Greath Wealth -Investment Information & Services

Thoughts on Investing TODAY

Everyone,

As always, thank you for your kind words.  In posting today I decided to post my response to a client’s questions about where to put some money from bonds that just matured.  The clients are within ~5 years of retirement.  I have to keep the amount confidential, but it was approximately 1.5 percent of their total portfolio.  Although it’s not a huge amount, it’s still significant.  They pay me to watch every penny, which is what I do my best to fulfill.

Susan:

Thank you for getting back to me.  I have two thoughts on the $X that matured with the GRDA.  Each has its own risks and rewards issues.

The first option is to put it back into the municipal bond market.  If we were to go this route I’d highly recommend a municipal bond fund instead of single municipal bonds.  Why?  we’re not going to get significantly better returns going the single municipal bond route.  Yes, we can go with something that triple A and insured, but in today’s environment that doesn’t always mean a lot.

Have I lost faith in municipalities?  No, but I’d much rather spread the risk over hundreds or thousands of bonds, such as the DFA short term municipal bond fund or something similar, instead of putting it into one issue.  Why?  Some of the states are in financial trouble, which could trickle down to the municipalities. Can’t we go with safe states like OK and/or TX?  Yes, we could, but the federal government, with its “stimulus” plan, is threatening the states to take on huge fiscal liabilities.  As it now stands, the Feds take on the expense the first two or so years, but then dump it on the states.  That’s not good, as we don’t know which states are going to get whacked the hardest.  Hence, I’d much rather spread the risk across the entire country instead of buying a single issue that sounds good today but gets hammered with something unforeseen in a couple of years as the government fiscal landscape is changing.

How much are triple A municipal bonds getting right now?  Triple A, maturing in 5 years, as of a week or so ago, were getting 2.5 – 2.8 percent tax free.  One can get toward 3 percent if you go out 8 years, but I recommend sticking with 5 years and under.  Why?  Did you see the jump in interest rates last week? Mortgage rates climbed ~0.4 percent in two or three days.  Rates then fell back some on Friday, but still, to climb 0.4 percent in two days is outrageous.  As interest rates go up, bond values go down.  Hence, the shorter your time to maturity, the less you get hurt.  Should we invest at all in bonds with rising interest rates?  It’s not a good financial move, but its less volatile than stocks or real estate.  This is a move I don’t like to make; i.e., looking for the route of least potential pain.

What else is there?  I realize that John and you are highly skeptical of investing in stocks, but now may be a good time to get into some large “blue chip” stocks.  This would bring your portfolio back toward the long term stock and bond balance we’re seeking, as we designed a few years ago when I brought you on board with the Schulz Financial/TDAmeritrade/DFA team.

I’ll be the first to admit that I’m not clairvoyant, but the market isn’t in the free-fall that it was in from last Sep/Oct through Feb/Mar.  Also, as far as weathering out changes, I have more faith in a broad section of “blue chip” companies than a broad section of government bonds.  I don’t know if you noticed, but a couple of weeks ago one of the rating agencies (I believe it was Standard and Poors) warned the UK that it was thinking about downgrading their bond rating. And you don’t have to look far on our side of the pond to see similar things happening.

For example, I believe California’s bonds are now rated as either “junk” bonds or one step above junk bonds.  Oregon is contemplating (a) shutting down some courts; (b) letting convicted felons out of prison early; and (c) trimming its public school year from 9 months to 8 months, or some combination of (a) – (c) to save money because it’s in such dire financial straits.  NY, NJ and MI aren’t far behind.  And in the private university world, Ivy League Dartmouth College recently had its credit rating revised downward.  Yes, people are starting to realize that the U.S. government may have its bond rating reduced.  In reality, the bond has already been hit by the time the agencies take something down a notch.  Markets are efficient.

What about CDs?  Everyone who’s within ten years of retirement should have some money in CDs but we need to realize that their long term return, after taxes and inflation, has historically been negative.  Yes, CDs have increased their yield in the last couple of weeks due to the rise in interest rates, but we also need to keep in mind that inflation has gone from ~0 to ~2 percent.

In summary, we’re not out of the woods.  However, it may be a good time to take some or all of the $X that matured with the GRDA and roll it into a broad cross section of large cap “blue chip” stocks.  Another option is a municipal bond fund, and still another option is splitting it 50/50 between the two. CDs may feel safe, but, long term, too much in CDs won’t get us where we need to be financially.

What do you think?  Please drop me a note or give me a call.

Thanks,

Rod