-right out of the republican party, and the libertarians can rise again.

  5. #4

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    The most trusted names:

    www.vanguard.com
    www.fidelity.com
    www.schwab.com
    www.tdameritrade.com

    That said, Merrill Lynch is just fine. If that is more convenient and integrates into your existing systems, I think there's no reason not to use them.

  6. #5

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    I have a couple index funds with Vanguard (Fidelity would be a good choice for them as well) and a DRIP in a utility. Both offer the lowest cost means of investing (costs reduce returns). DRIPs are Dividend ReInvestment Plans. Worth checking out. Each company will have different rules for their DRIP so you need to check on each one but in general you buy shares in a dividend paying company. They use the dividend to purchase more shares instead of sending you a check. Extremely low minums and as close to "free" investing you will likely find.
    Quote Originally Posted by NorthCarolinaLiberty View Post

    Half the crap I write here is just to entertain myself.
    I am Zippy and I approve of this post. But you don't have to.

  7. #6

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    Quote Originally Posted by Zippyjuan View Post
    I have a couple index funds with Vanguard (Fidelity would be a good choice for them as well) and a DRIP in a utility. Both offer the lowest cost means of investing (costs reduce returns). DRIPs are Dividend ReInvestment Plans. Worth checking out. Each company will have different rules for their DRIP so you need to check on each one but in general you buy shares in a dividend paying company. They use the dividend to purchase more shares instead of sending you a check. Extremely low minums and as close to "free" investing you will likely find.
    I have lost more than my fair share by investing in gold miners. I feel I have "matured". Though I still am heavily overweight gold, it is primarily in GTU or physical gold in my hand. Miners are just losers. I will soon take my capital losses and move on.

    Anyways my point is I am getting more and more attracted to dividend growth stocks to build my wealth over time. I am primarily waiting till "the collapse" to start doing this and who knows what the landscape will look like at that time, but assuming the future is similar to the present(and past) the math just works. Buying a large cap stock that pays 4% and grows its dividend yearly at a 6-8% clip, means you double your money in 5-7 years. Just put the numbers into excel and watch how fast your income can be replaced by dividends. Let the DRIP dollar cost average for you, and put in additional principle on the dips. I only wish I had started earlier, though a lesson learned now may have saved me big later.
    What I say is for entertainment purposes only!

    Mark 10:45 The Son of Man did not come to be served, but to serve, and to give His life as a ransom for many.

    "If you want to make a lot of money, resist diversification." - Jim Rogers

  8. #7

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    Look up Harry Browne, and then get into this: http://www.permanentportfoliofunds.com/
    __________________________________________________ ________________
    "A politician will do almost anything to keep their job, even become a patriot" - Hearst

  9. #8

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    Go to vanguard and buy low cost diversified index funds. That is what I am doing. I only have 3 funds:

    Vanguard Total Stock Index (US stocks)
    Vanguard Developed Stock Index (Developed Countries Excluding US)
    Vanguard Emerging Stock Index (Countries that don't fit into the first two)

    This is a simple easy investment strategy which will more than likely outperform 90% + of investors (so long as you have a long time frame and methodically invest, even when the market drops 50%)

  10. #9

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    Quote Originally Posted by Matt Collins View Post
    Look up Harry Browne, and then get into this: http://www.permanentportfoliofunds.com/
    That is one way to kind-of-sort-of implement a Permanent Portfolio. He refined the concept over some years. The Permanent Portfolio Fund is using an incarnation of the original concept, which was more complex. And some of the holdings have become obsolete, as the purposes for holding them have gone away or further scholarship has proven them misguided. In the case of the purpose going away, I'm thinking of the Swiss Franc. The main Permanent Portfolio Fund (PRPFX) holds 10% of its assets in the Swiss Franc. But the Swiss Franc, as of 2000, is no longer linked to gold. I personally do not think there is a clear and indispensable reason any more to hold Swiss Francs. In the case of further scholarship giving us further light and knowledge, I'm thinking of the concept of having "aggressive growth stocks". Such a thing does not out-perform an index fund. The idea was that this would make the stock portion even more volatile, which for purposes of the Permanent Portfolio is a good thing (the PP embraces volatility). It would amplify the effect of the stock market, going up even more when stocks are going up, and crashing even harder when stocks are crashing, but over the years and decades having an overall higher return than the market overall. The problem is: that doesn't reliably work. And there's good theoretical reasons for why it can't reliably work. So, an index fund is better.

