Your Questions About Disadvantages Of Investing In Bonds

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Charles asks…

What are some BENEFITS of investing in a single investment grade bond?

I am looking for benefits or advantages of investing in one high rated bond, not disadvantages. If anyone knows of any documents stating any of these, I would REALLY appreciate it. Thank you!

Also, how can investing in one bond be a better decision than diversifying a portfolio. This is a tough question, but I’m hoping someone might have some answers?? Please give sources, thanks!

financi4 answers:

The truth is you are better of diversifying. I would never hold a bond I would buy a mutual fund of bonds. At this time rates can only go up you want short duration bonds. I’m a fan of short duration bond funds right now.

Thomas asks…

Wat are d disadvantages of investing in a callable bond?Wats d advantage 2 d issuer of issuing callable bond?

financi4 answers:

Well, we’re seeing the feds call their treasury bonds to provide quantitative easing to the economy injecting cash into the economy in order to stimulate it so obviously a government issues a callable bond in order to have a means of influencing the economy when needed. I guess for corporations issuing bonds it’s like paying off a loan early, you save yourself the interest payments that you have yet to make.

James asks…

Male single 33 owns a condo in Ny City. worth 250,000. last years income was 90,000. several years ago he?

began investing in stocks and bonds, his slections were basis of a articles he read describing good investment opportunities, some worked well some not. he has never taken a look at his investment portfolio performance. he currently has $90,000. to invest, he is planning to get married in three years and will need $20,000. his only other investment is to accumulate funds for retirement. but has to specific dollar target for his goal. he feels he has a moderate risk tolerance level. 1. explain some disadvantages about the current investment approach. 2. Construct a portfolio, limiting your selections to mutual funds( assume that he sells his current stocks and bond holdings. Plan and indicate specific dollar amounts for each portfolio component. explain your slections for each portfolio. Explain how you should periodically rebalance your portfolio, indicating how frequently rebalancing should be done.

financi4 answers:

Since there are very few condos in NYC worth something as low as $250k right now, I assume this is some kind of homework question.

Chris asks…

Please Help Finance Homework?

Cliff Swatner is single, 33, and owns a condo in New York worth $250,000. Cliff is an attorney and doing well financially. His income last year exceeded $90,000, and he has sufficient liquid assets to supplement his condominium and other tangible assets. Several years ago, Cliff began investing in stocks and bonds. Some have worked well for Cliff, but others have not. Cliff has never evaluated his portfolio performance, but he feels it isn’t good. Cliff currently has about $90,000 invested. He has been dating a woman lately and hopes to marry her in three years, at that time he will need $20,000 for marriage expenses and a honeymoon. Cliff’s only other objective is to accumulate funds for retirement, but he does not have a specific dollar target for it. Explain some disadvantages of Cliff’s current investment approach.
Construct a portfolio for Cliff, limiting your selections to mutual funds (assume he sells his stock and bond holdings). Make sure your plan indicates specific dollar amounts for each portfolio component. Make sure your plan also explains your selections for each portfolio component.
Explain how Cliff should periodically rebalance his portfolio, indicating how frequently rebalancing should be done.

financi4 answers:

Okay, you’ve copied the homework problem here; that’s great background. Now, where are you having trouble? How far did you get? What preliminary conclusions have you made? This is homework *help*.

Donald asks…

look below?

Cliff Swatner is single, 33, and owns a condominium in New York City worth $250,000. Cliff is an attorney and doing well financially. His income last year exceeded $90,000, and he has sufficient liquid assets to supplement his condominium and other tangible assets. Several years ago, Cliff began investing in stocks and bonds. He made his selections on the basis of articles he read describing good investment opportunities. Some have worked well for Cliff, but others have not. Cliff has never taken the time to evaluate his portfolio performance, but he feels it isn’t very good. Cliff currently has about $90,000 invested. He has been dating a woman lately and hopes to marry her in three years, at which time he will need $20,000 for marriage expenses and a honeymoon. Cliff’s only other objective is to accumulate funds for retirement, but he does not have a specific dollar target for this goal. Cliff feels that he has a moderate risk-tolerance level.

Explain some disadvantages of Cliff’s current investment approach.
Construct a portfolio for Cliff, limiting your selections to mutual funds (assume that he sells his current stock and bond holdings). Make sure your plan indicates specific dollar amounts for each portfolio component. Make sure your plan also explains your selections for each portfolio component.
Explain how Cliff should periodically rebalance his portfolio, indicating how frequently rebalancing should be done.

financi4 answers:

First off at 33 and owning a condo in NY is outstanding so good for Cliff. And more kudos for saving $90k.

Very first recommendation is to read, read, and then read some more. Here’s an excellent selection of books to review

“Random Walk Guide to Investing” by Burton Malkiel
“Four Pillars of Investing” by William Bernstein

Both have a number of sample portfolios that Cliff can select from. Also take a look at www.fundadvice.com which has a number of articles and sample portfolios.

For now, I would tell Cliff to look at his investments carefully and determine those that have had losses and focus on selling those. Cliff can recognize a tax deduction for those losses (up to $3000 per year with the remainder carrying over to the following year).

