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The Right Bond for Any Purpose

By David Luhman on Mon, 05/11/2009 - 23:18

The Right Bond for Any Purpose

Long-term returns on bonds

Selecting the right fixed-income investment

Bond market timing

Long-term returns on bonds

Total return for bonds has been 5.5 percent over past 70 years

But the best way to estimate future return is not past return, but to simply look at current yield for bonds trading at par

80 percent of expected return can be explained by current yield

Notice total return is different from current yield

A bond selling at a premium will have a deceptively high yield

You will have a capital loss in the bond as the bond nears maturity

In general, what you gain in higher current yield is eventually surrendered as loss in principal

Selecting the right fixed-income investment

Use maturity matching when it comes to all of your debts or investments

Short-term goals mean short-term investments

Emergency funds imply money market mutual funds or bank accounts

Home down payments or near-term college fund implies short-term bonds

Short-term bonds with a maturity of two to three years pay about 1 percent more than comparable money market mutual funds

The value of your short-term bond fund may increase or decrease slightly based on shifts in interest rates

Investing in short-term bond funds may subject yourself to capital gains taxes if held outside of retirement accounts

Long-term goals mean long-term investments

Saving for retirement means investing in a mixture of stocks and long-term bonds

Long-term bonds with a maturity of 10 years or more pay about 2 percent more than money market mutual funds

Long-term bonds also lock in your investment income and shield you from reinvestment risk

Bond market timing

If you want to gamble on the direction of interest rates and try to make capital gains from bonds, you should invest in long-term bonds

Actually, invest in bonds with a long duration

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