    All in all, the 4 way split -- stocks, bonds, gold, and cash -- is just better. And it's simple enough a person can manage it himself, buying the bonds directly and so forth.

    Here's the make-up of the Permanent Portfolio Fund (PRPFX)

    Gold 20%
    Silver 5%
    Swiss franc assets 10%
    Stocks of U.S. and foreign real estate and natural
    resource companies
    15%
    Aggressive growth stocks 15%
    Dollar Assets 35%
    Total 100%

    It also has a high fee, 0.69%, and high turnover, 23.71%. I think you're better off avoiding it. But if it's the only option available to you, or if buying one fund is really all that much of an advantage to you over buying 4, then it can be a decent option, providing a somewhat lower rate of return (fees! turnover!) and lower level of protection.

    As for the other funds in the family of funds, I do not think they are worthwhile for an investor trying to build a balanced portfolio following the Permanent Portfolio concept. The short term Treasury fund holds 23% in corporate bonds. It holds only 32% in cash and equivalent. It's not an acceptable fund to use for the cash portion of your portfolio. iShares SHV is much better.

    Anyway, I'm hoping Lord Xar will come back and let us know a little bit about his situation and what, if any, of our advice has been useful, and what his thoughts are and what direction he's wanting to take.

  11. #10

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    Quote Originally Posted by jclay2 View Post
    Go to vanguard and buy low cost diversified index funds. That is what I am doing. I only have 3 funds:

    Vanguard Total Stock Index (US stocks)
    Vanguard Developed Stock Index (Developed Countries Excluding US)
    Vanguard Emerging Stock Index (Countries that don't fit into the first two)

    This is a simple easy investment strategy which will more than likely outperform 90% + of investors (so long as you have a long time frame and methodically invest, even when the market drops 50%)
    It will outperform 90% of investors who are investing solely in stocks. But it will outperform 0% of investors who are invested in bonds, if bonds are doing better. It will outperform 0% of investors who are invested in gold, if gold is doing better.

    When the stock market drops 50%, you seem to be saying, "No big deal. Just keep putting more money down that hole." But it is a big deal! If you are invested 100% in stocks, half of your life savings just went up in smoke. It's gone. You can't get it back. Losses of that size are disastrous!

    Here's two reasons why: First, we hear a lot about the power of compound interest, and that's true, it's very powerful, multiplying gains many times over. But compound interest works both ways! It works for losses exactly as it works for gains. We usually forget that. So that 50% loss is going to be amplified and leveraged year in and year out and will get bigger and bigger and bigger. What was a $10,000 loss will become, after 40 years, a $300,000 loss.

    Second, it's harder to crawl out of the hole than it was to fall in it. Taking a 40% loss means that you need then to earn a 66% return just to get back to where you started! How about a hypothetical 90 percent decline as happened in the Great Depression? That means you need to earn a 900% return on that asset to get back to where you started. That will take decades! More realistically, it will never happen. You will despair and take your money out and do something else with it, locking in your losses forever.

    Don't get me wrong, your strategy is good, as far as it goes. But you may not have thought beyond your preferred asset (stocks) to see the bigger picture. You've come up with a sound way to invest in stocks. But you need your money to grow even in years/decades when stocks do poorly. You need a more balanced portfolio that will allow you to avoid the huge losses that you will have otherwise in the stock market's crashes.
    Last edited by helmuth_hubener; 10-29-2013 at 09:31 AM.

  12. #11

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    Quote Originally Posted by helmuth_hubener View Post
    It will outperform 90% of investors who are investing solely in stocks. But it will outperform 0% of investors who are invested in bonds, if bonds are doing better. It will outperform 0% of investors who are invested in gold, if gold is doing better.

    When the stock market drops 50%, you seem to be saying, "No big deal. Just keep putting more money down that hole." But it is a big deal! If you are invested 100% in stocks, half of your life savings just went up in smoke. It's gone. You can't get it back. Losses of that size are disastrous!

