Risk/Reward Vol. 396
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I subscribe to three daily financial publications and read several online financial columns. No where did I read a cogent explanation for what occurred in the equity markets this week. Bomb threats? The caravan? Trump excoriating Fed governors? Draghi ending bond buying in the ECB? I don't think so. The only comment that made any sense was uttered by Larry Kudlow. He said the volatility was in anticipation of the Democrats winning the House. I think he is right. If he is, we should see several more days of roller coaster rides with an overall downward trajectory. As reiterated last week, the midterms are the reason that I have rotated into bonds. For the first time in a decade, bonds are paying a small albeit acceptable rate of return.
Last week's column spurred several comments and questions from subscribers. A few inquired whether I buy bonds or bond funds. I buy bonds. Conventional wisdom is that in times of increasing interest rates one should eschew buying bond funds. Why? Remember, bond funds never mature. They hold a portfolio of bonds which they continually rollover. As rates increase, lower paying bonds are sold and replaced. This is good in theory, but has a downside. Bonds with lower yields trade at reduced principal prices. Generally bond fund portfolios lose principal value quicker than the rates increase. Indeed, a simple look at major bond funds shows that they are in the red year to date. Individual bonds, on the other hand, held to maturity do not lose principal. Assuming the underlying issuer (e.g. the US Government) is solvent, one will receive one's principal and accrued interest on maturity. A more fulsome explanation is beyond the scope of this publication. Google "bond versus bond fund" for elucidation.
Another question was where do I buy the bonds. I buy them on bond exchanges sponsored by TD Ameritrade and Charles Schwab, two brokerage houses where I have on line accounts. Unlike in times past, I do not need the assistance of a broker to effect a purchase. The trade is closed as quickly as an equity buy. Given that this is a private exchange, the number and variety of bonds is limited but to date the offerings have been sufficient to satisfy me.
Winter is coming.
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