Bond Investing For Dummies E-Book

Russell Wild

• Herausgeber: John Wiley & Sons
• Kategorie: Ratgeber
• Sprache: Englisch
• Veröffentlichungsjahr: 2012

Seitenzahl: 585

Beschreibung

Your friendly guide to trading the bond and bond fund market Bonds and bond funds are among the safest and most reliable investments you can make to ensure an ample and dependable retirement income--if you do it right! Bond Investing For Dummies helps you do just that, with clear explanations of everything you need to know to build a diversified bond portfolio that will be there when you need it no matter what happens in the stock market. This plain-English guide clearly explains the pros and cons of investing in bonds, how they differ from stocks, and the best (and worst!) ways to select and purchase bonds for your needs. You'll get up to speed on the different bond varieties and see how to get the best prices when you sell. * Covers the ups and downs of today's market, which reinforces the importance of bonds in a portfolio * Explains how a radical fall in interest rates make bond investing trickier than ever * Explores the historic downgrade of U.S. Treasuries and its possible effects on government bonds If you're an investor looking for a resource that helps you understand, evaluate, and incorporate bonds into your portfolio, Bond Investing For Dummies has you covered.

Leseprobe

Bond Investing For Dummies®

Visit www.dummies.com/cheatsheet/bondinvesting to view this book's cheat sheet.

Table of Contents

Introduction

About This Book

Conventions Used in This Book

What You’re Not to Read

Foolish Assumptions

How This Book Is Organized

Part I: Bond Appetit!

Part II: Numerous and Varied Ways to Make Money in Bonds

Part III: Customizing and Optimizing Your Bond Portfolio

Part IV: Bonds Away! Navigating the Fixed-Income Marketplace

Part V: Bonds as Replacements for the Old Paycheck

Part VI: The Part of Tens

Icons Used in This Book

Where to Go from Here

Part I: Bond Appetit!

Chapter 1: So You Want to Be a Bondholder

Understanding What Makes a Bond a Bond

Choosing your time frame

Picking who you trust to hold your money

Recognizing the difference between bonds, stocks, and Beanie Babies

Why Hold Bonds? (Hint: You’ll Likely Make Money!)

Identifying the best reason to buy bonds: Diversification

Going for the cash

Introducing the Major Players in the Bond Market

Supporting (enabling?) your Uncle Sam with Treasury bonds

Collecting corporate debt

Demystifying those government and government-like agencies

Going cosmopolitan with municipal bonds

Buying Solo or Buying in Bulk

Picking and choosing individual bonds

Going with a bond fund or funds

Chapter 2: Developing Your Investment Game Plan

Focusing on Your Objectives

Deciding what you want to be when you grow up

Picturing your future nest egg

Understanding the Rule of 20

Choosing your investment style

Making Your Savings and Investment Selections

Saving your money in safety

Investing your money with an eye toward growth

Understanding Five Major Investment Principles

1. Risk and return are two sides of the same coin

2. Financial markets are largely efficient

3. Diversification is just about the only free lunch you’ll ever get

4. Reversion to the mean — it means something

5. Investment costs matter — and they matter a lot!

Chapter 3: The (Often, But Not Always) Heroic History of Bonds

Reviewing the Triumphs and Failures of Fixed-Income Investing

Beating inflation, but not by very much

Saving the day when the day needed saving

Looking Back Over a Long and (Mostly) Distinguished Past

Yielding returns to generations of your ancestors

Gleaning some important lessons

Realizing How Crucial Bonds Are Today

Viewing Recent Developments, Largely for the Better

Chapter 4: Sweet Interest Is the Name of the Game

Calculating Rates of Return Can Be Like Deciphering Ancient Babylonian

Cutting deals

Changing hands

Embracing the complications

Conducting Three Levels of Research to Measure the Desirability of a Bond

Level one: Getting the basic information

Level two: Finding out intimate details

Level three: Examining the neighborhood

Understanding (and Misunderstanding) the Concept of Yield

Coupon yield

Current yield

Yield-to-maturity

Yield-to-call

Worst-case basis yield

The 30-day SEC yield

Recognizing Total Return (This Is What Matters Most!)