    Here's two reasons why: First, we hear a lot about the power of compound interest, and that's true, it's very powerful, multiplying gains many times over. But compound interest works both ways! It works for losses exactly as it works for gains. We usually forget that. So that 50% loss is going to be amplified and leveraged year in and year out and will get bigger and bigger and bigger. What was a $10,000 loss will become, after 40 years, a $300,000 loss.

    Second, it's harder to crawl out of the hole than it was to fall in it. Taking a 40% loss means that you need then to earn a 66% return just to get back to where you started! How about a hypothetical 90 percent decline as happened in the Great Depression? That means you need to earn a 900% return on that asset to get back to where you started. That will take decades! More realistically, it will never happen. You will despair and take your money out and do something else with it, locking in your losses forever.

    Don't get me wrong, your strategy is good, as far as it goes. But you may not have thought beyond your preferred asset (stocks) to see the bigger picture. You've come up with a sound way to invest in stocks. But you need your money to grow even in years/decades when stocks do poorly. You need a more balanced portfolio that will allow you to avoid the huge losses that you will have otherwise in the stock market's crashes.
    Bonds are highly risky at this time in my opinion. Prices of bonds move in the opposite direction from interest rates and rates are at all time lows meaning the most likely direction is up which will decimate values in bond funds if they rise sharply. If a bond fund (or an individual) buys and holds them (or an investor does) they won't get hit by rising interest rates but will run the risk of locking in low returns during the life of the bonds. Bonds did great while interest rates were falling but there isn't room for them (rates) to go down much more and will likely head up.

    If you want to get a fixed, relatively safe return like a bond without the interest rate risk, look at dividend paying stocks like the DRIPs I mentioned earlier.
    Quote Originally Posted by NorthCarolinaLiberty View Post

    Half the crap I write here is just to entertain myself.
    I am Zippy and I approve of this post. But you don't have to.

  13. #12

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    Quote Originally Posted by Zippyjuan View Post
    Bonds are highly risky at this time in my opinion.
    What does "risky" mean? Everything has risk. "Is this investment risky" is the wrong question to be asking. You should ask rather "What conditions could cause this investment to do poorly?" and "What is it likely to do under those conditions?"

    Bonds will do poorly if interest rates go up. What does that mean? They will probably fall in pretty much a mathematically determinate way, based on how much the rate goes up.

    So we know why they would do poorly. Digging deeper, why would interest rates go up? Only if inflation increased. The treasury is not going to pay more interest than it has to.

    So if inflation increases, no problem. In that situation, gold will carry the portfolio. So with a Permanent Portfolio, you are prepared for that situation, that "risk," should it arise.

    rates are at all time lows
    All-time of what time? During the Great Depression, guess how low rates went. 1%. The yield was 1% for a 30 year bond. Rates right now are over 300% higher. What if it goes that low again? What if it goes even lower? Exhibit: Japan. Are you prepared for that "risk"? If you had a Permanent Portfolio, you would be.

    If you want to get a fixed, relatively safe return like a bond without the interest rate risk, look at dividend paying stocks like the DRIPs I mentioned earlier.
    Safe? What does that mean? As Yoda would say: "Safe? There is 'when would this do well?' and there is 'when would this do poorly?'. There is no 'safe'."

    Long term bonds are not safe. If by safe you mean dependable, consider that the US politicians are not uber-dependable. If by safe, you mean slow and steady, remember that they are incredibly volatile.

    Bonds did great while interest rates were falling but there isn't room for them (rates) to go down much more and will likely head up.
    What makes you so special that you know the future?
    Interest rates may go up. Interest rates may go down. You do not know which they will do. Rather than risk my money on your prediction, I will go get a fortune cookie and base my financial decisions on that. Oh no, wait: I think instead I'll have a balanced portfolio and be ready no matter what happens.

  14. #13

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    Digging deeper, why would interest rates go up? Only if inflation increased. The treasury is not going to pay more interest than it has to.
    What conditions do you think make it likely that interest rates will go lower than they are now? Do you see that as more likely than the possibility that rates do rise? If you think that they are more likely to go lower, then yes, buying bonds could be good. Otherwise, the risk is greater of losing money than gaining it by investing in bonds.

