So What’s an Investor to Do? Solution 1: Short Term Corporate Bonds

If the cult of equities is over and the markets are gamed and financial derivatives threaten economic meltdowns, then how should we be investing our life savings?  My answer to that is quite simple.  We should be investing in short term corporate bonds; NOT bonds funds, but individual bonds.

  • Short term (3 to 5 years) because we are still in a very dangerous financial world.  Europe could collapse at any moment and our economy is still very fragile so we do not want to lock in anything long term.  Secondly, short term because even though interest rates are low, in three to five years they might be higher allowing us to roll our principal into higher yielding bonds.  Also in uncertain times cash is king.  The way I invest in bonds enables us to go to cash immediately if need be.
  • Corporate bonds because right now major corporations are extremely secure and perhaps even more secure than the federal government.   They have little or no debt and they are cash rich.  The probability of them being able to pay the interest on the bonds while we hold them and pay us our principal when redeemed is very high.
  • Why individual bonds?  Because individual bonds have a set maturity date and bonds funds do not.   Bond funds trade their underlying bonds in and out every day.  If you own individual bonds you are assured, assuming the entity is financially sound you will get your principal returned.  Neither stocks nor stock funds have maturity dates.

What happens if there is a crash again, such as in 2008 and the value of both the stock and the bond market goes down?  Again, if you have a bond with a solid company that still exists and you reach your bonds’ maturity date, even if it is in the middle of the crash, you will get your principal back.  Shareholders of a bond funds however may not because the current value has been hit and it is never necessarily going to come back because the bond will most likely be gone from the fund before the maturity date.

As I discussed in the “The Cult of Equities is Over” and “The Stock Market is Gamed” sections, we are looking at a period where it will be unwise for the small investor to get back into equities for a very long time.  The most appropriate investment looking both in the short, mid, and long term for the small investor will be bonds.

This is not the kiss of death.  Remember, the average bond investor made approximately 7% per year from 2000 to 2010, while the average stock investor made nothing.

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Each year your advisor should evaluate your bond portfolio and determine where in the yield curve is the best return for your money.  So at any one time; short, intermediate or long term could be over weighted to maximize your income.  Bond investing for the long term can be an extremely successful and safe way of placing your life savings.

Very few advisors, financial planners, brokers, etc. are capable of structuring bond portfolios for you.  They are accustomed to using mutual funds that never mature, not individual bonds.  Also many advisors now hand off your money to third party money managers and have no idea what you are invested in on a day-to-day basis.

Today’s investor needs to replace the mindset of making “capital appreciation” (growth) on stocks with the idea of securing a “yield” from safe income producing investments.

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