Figuring in capital gains and losses

Factoring in reinvestment rates of return

Allowing for inflation adjustments

Weighing pre-tax versus post-tax

Measuring the Volatility of Your Bond Holdings

Time frame matters most

Quality counts

The coupon rate matters, too

Foreign bonds, added risk

Returning to the Bonds of Babylonia

Interest short run, interest long run

Interest past, interest future

Part II: Numerous and Varied Ways to Make Money in Bonds

Chapter 5: “Risk-Free” Investing: U.S. Treasury Bonds

Exploring the Many Ways of Investing with Uncle Sam

Savings bonds as gifts or small investments

Treasury bills, notes, and bonds for more serious investing

Treasury Inflation-Protected Securities (TIPS)

Easing Your Fears of Default

Deciding Whether, When, and How to Invest in Treasuries

Figuring out whether you want Treasuries

Picking your own maturity

Adding in some inflation protection

Entering the Treasury Marketplace

Buying direct or through a broker

Choosing a new or used bond

Tapping Treasuries through mutual funds and exchange-traded funds

Chapter 6: Industrial Returns: Corporate Bonds

Why Invest in These Sometimes Pains-in-the-Butt?

Comparing corporate bonds to Treasuries

Considering historical returns

Getting Moody: The Crucial Credit Ratings

Revisiting your ABCs

Gauging the risk of default

Special Considerations for Investing in Corporate Debt

Calculating callability

Coveting convertibility

Reversing convertibility . . . imagine that

Appreciating High-Yield for What It Is

Anticipating good times ahead

Preparing for the bad times

Investing in high-yields judiciously

Chapter 7: Lots of Protection (and Just a Touch of Confusion): Agency Bonds

Identifying the Bond Issuers

Slurping up your alphabet soup

Separating federal agency bonds from GSEs

Sizing up the government’s actual commitment

Introducing the agency biggies

Comparing and Contrasting Agency Bonds

Eyeing default risks, yields, markups, and more

Weighing taxation matters

Making like John Travolta: Discos, floaters, and step-ups

Banking Your Money on Other People’s Mortgages

Bathing in the mortgage pool

Deciding whether to invest in the housing market

Considering Agencies for Your Portfolio

Chapter 8: (Almost) Tax-Free Havens: Municipal Bonds

Appreciating the Purpose and Power of Munis

Sizing up the muni market

Comparing and contrasting with other bonds

Delighting in the diversification of municipals

Knowing That All Cities (Bridges or Ports) Are Not Created Equal

Dealing with the rare default

Enjoying low risk

Choosing from a vast array of possibilities

Consulting the Taxman

Bringing your bracket to bear

Singling out your home state

Matching munis to the appropriate accounts

Recognizing Why This Chapter is Titled “(Almost) Tax-Free Havens”

Reckoning with the AMT tax

Capping your capital gains

Introducing the fully taxable muni

Buying Munis Made Easier

Chapter 9: Le Bond du Jour: Global Bonds and Other Seemingly Exotic Offerings

Traveling Abroad for Fixed Income

Dipping into developed-world bonds

Embracing the bonds of emerging-market nations

Bond Investing with a Conscience

Having faith in church bonds

Adhering to Islamic law: Introducing sukuk

Investing for the common good: Socially responsible bonds

Playing with Bond Fire: Potentially Risky Bond Offerings

Rocking with Bowie Bonds

Cashing in on catastrophe bonds

Dealing in death

Dancing in the Flames: Derivatives and Default Bond Products

Daring to delve into derivatives

Banking on losses with defaulted bond issues

Evaluating Exchange-traded Notes

What are they?

Should you invest?

Part III: Customizing and Optimizing Your Bond Portfolio

Chapter 10: Risk, Return, and Realistic Expectations

Searching, Searching, Searching for the Elusive Free Lunch

Making a killing in CDs . . . yeah, right

Defining risk and return

Appreciating Bonds’ Risk Characteristics

Interest rate risk

Inflation risk

Reinvestment risk

Default risk

Downgrade risk

Tax risk

Keeping-up-with-the-Joneses risk

Regarding all these risks . . .

Reckoning on the Return You’ll Most Likely See

Calculating fixed-income returns: Easier said than done

Looking back at history: An imperfect but useful guide

Investing in bonds despite their lackluster returns

Finding Your Risk-Return Sweet Spot

Allocating your portfolio correctly

Tailoring a portfolio just for you

Chapter 11: The Science (and Pseudoscience) of Portfolio-Building

Mixing and Matching Your Various Investments

Dreaming of limited correlation

Seeking zig and zag with Modern Portfolio Theory

Translating theory into reality

Appreciating Bonds’ Dual Role: Diversifier and Ultimate Safety Net

Protecting yourself from perfect storms

Eyeing a centuries-old track record

Recognizing Voodoo Science

Comparing actively managed funds to index funds

Forecasting the future — and getting it wrong

Ignoring the hype

Chapter 12: Dividing Up the Pie: What Percentage Should Be in Bonds?