    On the second point, the Treasury does not set any interest rates. They are forced to accept what investors offer them (they do accept the highest price which allows them to sell as much debt as they need to- highest price meaning lowest interest rate via an auction process).

    Safe? What does that mean? As Yoda would say: "Safe? There is 'when would this do well?' and there is 'when would this do poorly?'. There is no 'safe'."
    True that nothing is completely safe but if you pick a solid company (mine is a utility), they can be pretty safe.

    When will this do well and when will it do poorly?
    Speaking of my suggested alternative of a dividend paying stock- since it is sort of a hybrid, it can do well under several different conditions. Stocks are rising? You get the apreciation of the stock- plus the dividend payout. Stocks do poorly and the price falls? Then the return (yield) of the dividend goes up (it is measured as a percentage of the stock price). If it is in a DRIP, the dividend is used to buy more shares at no or very low cost to you and when prices are high, that purchases fewer shares, if prices of the stock are down, you get more). And utilities do pretty well even when the economy slows and also do well when the economy booms. People still need energy.

    My stock currently has a yield of 2.76%. To get a comparable yield from a US Treasury, I would have to go out to 10 years to nearly match it (currently 2.66%) or to 20 years to beat it. That is a long time to lock in that rate. http://www.treasury.gov/resource-cen...spx?data=yield

    What makes you so special that you know the future?
    I didn't predict anything. I merely expressed my opinion and said what I think is most likely to occur.

    Bonds will do poorly if interest rates go up.
    Long term bonds are not safe.
    Which was my point. Thanks for agreeing (after seeming to try to say I was incorrect).

    But your advice in an earlier post in this thread says:
    Long-term U.S. bonds should be 25% of your investment portfolio.
    If they aren't safe, why put 25% of your assets into them?

    What I did say:

    Originally Posted by Zippyjuan

    Bonds are highly risky at this time in my opinion.
    They can be useful investment tools- I just think this is not a good time to be buying them.
    Last edited by Zippyjuan; 10-29-2013 at 03:08 PM.
    Quote Originally Posted by NorthCarolinaLiberty View Post

    Half the crap I write here is just to entertain myself.
    I am Zippy and I approve of this post. But you don't have to.

  15. #14

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    I've had good experiences with TradeKing.

    Nice interface and $4.95 per trade.

  16. #15

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    Quote Originally Posted by Zippyjuan View Post
    What conditions do you think make it likely that interest rates will go lower than they are now?
    The opposite situation to the one that would make them go higher, of course. Inflation is bad for bonds. Deflation is good for bonds.

    Do you see that as more likely than the possibility that rates do rise?
    I do not presume to know anything about it. Any guess I made would be just that: a guess, educated though it might be. That's speculation. If I have money I can afford to lose, I'm going to take and put it into my career, maybe start (another) business, or go have an adventure, or whatever, not use it to place a bet on interest rate behavior. I have no control over interest rate behavior.

    If you think that they are more likely to go lower, then yes, buying bonds could be good. Otherwise, the risk is greater of losing money than gaining it by investing in bonds.
    How do you quantify risk? How do you know if it's greater than or less than X? The only way is to put a probability on it. Where does that probability come from? Oh yeah: you just made it up! It's just a guess. It's almost certainly wrong.

    You can make it sound very weighty and worth listening to. "Regression analysis going all the way back to 1830 shows a .52 correlation between interest rate hikes and particularly large cicada-molting years. This translates into a 68% (+/- 3%) chance that interest rates will rise to 5% over the next 5 years. Furthermore, interest rates are at historic lows, a stunning 230% lower than the historic average over the last hundred years. Our statistical analysis did not even take this factor into consideration, but it can only increase the probability. It is virtually certain that interest rates are going to rise, and they are going to rise a lot, and they're going to do it soon. Any prudent investor can readily see, he should sell his bonds and buy gold, before it's too late. In fact, the real power play would be to short bonds, which this newsletter highly recommends." But actually, it is just a guess. When it turns out to be wrong, the newsletter/Motley Fool/Jim Cramer is not going to give you a refund.