I would then sell the rest and focus my portfolio on passive mutual funds (index funds). First some rules of thumb. At no time should Cliff pay a “load”. There a plenty of funds without them so why pay extra when you don’t need to? Second, the expense ratio should be less than 1%. More means Cliff again is paying more than necessary. Third is to check the turnover ratio is low such that the mutual fund manager is not consistently buying and selling stocks within the funds as this will increase the tax burden (irrelevant if investing in a tax deferred investment such as a 401k, IRA, or Roth IRA). Companies I would choose are Vanguard, T. Rowe Price, American Century, Fidelity, USAA. Vanguard is my personal favorite.

As for the allocation I would make it simple as possible. Either invest in a target fund such as Vanguard’s Target Retirement Fund 2035 or 2040. These funds will automatically rebalance the fund for Cliff. The lower the year the less the risk but this will also reduce your return.

If Cliff is more adventurous I would suggest looking at selecting an allocation that may work for his risk tolerance. Cliff is young so I would not go much less than 90/10 or 90% stocks and 10% bonds. Going less will impact the return in the long run. (for the dollar amound just multiply the % by $90k)

I will use Vanguard funds:
Total Stock Market Fund 60%
Total International Stock Market Fund 30%
Total Bond Market Fund 10%

Now should Cliff want to adventure further then the books mentioned above will be his best bet. The allocation is the most important. Here’s an example allocation if Cliff were to get more granular:

Large cap value – 20%
Large cap growth – 15%
Small cap growth – 15%
Small cap value – 10%
International large cap blend – 20%
International small cap blend – 10%
Short term bond 5%
Treasury inflations protected fund 5%

The options are endless. It really depends on how involved Cliff would like to be. Rebalancing can be done every couple of years. Some analysis was done on William Bernstein’s website, www.efficientfrontier.com that showed this to be more than adequate.

Some additional basics.
1. Invest as much as possible in 401k up to the match if one exists
2. Invest as much as possible in a Roth IRA (since your income is less than $100k you should still qualify). If there is no 401k match, invest the max in the Roth IRA first.
3. Max out your 401k

HTH

Jesse

Richard asks…

Help Me Please!?

Cliff Swatner is single, 33, and owns a condominium in New York City worth $250,000. Cliff is an attorney and doing well financially. His income last year exceeded $90,000, and he has sufficient liquid assets to supplement his condominium and other tangible assets. Several years ago, Cliff began investing in stocks and bonds. He made his selections on the basis of articles he read describing good investment opportunities. Some have worked well for Cliff, but others have not. Cliff has never taken the time to evaluate his portfolio performance, but he feels it isn’t very good. Cliff currently has about $90,000 invested. He has been dating a woman lately and hopes to marry her in three years, at which time he will need $20,000 for marriage expenses and a honeymoon. Cliff’s only other objective is to accumulate funds for retirement, but he does not have a specific dollar target for this goal. Cliff feels that he has a moderate risk-tolerance level.

Explain some disadvantages of Cliff’s current investment approach.
Construct a portfolio for Cliff, limiting your selections to mutual funds (assume that he sells his current stock and bond holdings). Make sure your plan indicates specific dollar amounts for each portfolio component. Make sure your plan also explains your selections for each portfolio component.
Explain how Cliff should periodically rebalance his portfolio, indicating how frequently rebalancing should be done.

financi4 answers:

This section is to find help with your homework, not for people to do your homework for you.

Is there a specific problem you are having with this assignment?

Mark asks…

help please?

Cliff Swatner is single, 33, and owns a condominium in New York City worth $250,000. Cliff is an attorney and doing well financially. His income last year exceeded $90,000, and he has sufficient liquid assets to supplement his condominium and other tangible assets. Several years ago, Cliff began investing in stocks and bonds. He made his selections on the basis of articles he read describing good investment opportunities. Some have worked well for Cliff, but others have not. Cliff has never taken the time to evaluate his portfolio performance, but he feels it isn’t very good. Cliff currently has about $90,000 invested. He has been dating a woman lately and hopes to marry her in three years, at which time he will need $20,000 for marriage expenses and a honeymoon. Cliff’s only other objective is to accumulate funds for retirement, but he does not have a specific dollar target for this goal. Cliff feels that he has a moderate risk-tolerance level.

1. Explain some disadvantages of Cliff’s current investment approach.
2. Construct a portfolio for Cliff, limiting your selections to mutual funds (assume that he sells his current stock and bond holdings). Make sure your plan indicates specific dollar amounts for each portfolio component. Make sure your plan also explains your selections for each portfolio component.
3. Explain how Cliff should periodically rebalance his portfolio, indicating how frequently rebalancing should be done.

financi4 answers:

Cliff needs some help. It’s very likely that he has a very unbalanced portfolio that is risk concentrated and he should be concerned that he has been buying the wrong things. He should be invested in mutual funds because they are for people like himself who are not interested in doing it himself.

If he sells out he should buy VFINX (Vanguard S&P 500) fund with 70% of his proceeds and 30% VBIIX (Vanguard Intermediate Term Bond Index. This will give him balance, low fees, and the ability to simply save and ignore the management aspect.

His other good option would be VTTHX. Which is Vanguards target timeline 2035 which is probably about his retirement time. This fund allocates assets for him based on time to target reducing his exposure to stocks along the way. It’s quick easy and also has relitavely low fees.

If he buys the second fund he will never have to rebalance and on the first two he should rebalance annually on a percentage basis to keep a 70/30 mix until he gets closer to retirement then reduce the VFINX down slightly on an annual basis.

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