Why the Bond Percentage Question Is Not As Simple As Pie

Minimizing volatility

Maximizing return

Peering into the Future

Estimating how much you’ll need

Assessing your time frame

Factoring in some good rules

Recognizing yourself in a few case studies

Noticing the Many Shades of Gray in Your Portfolio

Bonds of many flavors

Stocks of all sizes and sorts

Other fixed income: Annuities

Other equity: Commodities and real estate

Making Sure That Your Portfolio Remains in Balance

Tweaking your holdings to temper risk

Savoring the rebalancing bonus

Scheduling your portfolio rebalance

Chapter 13: Which Kinds of Bonds Make the Most Sense for You?

Reviewing the Rationale behind Bonds

Making your initial selection

Following a few rules

Sizing Up Your Need for Fixed- Income Diversification

Diversifying by maturity

Diversifying by type of issuer

Diversifying by risk-and-return potential

Diversifying away managerial risk

Weighing Diversification versus Complication

Keeping it simple with balanced funds (for people with under $5,000)

Moving beyond the basic (for people with $5,000 to $10,000)

Branching out (with $10,000 or more)

Finding the Perfect Bond Portfolio Fit

Case studies in bond ownership

Seeking out the more exotic offerings

Part IV: Bonds Away! Navigating the Fixed-Income Marketplace

Chapter 14: Strategizing Your Bond Buys and Sells

Discovering the Brave New World of Bonds

Finding fabulously frugal funds

Dealing in individual bonds without dealing over a fortune

Deciding Whether to Go with Bond Funds or Individual Bonds

Calculating the advantages of funds

Considering whether individual bonds make sense

Is Now the Time to Buy Bonds?

Predicting the future of interest rates . . . yeah, right

Paying too much attention to the yield curve

Adhering — or not — to dollar-cost averaging

Choosing between Taxable and Tax-Advantaged Retirement Accounts

Positioning your investments for minimal taxation

Factoring in the early-withdrawal penalties and such

Chapter 15: Investing (Carefully!) in Individual Bonds

Navigating Today’s Individual Bond Market

Getting some welcome transparency

Ushering in a new beginning

Dealing with Brokers and Other Financial Professionals

Identifying the role of the middleman

Do you need a broker or agent at all?

Selecting the right broker or agent

Checking the dealer’s numbers

Hiring a financial planner

Doing It Yourself Online

If you’re looking to buy

If you’re looking to sell

Perfecting the Art of Laddering

Protecting you from interest rate flux

Tinkering with your time frame

Chapter 16: Picking a Bond Fund That Will Serve You for Life

Defining the Basic Kinds of Funds

Mining a multitude of mutual funds

Considering an alternative: Closed-end funds

Establishing a position in exchange-traded funds

Understanding unit investment trusts

Taking a flyer (or not) on an exchange-traded note

Knowing What Matters Most in Choosing a Bond Fund of Any Sort

Selecting your fund based on its components and their characteristics

Pruning out the underperformers

Laying down the law on loads

Sniffing out false promises

My Picks for Some of the Best Bond Funds

Very short-term, high quality bond funds

Intermediate-term Treasury bond funds

Treasury Inflation-Protected Securities

(Mostly) high quality corporate bond funds

Junk city: Corporate high-yield funds

Agency bond funds

Municipal bond funds: Taxes be damned

International bond funds

Emerging market bond funds

All-in-one bond funds

All-in-one bond and stock fund

Target-retirement date funds (otherwise known as life-cycle funds)

Part V: Bonds As Replacements for the Old Paycheck

Chapter 17: Fulfilling the Need for Steady, Ready, Heady Cash

Reaping the Rewards of Your Investments

Aiming for freedom

Estimating your target portfolio

Lining up your bucks

Finding Interesting Sources of Interest

Certificates of deposit (CDs)

Mining the many money market funds

Banking on online savings accounts

Prospering (perhaps) with peer-to-peer lending

Considering the predictability of an annuity

Hocking your home with a reverse mortgage

Recognizing that Stocks Can Be Cash Cows, Too (Moo)