    On the second point, the Treasury does not set any interest rates. They are forced to accept what investors offer them (they do accept the highest price which allows them to sell as much debt as they need to- highest price meaning lowest interest rate via an auction process).
    Yes, yes, yes, I was just saying that same thing.


    True that nothing is completely safe but if you pick a solid company (mine is a utility), they can be pretty safe.
    Again: what does it mean to be "safe"? Does it involve probabilities... which are plucked from thin air? Was Lehman Brothers a "safe" company in 2005? Was Pacific Gas and Electric a "safe" company in 1995? When did they become unsafe, exactly? Are you sure that you can tell the difference, every time?


    Speaking of my suggested alternative of a dividend paying stock- since it is sort of a hybrid, it can do well under several different conditions. Stocks are rising? You get the apreciation of the stock- plus the dividend payout. Stocks do poorly and the price falls? Then the return (yield) of the dividend goes up (it is measured as a percentage of the stock price). If it is in a DRIP, the dividend is used to buy more shares at no or very low cost to you and when prices are high, that purchases fewer shares, if prices of the stock are down, you get more). And utilities do pretty well even when the economy slows and also do well when the economy booms. People still need energy.
    Dividend pay-outs are not set in stone, it's not as if they made a contract with you to never change it (like bonds) so this analysis is extremely flawed. If 10 years from now the stock price of Gas and Elec. Co. is one-fourth of today's, and has been for a long time, do you really think they are still going to be paying out the same dividend as today? Even similar? Fundamentally, as long as people want the same or more energy in the future, and as long as the price of the inputs (coal, gas) stays the same or goes lower, the energy sector overall should stay profitable. If both of those do not work out that way, then not. If the energy sector is profitable, then as long as everything else about the company is good -- management is good, employees are good, no natural disasters, etc. -- then that particular company should be profitable, too. That is, as long as the local polity allows them to keep their monopoly, doesn't decide to lower their maximum permissible profits, hamstring them some other way, etc. So the conditions under which this investment will perform well? All of the above "as long as"s are true. The conditions under which this investment will perform poorly? One or more of them don't work out that way.

    My stock currently has a yield of 2.76%. To get a comparable yield from a US Treasury, I would have to go out to 10 years to nearly match it (currently 2.66%) or to 20 years to beat it. That is a long time to lock in that rate. http://www.treasury.gov/resource-cen...spx?data=yield
    Yes it is. That could be a good thing, or a bad thing. If there's inflation, it will be bad (as in the 1970s). If there's deflation, it will be good (as in the 1980s, 1990s, 2000s, and so far in the 2010s). Do we know which one will happen. I don't. You say that one is likely and the other isn't. I'm not so sure.

    I didn't predict anything. I merely expressed my opinion and said what I think is most likely to occur.
    To say "X is likely" is a prediction. You are making a statement involving the probability of future actions of human beings. If something is "likely," the odds of it happening are greater than of it not happening -- >50%. How do you know the odds are >50%? What makes you so special that you know the future?

    Which was my point. Thanks for agreeing (after seeming to try to say I was incorrect).
    Nope, I never said bonds are safe. People buying bonds because they think they are safe are misguided.

    No, you were incorrect to say there isn't room for rates to go down. That is not correct. They can always go lower. You may be right or you may be wrong about your other future-looking statements, such as " [they] will likely head up." I do not know. But I do not think you actually know, either. Making guesses about future likelihoods is speculating, not investing.

    If they aren't safe, why put 25% of your assets into them?
    I don't even know what "safe" means in this investment context. I think it's just a nice word to sound warm and fuzzy. If people say an investment is safe, what does that mean? Safe from what?

    They can be useful investment tools- I just think this is not a good time to be buying them.
    And that is a speculation. But because they are absolutely causally-linked to deflation, they are very important to hold, should the central bank decide to ease up on inflation, as Paul Volcker did in the 1980s. No one wanted to buy bonds in the mid and late 70s when Harry Browne started recommending it, as part of a diversified portfolio, ready for anything. Everyone knew bonds were an awful investment. Everyone knew it.

    But actually, no one knew the future. Browne didn't know either. But he, unlike them, knew that he didn't know. Humility is a key virtue in investing. Those who have it will beat those who don't.

