Today many investors are very worried about the stock market. The volatility in the equity markets has made many investors draw out money from equity funds and put the money in bond funds at a record pace.
(prHWY.com) May 30, 2012 - New York, NY -- Today many investors are very worried about the stock market. The volatility in the equity markets has made many investors draw out money from equity funds and put the money in bond funds at a record pace.
BONDS
When you invest in bonds you are lending your dollar. Lending your dollar means to give your dollar to an entity that will pay you interest on your dollar for a specific length of time. The common way of lending is to give your dollar to a bank (savings account) and the bank will pay you interest as long as you keep the money in the account. Investors who want a higher rate of return from the bank can look at Certificates of Deposits. CD's pay a higher rate of interest because you tie up your dollar for a specific time (1 month to 5yrs).
You can lend your dollar to the U.S Government (Treasuries). The government will pay you an interest rate depending on the maturity. The longer you go out the higher the rate of interest.
Another place to lend your money is Corporate Bonds. By lending your dollar to a corporation (IBM, APPLE) you will receive a fixed interest payment usually paid every 6 months for a specific amount of time. These corporate bonds usually pay higher interest rates than the bank but do have more risk. The longer the maturity is the higher the rate of interest. The higher the risk (can the corporation make its interest payments and pay the bond back at maturity) the higher the interest rate. All of the above examples of lending are taxable.
You can also lend your dollar and receive a tax free interest payment. Municipal Bonds are issued by states, state agencies & local governments. The interest is federal tax free and can be state tax free if you lend within the state you reside.
All these lending vehicles can be done within a mutual fund that can specialize in all or certain areas listed above. By investing in a mutual fund you can diversify your lending which can lessen risk. This lending is known as "fixed income" investing.
BE CAREFUL
The basic concept that bond investors must understand is how bonds fluctuate in value. When interest rates go up the value of bonds you hold goes down & when interest rates go down the bonds you hold go up in value. Today interest rates are being kept at very low levels by the Federal Reserve policies. There will come a time when the Fed will not be able to hold interest down. They are sitting on a very tightly coiled spring (interest rates), when the Fed starts to release this coiled spring rates will rise very fast causing large losses in bond portfolios. Investors should make sure portfolios are not over weighted in bonds.
DLG WEALTH MANAGEMENT, LLC
DLG Wealth Management is an SEC-registered Investment Advisory firm that provides high net worth individuals and institutional clients with comprehensive and personalized investment management expertise. Our investment approach is built on identifying each client's unique objectives and establishing a customized investment plan to meet them. We address each critical step in the investment management process including: goal setting and risk/return profiling; asset allocation modeling and execution; rigorous investment selection, monitoring and reporting. For more information about DLG Wealth Management, visit
www.dlgwealthmanagement.com. Securities offered through Dinosaur Securities, LLC a member of FINRA, SIPC & NFA.
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