Focusing on stocks with sock-o dividends

Realizing gain with real estate investment trusts (REITs)

Taking a middle ground with preferred stock

Introducing a Vastly Better Way to Create Cash Flow: Portfolio Rebalancing

Buying low and selling high

Rolling bond interest back in

Dealing with realities

Chapter 18: Finding Comfort and Security in Old Age

Looking Ahead to Many Years of Possible Portfolio Withdrawals

Knowing Where the Real Danger Lies: The Risk of Being Too Conservative

Considering an aggressive approach

Easing back toward your comfort zone

Setting your default at 60/40

Allowing for adjustments to suit the times

Choosing my and your ultimate ratio

Calculating How Much You Can Safely Tap

Revisiting risk, return, and realistic expectations

Basing your retirement on clear thinking

Making the Most Use of Uncle Sam’s Gifts

Minimizing income is the name of the game

Lowering your tax bracket through smart withdrawals

Part VI: The Part of Tens

Chapter 19: Ten Most Common Misconceptions about Bonds

A Bond “Selling for 100” Costs $100

Buying a Bond at a Discount Is Better Than Paying a Premium, Duh

A Bond Paying X% Today Will Pocket You X% Over the Life of the Bond

Rising Interest Rates Are Good (or Bad) for Bondholders

Certain Bonds (Such as Treasuries) Are Completely Safe

Bonds Are a Retiree’s Best Friend

Individual Bonds Are Usually a Better Deal than Bond Funds

Municipal Bonds Are Free of Taxation

A Discount Broker Sells Bonds Cheaper

The Biggest Risk in Bonds is the Risk of the Issuer Defaulting

Chapter 20: Ten Mistakes That Most Bond Investors Make

Allowing the Broker to Churn You

Not Taking Advantage of TRACE

Choosing a Bond Fund Based on Short-Term Performance

Not Looking Closely Enough at a Bond Fund’s Expenses

Going Through a Middleman to Buy Treasuries

Counting Too Much on High-Yield Bonds

Paying Too Much Attention to the Yield Curve

Buying Bonds That Are Too Complicated

Ignoring Inflation and Taxation

Relying Too Heavily on Bonds in Retirement

Chapter 21: Ten Q and A’s with Bond Guru Dan Fuss

Appendix: Helpful Web Resources for Successful Bond Investing

Cheat Sheet

End User License Agreement

Bond Investing For Dummies®

by Russell Wild, MBA

Bond Investing For Dummies®

Published by John Wiley & Sons, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com

Copyright © 2012 by John Wiley & Sons, Inc., Hoboken, New Jersey

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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About the Author

Russell Wild is a NAPFA-certified financial advisor and principal of Global Portfolios, an investment advisory firm based in Allentown, Pennsylvania. He is one of only a handful of wealth managers in the nation who is both fee-only (takes no commissions) and welcomes clients of both substantial and modest means. He calls his firm Global Portfolios to reflect his ardent belief in international diversification — using mostly low-cost index funds to build well-diversified, tax-efficient portfolios.

Wild, in addition to the fun he has with his financial calculator, is also an accomplished writer who helps readers understand and make wise choices about their money. His articles have appeared in many national publications, including AARP The Magazine, Consumer Reports, Details, Maxim, Men’s Health, Men’s Journal, Cosmopolitan, and Reader’s Digest. He writes a regular finance column for The Saturday Evening Post. And he has also contributed to numerous professional journals, such as Financial Planning, Financial Advisor, and the NAPFA Advisor.

The author or coauthor of two dozen nonfiction books, Wild’s work includes One Year to an Organized Financial Life, coauthored with professional organizer Regina Leeds, published by Da Capo Press. He also wrote two other Dummies titles in addition to this one: Exchange-Traded Funds For Dummies, now in its second edition, and Index Investing For Dummies. No stranger to the mass media, Wild has shared his wit and wisdom on such shows as Oprah, The View, CBS Morning News, and Good Day New York, and in hundreds of radio interviews.