    So I hope I don't come off as a know-it-all. Because I don't. I'm just learning and growing and thinking. But for the money that is precious to you that you want to keep and protect, the best course seems to me to be to protect it from all circumstances. Whatever the weather may bring.

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    If you hold bonds to maturity then rising rates really doesn't matter insofar as capital preservation. So, since most people don't buy individual bonds, but rather funds, be sure you're buying into a fund that holds to maturity, one that doesn't flip through maturities often, or one with a target date (i.e. Bulletshares 2020, or something similar.)

  18. #17

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    Quote Originally Posted by Jordan View Post
    If you hold bonds to maturity then rising rates really doesn't matter insofar as capital preservation. So, since most people don't buy individual bonds, but rather funds, be sure you're buying into a fund that holds to maturity, one that doesn't flip through maturities often, or one with a target date (i.e. Bulletshares 2020, or something similar.)
    Your first sentence makes no sense to me. I think it is false, for practical purposes. And so your advice doesn't make any sense either.

    First to explain bonds, as I understand them:

    With a US Treasury bond, you have a locked-in interest rate. Let's say it's 6%. If we go into deflation and now interest rates are only 2%, your bond which is still getting 6% is now much more valuable. People will pay a big premium for it, basically three times as much so that its effective rate of return will be the same as the 2% bonds which are all that are available from the Treasury now. You can multiply the effect even more the longer term bond you have. Like if you have a 30 year bond, you have that 5% locked in for 30 years (!!) and so the amount of extra interest for all 30 years will be built into the market price that people will bid it up to, whereas if it's only for 15 years, your leverage and thus your profits will be half as much.

    If that didn't make sense to you, I'll try again. A bond is just a loan. It's like a fixed-rate mortgage. So let's use a mortgage as an example. Let's say you have a 30 year mortgage with a 6% interest rate and a few years later rates have gone down to 4%. Now your mortgage company is making a killing. Some other mortgage company with extra cash laying around might offer to buy your mortgage from them, and they will offer to pay more than the amount you owe, because that higher interest rate obviously makes it more profitable for them than a new mortgage at 4%.

    So, that's how bonds work, and why their value is affected by interest rates. The market arbitrages away any change in the rates into the price of your bond, so that the effective yield of all bonds of the same time period is the same.

    Now, getting to your assertion, that if one holds a bond to maturity its value is unaffected by changes in the interest rate: well, its nominal value is unaffected. But nominal values are worthless in investing. They're irrelevant. What's important is real value. You shouldn't care about nominal returns at all; you should care about real returns. Real returns is what return you get in real dollars, that is, the return corrected for inflation. In other words, how much purchasing power your investment now has. And interest rates very much affect the real value, the real return, of your bond.

    Simple demo: you have a $1,000 bond. You hold it to maturity. You get the $1,000 back. Just as you say, it doesn't matter what interest rates have done in the mean time; you get back exactly the same nominal amount regardless. But if that $1,000 now has a purchasing power of only $600, you have just experienced a catastrophic loss. You've had a real return of -40%. Ouch. If instead that $1,000 is worth $1,200, you've experienced a real return of +20%. Nice.

    "Nice" and "Ouch" are very different.
    Last edited by helmuth_hubener; 11-01-2013 at 10:52 AM.

  19. #18

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    Your first sentence makes no sense to me. I think it is false, for practical purposes. And so your advice doesn't make any sense either.
    If you hold the bond until it matures, you are guaranteed to get that amount. If you don't keep it until it matures and sell it beforehand, how you do depends on what happened with interest rates on comparable bonds. If interest rates fell, your bond is worth more than other bonds and you can sell it at a profit. If interest rates rose, your bond is worth less and you will have to sell it for less than you paid for it.

    If you invest in a bond fund which trades bonds rather than holds them until maturity, that can boost returns while interest rates are falling but if interest rates are rising, the bond fund will lose money. If they hold them until maturity, they get low but steady returns.

    News article from today:
    http://enews.earthlink.net/article/b...4-f2c48d023a5f

    Wait, bond funds are posting gains?
    By STAN CHOE
    From Associated Press
    November 01, 2013 3:39 PM EST
    NEW YORK (AP) — What bear market for bonds?

