Buying Bonds Now Puts An Investor At Risk

Investors in mutual funds, a popular way for small investors to access the markets, pulled roughly $250 billion from stock funds during the market downturn from October 2007 through March 2009, according to the Investment Company Institute.

The problem for investors is that instead of buying back stocks, individual investors have increasingly poured their money into bonds, which are considered safer but could pose real risks to their investment returns in the years ahead.

Although signs of an economic recovery began budding last spring, nine months later, retail investors have yet to jump back into stocks in full force, instead steadily putting money into bond funds in increasing sums.

The fact is that we are currently experiencing unusually low Fed sponsored interest rates since the fed funds rate is currently at 0-.25%. This is as low as that rate will ever go.  Soon, the Fed will begin to raise interest rates and the prices of bonds and bond mutual funds will fall. The bonds on the longest end of the curve will fall the most but all bond funds will suffer.  

Investors that took major losses in the stock market decline, now risk taking additional losses trying to hide from the current financial crisis in bonds and bond funds in the coming year.  Buying bonds exposes new investment capital to both interest rate and future inflation risks. It is interesting to note that the world's foremost bond giant - Pimco - has just started offering equity funds.

So what is a conservative investor to do? Where can a suitable and safe return be made if not in intermediate to long term bonds and bond funds? The answer is to look to global, large capitalization equities with yields of 3% or greater. We have already mentioned several examples of these types of investments in the World Of Investments Journal. 

Examples that have been mentioned are equities such as British Petroleum. BP is a world class company with a global reach.  It has nearly a 6% dividend, is well positioned in an industry in great demand, and like our other selections, has the safety of a great balance sheet. 

Abbott Labs and ADP are stocks that have premier positions in their respective industries, provide great dividends and are well run companies. Florida Power and Light is an international leader in wind Power, has a 3% dividend and is well positioned for growth in the years ahead.

So, buying global, large capitalization companies with a yield that currently beats U.S. Treasuries are a compelling investment at the current prices. Growth in Asia and emerging markets make gold, oil and commodities an excellent long term investment hedge as well.

These are the types of investments that will work going forward. If you like diversified stock mutual funds, Fidelity Contrafund and Oakmark International are great funds to own. For more exposure to the growth in Asia, Matthews Growth and Income Fund is a great choice. For exposure to commodities, funds like Fidelity Select Natural Resources should be a great long term investment.

With money market fund returns so low, money can also be put to work in the Fidelity Floating Rate High Income Fund which invests in bank loans and provides a decent short term yield.

However, it should be understood that holding bond or bond funds now puts investors at risk. For the small investor, buyer beware.    

For our next investment in the eWorldvu Model Retirement Portfolio, please see the article in the World Of Investment Journal on Wednesday February, 2010 after the market closes. 

http://www.eworldvu.com