This will be a transition year for most bonds.... we've had a long bull market, with bond prices rising steadily in some cases for 30 years. Eventually, we'll see interest rates rise and with that, some decline in the market values of most bonds and other income securities. But not right away, and not in any sort of a V-shaped pattern as we saw with stocks a few years ago, when before you knew it, the Dow was down from 14,000 to 7,000 and now it's back again near its previous highs. In bonds, such movements take decades. So you're safe.
So, it sounds like bond-investors are pretty safe in the short-term. But what would you say is the biggest risk to income investors in today’s market?
I'm going to answer that one with a curve ball: It would be more of this rampaging bull market in stocks and continued recovery in real estate. People who may be getting bored with bonds will take some of their money and put it elsewhere. It won't be that anything is wrong with the bonds themselves, but that they'll no longer seem so appealing.
Interesting. Sounds like the opposite of what we saw happen last year?
In some ways, yes. It's about emotion and momentum. And while some people will be investing more in the stock market AFTER its big run-up, and not getting the returns they ought to have captured, that's often the case.
Thanks, Jeff. It's always tough to take the emotion out of investing.
Ready for our first question from Jerry?
Bond funds are not all alike, but you're generally on the money here: First, the value of the bonds in the portfolio fall, people take their money out, and the fund has to sell either at a loss or at a diminishing gain if these are bonds that have appreciated already. Then the question becomes whether investors do contribute new money so the manager can, as you say, invest that for a higher yield (meaning the funds pay higher dividends). But sometimes the money leaves much faster than it arrives, so you're not going to do especially well. Depends on the specifics of each fund and its flows.
Thanks, Jeff. Sounds like a tricky situation.
As for being 88, that's only an issue if you absolutely cannot lose any principal but can afford to collect 1% or 2%, in which case you can buy some CDs and suffer low returns but take no risk. Perhaps tax-free bonds are the way to go, again varying with the situation. But in the main, bond strategy doesn't hinge as much on age as other kinds of investment decisions.
Any suggestions for asset allocation, Jeff?
The older you are, the less risk you should take. But oftentimes, a good blue-chip dividend stock is less riskier than, say, a long-term Treasury bond. Better to set an income goal and then work from the bottom up.
Thanks, Jeff. That's a great segue into our next question from Sarge.
Some of each. Do remember that dividends from stocks are still taxed lightly, whereas bond inetrest is ordinary income.
An important distinction to make, especially depending on your tax bracket. Thanks, Jeff.
Jeff, here's another question about dividends from Roger
If you're only in the stock for the dividends, and it cuts or suspends, that's a sign. If the company has to borrow money or sell new shares to raise the cash to pay the dividends, that's even worse. Other than that, your decision is the same as any buy/sell/hold election. And don't let special dividends muddy this. There will be comapnies that paid, say $2.00 last year but $1.00 of that was a one-time special, so when they show up again as $1.00, or $1.05, that's not a 50% cut.
Good point about the special dividends. Thanks, Jeff.
Here's a great question from Tom.
Build your income slowly, make sure that you know where the money is coming from to pay your interest or dividends, and spread it around. I would add that you should not be afraid to buy individual stocks or bonds provided they are quality ones. Many mutual funds and ETFs have been serious problems.
Can you elaborate a bit more on that, Jeff? What are some of the problems? Anything in particular investors can look out for with mutual funds and ETFs?
High expenses, losses in years when most funds of the same kind break even or make money, the reliance on or misuse of derivatives trading to pad income, and more and more. Plenty of excellent mutual funds do not engage in these practices. But many that do still sell billions of dollars of shares to the public.
Thanks, Jeff. So, in other words, be careful about which funds/ETFs you invest in.
Here's our next question from T-Bills.
Depends on what you would do with the money? Do you have a gain or a loss? It might only break even for 2013, but for the folks who wish to preserve their capital, that's acceptable.
We have a follow-up from T-bills
No, there's no problem with Vanguard ETFs. Now, Treasury bonds, that's another matter. But these are intermediate-term. I wouldn't expect much change in the rate level for a while.
Thanks, Jeff. In general, would you advise investors to stay away from Treasury bonds?
Oops, we'll get to Beth's question in just a minute.
Treasury bonds have evolved into a global safe-deposit box for banks, governments, insurance companies, pension funds, and other institutions that do not care about what interest rate they earn but do care about the U.S. Treasury's full faith and credit. Deficit hawks: This is why the Treasury can sell all these enormous volumes of bonds at these low rates. Individuals really have no compelling reason to own them, except that you'll often have them inside a general bond market index fund. You can do better elsewhere.
Interesting. Thanks, Jeff.
Alright, now we'll go ahead and take Beth's question. I'm sure you've been waiting for a question about Apple, Jeff.
I really don't have a view on Apple dividends, but as a general rule, when a company that has a wide base of individual shareholders commences a dividend, it won't stop with one. Apple has so much cash that it probably should raise dividends because it can afford it and to reassure investors who may be threatening to bolt big time after this recent 30% decline.
Thanks, Jeff. It's certainly an interesting time for Tim Cook and Co. right now.
Alright, it looks like we have one more question from Lewis.
Very risky, though maybe due for a good year as the real estate economy recovers. Most high-yield municipals are issued to support development projects that often involve mixed-use communities--- housing, retail, office/industrial development- on the edge of cities or in high-growth areas. So you need to see the return of that urban sprawl-type boom we had for 20 years until the last recession.
Kiplinger's investing team is preparing an article on Apple, which we should hopefully post this some time afternoon or tomorrow.
Thanks, Jeff. We actually have one more question from Sarge.
I love REITs. But there are hundreds of them, and they own different kinds of properties or even stuff like cell-phone towers. The record is remarkable, and the successes outnumber the failures. Just do some research about which ones because on some of the biggest and most popular REITs, the share prices and extremely high and the current dividend yield low. You need to plan on holding any REIT for several rounds of dividend increases.
Alright, that's it for today's chat. Thanks for a great discussion, everyone!
And thank you, Jeff, for taking the time to share your expertise.
And be sure to join us again in two weeks for the first round of Jump-Start Your Retirement Plan Days. NAPFA advisors will online all day on Thursday, Feb. 7, from 9am to 5pm ET.