    A funny thing has happened since investors pulled more than $100 billion from bond mutual funds this summer as they worried that the 30-year run for bonds was coming to an end. Bond funds are no longer losing money, at least not recently. Almost every kind has made money over the last month.

    To be sure, the gains are over only a short period and are modest, but money managers say conditions are in place for bond funds to offer flat to modestly positive returns over the next year or so, a better outcome than many investors feared.

    "Just because the bull market for bonds has ended doesn't mean that the bear market has to begin," says Jim Kochan, chief fixed-income strategist for Wells Fargo Funds Management. "The ingredients that typically are necessary for an upward trend in bond yields -- for a true bear market -- are simply not in evidence."

    Interest rates are key because they dictate prices for bonds. When rates fall, they make the higher yields being paid by existing bonds more attractive to investors. The increased demand means their prices rise. When interest rates rise, the opposite occurs. The effect is more pronounced for bonds that have a longer time until maturity. If bond prices fall enough, they overwhelm the income payments that bond funds make and leave investors with losses.
    More at link.

    As for "real returns" you are right- inflation is important. If the rate of inflation is higher than the rate of return on your bond (or any other investment), even if you make a nominal gain, you have lost purchasing power. But the expected rate of inflation is included in interest rates. It may or may not be correct, but the buyer of a bond is guessing at what the rate of inflation will be between the time of their purchase and when the bond matures. If you expect three percent inflation over the next five years, a five percent yield on a five year bond sounds good. If you expect a seven percent rate of inflation, you probably aren't going to buy a bond offering five percent.

    From the same article:
    Another factor that could send interest rates higher, inflation, has also been tame. The Consumer Price Index rose 1.2 percent in September from a year earlier. That's down from the 2 percent inflation rate in September of last year and 3.9 percent two years ago. Economists expect inflation to stay under control, partly because the sluggish job market means wages aren't rising for many households.
    Last edited by Zippyjuan; 11-01-2013 at 04:19 PM.
    Quote Originally Posted by NorthCarolinaLiberty View Post

    Half the crap I write here is just to entertain myself.
    I am Zippy and I approve of this post. But you don't have to.

  20. #19

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    Quote Originally Posted by Zippyjuan View Post
    If you hold the bond until it matures, you are guaranteed to get that amount....
    I do not understand why you quoted my post and then posted this information. That makes it appear it is in reply to my post. But surely you read the whole post, right? Or did you just read that first sentence.

    I guess you just read the first sentence and thought "Oh, he doesn't understand how bonds work. I will explain them to him." Well, thank you. You seem to be a helpful person. But if you will read my whole post, you will see that I understand exactly what he meant ("makes no sense was perhaps the wrong phrase to use), and understand how bonds work, and simply wanted to add the further consideration of real returns that Jordan may not have thought of.

    Again, you and Jordan say you are guaranteed to get back a certain amount upon maturity. Nominally: yes. Really? No.

    I would enjoy it if you replied to my reply to you, Zippyjuan.

  21. #20

    Default

    Sorry- you sounded like you were still a bit confused so I was just trying to help explain it.
    Quote Originally Posted by NorthCarolinaLiberty View Post

    Half the crap I write here is just to entertain myself.
    I am Zippy and I approve of this post. But you don't have to.

  22. #21

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    Quote Originally Posted by Zippyjuan View Post
    Sorry- you sounded like you were still a bit confused so I was just trying to help explain it.
    Right, that's what I thought. Thanks!

  23. #22

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    The only online broker I've used is PennTrade, and I'd be willing to recommend them. The trading platform was nothing special, more designed for functionality, but it looks like its been upgraded since I last traded. Gives you access to US stocks plus TSX and TSX-V which are Canadian exchanges with oogles of gold/silver miners and other resource producers, big and small- plus lots of other good companies in different sectors. Trading Canadian stocks does require you to hold Canadian currency basically, so severe deflation could hurt possibly -over sitting in US$ that is-, but depreciation on the other hand would benefit you. At least the last time I traded, they do not have live charts- nor charts at all- as a free service for trading with them, maybe for extra $$ though?.

  24. #23

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    Quote Originally Posted by helmuth_hubener View Post
    I do not understand why you quoted my post and then posted this information. That makes it appear it is in reply to my post. But surely you read the whole post, right? Or did you just read that first sentence.