Wild holds a Master of Business Administration (MBA) degree with a concentration in finance from The Thunderbird School of Global Management, in Glendale, Arizona (consistently ranked the #1 school for international business by both U.S. News and World Report and The Wall Street Journal); a Bachelor of Science (BS) degree in business/economics magna cum laude from American University in Washington, D.C.; and a graduate certificate in personal financial planning from Moravian College in Bethlehem, Pennsylvania (America’s sixth-oldest college). A member of the National Association of Personal Financial Advisors (NAPFA) since 2002, Wild is also a longtime member and past president of the American Society of Journalists and Authors (ASJA).

The author grew up on Long Island and now lives in Allentown, Pennsylvania, where he is a board member of Friends of the Allentown Parks. His son Clayton attends George Washington University in Washington, D.C. His daughter Adrienne is in high school. His dogs, Norman and Zoey, collaborate to protect their home from squirrels and other potential dangers. His website is www.globalportfolios.net.

Dedication

To the people I’ve known in this crazy world who somehow manage to keep proper perspective on money and have helped me to do the same: Arun, Auggie, Joe, Marc, Michael, Mitch, Susan, Vicki, and the inhabitants of southern France.

Author’s Acknowledgments

This being my latest in a number of Dummies books, I’d like to thank once again all the good people at Wiley for, well . . . being good people. I’m so glad that you guys assigned Joan Friedman once again as the project editor. If Moody’s gave editors ratings, as it does bonds, Joan would be rated Aaa — right up there with Swiss government bonds.

Thanks to some of my colleagues in the investment world, including bond gurus Bill Conger, Bill Bengen, Dan Fuss, Chris Genovese, David Lambert, Kevin Olson, and Steve Pollock. Special thanks to Neil O’Hara, official tech consultant on this book, who knows bonds like Scarlett O’Hara (no relation) knew curtains.

My great appreciation to Helen Bartley, ace wordsmith of Michigan, for her identification of clunky prose and suggestions for its remediation.

I also appreciate the help of all the number-crunchers and analysts at Morningstar, such as Annette Larson and Eric Jacobson, as well as some very helpful folks at the U.S. Treasury, the Securities Industry and Financial Markets Association, and the Financial Industry Regulatory Authority. Special thanks to Rebecca Cohen at Vanguard.

And thanks to my literary agent, Marilyn Allen, for her continued good representation in the tangled and complicated world of book publishing.

Some others who provided very helpful input are mentioned throughout the pages of the book. I appreciate your help, one and all. Oh, I almost forgot . . . Thank you, my beloved daughter Adrienne, for your cool illustrations!

Publisher’s Acknowledgments

We’re proud of this book; please send us your comments at http://dummies.custhelp.com. For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax [phone].

Some of the people who helped bring this book to market include the following:

Acquisitions, Editorial, and Vertical Websites

Project Editor: Joan Friedman

Acquisitions Editor: Stacy Kennedy

Assistant Editor: David Lutton

Editorial Program Coordinator: Joe Niesen

Technical Editor: Neil A. O’Hara

Senior Editorial Manager: Jennifer Ehrlich

Editorial Supervisor: Carmen Krikorian

Editorial Assistant: Alexa Koschier

Art Coordinator: Alicia B. South

Cover Photos: © iStockphoto.com / Mark Jensen

Cartoons: Rich Tennant (www.the5thwave.com)

Composition Services

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Layout and Graphics: Carrie A. Cesavice, Jennifer Creasey

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Indexer: Sherry Massey

Publishing and Editorial for Consumer Dummies

Kathleen Nebenhaus, Vice President and Executive Publisher

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Kelly Regan, Editorial Director, Travel

Publishing for Technology Dummies

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Composition Services

Debbie Stailey, Director of Composition Services

Introduction

Perhaps you bought this book online, either in text or digital format. But if you are still the kind of reader who prefers to browse through aisles and handle books before you buy them, you may be standing in the Personal Finance section of your favorite bookstore right now. If so, take a look to your left. Do you see that pudgy, balding guy in the baggy jeans perusing the book on getting rich by day-trading stock options? Now look to your right. Do you see that trendy young woman with the purple lipstick and hoop earrings thumbing through that paperback on how to make millions in foreclosed property deals? I want you to walk over to them. Good. Now I want you to take this book firmly in your hand. Excellent. Finally, I want you to smack each of them over the head with it.

Nice job!

Wiley (the publisher of this book) has lawyers who will want me to assure you that I’m only kidding about smacking anyone. So in deference to the attorneys, and because I want to get my royalty checks . . . I’m kidding! I’m only kidding! Don’t hit anyone!