    I guess you just read the first sentence and thought "Oh, he doesn't understand how bonds work. I will explain them to him." Well, thank you. You seem to be a helpful person. But if you will read my whole post, you will see that I understand exactly what he meant ("makes no sense was perhaps the wrong phrase to use), and understand how bonds work, and simply wanted to add the further consideration of real returns that Jordan may not have thought of.

    Again, you and Jordan say you are guaranteed to get back a certain amount upon maturity. Nominally: yes. Really? No.

    I would enjoy it if you replied to my reply to you, Zippyjuan.
    I'm very aware of how bonds work, thanks. I was just offering up the advice that holding a bond fund, like a 20-year+ duration US Treasury ETF, can screw you in a rising rate environment because it constantly rolls over bonds into new and longer maturities. Thus, not a single one is held to maturity. Totally different concept.

    A way to remove that risk is to buy a bond fund that holds bonds to maturity. But, because you just read my first sentence, decided it didn't make sense, and then ignored the one other sentence, only to write countless paragraphs and accuse another person of not reading more than one sentence of your post, you didn't pick up on what I was saying.

    And yes, I understand the concept of real and nominal returns. My suggestion (buying a target maturity bond fund vs. rolling maturity) allows you to avoid nominal losses from interest rate flux.
    Last edited by Jordan; 11-02-2013 at 02:33 PM.

  25. #24

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    I would not fool with bonds unless they are held until maturity.

  26. #25

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    Quote Originally Posted by Jordan View Post
    I'm very aware of how bonds work, thanks. I was just offering up the advice that holding a bond fund, like a 20-year+ duration US Treasury ETF, can screw you in a rising rate environment because it constantly rolls over bonds into new and longer maturities.
    Or it can put a very big smile on your face if rates go up. Right.


    Thus, not a single one is held to maturity. Totally different concept.
    Umm, I don't know that I'd use the word "totally," but certainly there are differences.

    A way to remove that risk is to buy a bond fund that holds bonds to maturity.
    The risk you have mentioned is the risk that interest rates will rise. Holding a bond to maturity does not remove that risk. Interest rates rising will still be very bad for the real return of your bond. The effect of rate changes will simply change over the lifetime of the bond. When it is very long til maturity, it will be affected very powerfully. As the duration shortens, the power of the bond to respond to rate changes lessens. When it becomes, say, a year out, it will, obviously, behave just exactly like a one-year bond.

    But, because you just read my first sentence, decided it didn't make sense, and then ignored the one other sentence, only to write countless paragraphs and accuse another person of not reading more than one sentence of your post, you didn't pick up on what I was saying.
    LOL, calm down my man! I was just telling Zippyjuan that I already knew what he was saying. Zippyjuan and I have interacted a bunch on investment topics lately, and we get along fine. It may have sounded mean to you, but whatever.

    I read your post. I understand what you said. But I see the advice as worthless. Each year during your holding of the bond, you are holding a bond of a certain duration. Other than for tax purposes and transaction costs, it makes absolutely no difference whether you hold the bond to maturity, or whether each December you sell your bond and buy a new one with a duration one year less than the one you bought last year. Which begs the question: why did you think that 22 year bonds were the ideal length of bonds to have in 2002, 19 year bonds in 2005, 9 year bonds in 2015, etc.?

    Doing this gradual reduction of bond term doesn't eliminate interest rate risk. It makes interest rate risk higher at the beginning of your investment and lower at the end. There may be good reasons for doing that, if you're about to retire or something, or if you are speculating that interest rates are going to go down in the near term, but then go up or be steady in the long term.

    Perhaps there are other good reasons to hold a bond to maturity you have thought of which I have not. If so, I'd love you to tell us, so that I, and everyone else, can learn!

    And yes, I understand the concept of real and nominal returns. My suggestion (buying a target maturity bond fund vs. rolling maturity) allows you to avoid nominal losses from interest rate flux.
    I just really think nominal returns are so unimportant as to be virtually irrelevant. The only time it would matter is for taxes. Real returns are what matters. And so like I say: your advice makes no sense, to me personally.






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