We're finally ready to invest in some mutual bond funds after we do a bit more research. However, is now the wrong time to buy into them because interest rates are low? I've read that interest rates and bond rates run opposite each other so would bond rates be too expensive right now?

Why mutual bond funds?
Is this pretax or post tax investment?
What is your age?
What is the goal of this money?
Have you maxed out other investments like 401k or IRA's?
What percent of your allocation will this new bond fund be?

I believe it is a better time to buy stock funds because they are on sale now and return higher rates in the long run.


saladdin

It depends. Are you JUST investing in bond funds? Or do you mean this is just a part of your diversified portfolio that you need to fill in? Why bond funds? Is this in an IRA, 401k, or a regular (unqualified) account, or what?


Actually i remember your thread from last week but just to clarify

But generally I'd say if this is part of a rational investment plan, don't try to time the market, just do it. I put a piece of my 401(k) into a bond fund every pay day myself.

Why mutual bond funds? We're not knowledgeable with other types of investments just yet. We have a 6 month EF in savings and are looking to move new income to larger investments.
Is this pretax or post tax investment? Post tax
What is your age? 34 and 36
What is the goal of this money? To hopefully make more than current 3.5% in savings accounts
Have you maxed out other investments like 401k or IRA's? 401K is currently at 16% -- do you consider that maxed?
What percent of your allocation will this new bond fund be? No percentage specified....just throwing "extra" money into it for start

It depends. Are you JUST investing in bond funds? So far...see previous post

Is this in an IRA, 401k, or a regular (unqualified) account, or what? 401 unrelated....this would be through a discount brokerage firm on line

I'm taking it this is just extra money and you want to start investing.

First I would not use a broker. You can go direct through the fund company and not pay a load or fee other then the usual expense fees that we all pay. Fund companies like TR Price, Fidelity or Vanguard are top notch.

Second, I know you said post tax but I would mention that you should look into IRA's. I don't know your income and there are phaseouts but retirement is the most important investment goal for me.

Third, bond funds can be a useful part of a portfolio but at your age you need to be less conservative. Bond funds are low risk, low return vehicles and are not considered tax-wise in post tax investments. Percentage wise they are a very small part of an overall portfolio.

Fourth, if you are just trying to beat 3.5% savings rate then you can look at CD's or money market accounts. That would accomplish the goal of beating 3.5% and give you some time to read more and research. You could get in the 4% range with CD's.

To answer your question more directly, the market is always going up or down. Don't try to time it. You are looking 30 years down the road. If you want to go bond fund you can use sites like Morningstar to find one.




saladdin

Hmmm....

we went with Scottrade (just opened the account thus far), and are looking into no load, no fee mutual funds. Is that up there with your recommendations aside from your suggestions of CD's instead?

I am guessing that Scott charges per transaction. Brokers have to make money. If you went through one of the three companies I listed earlier you would not have to pay that fee.

Does Scott offer advice (like an Edward Jones) or is it just a "fill your order" place? Or are they pushing a specific fund?
If you are not getting advice then I would not use a broker. But it's the old Catch-22 (great book). If you are getting advice you don't know if it is good advice. If they are pushing a fund then it is 99.9% chance it is a load. Which a load is a fancy way of saying commission.

I would never pick a load fund. There are 1,000's of good no-load funds to choose from. And I would not use a broker. You can do this stuff yourself with some research.

Is your mind made up about a bond fund?


saladdin

I agree with Saladdin, go with a no-load mutual fund company like TRP or Vanguard, and Moriningstar.com is an excellent mutual fund research website. I reccomend reading mutual funds for dummies by Eric Tyson. Like everyone else said it will all depend on your goals. i.e. if your goal is to have your money invested for 7-10 years stock mutual funds are the way to go.

Uggh, come on guys, have any of you actually USED a discount broker? Just because you are unfamiliar with them does not make them a bad choice, believe it or not. iscred, I'm sure Scottrade is fine -- I've never tried it but I've used three other online discount brokerages and there is simply no chance I would ever go back to using a fund-family account.

No, discount brokers do NOT charge a commission when you buy mutual funds. I.e., The same no-load fund costs exactly the same whether you buy it from any discount brokerage I'm aware of, or directly from the fund family. Plus a brokerage gives you the opportunity to buy ETFs (exchange traded funds) which can be extremely useful, and no fund-family account permits this. A given brokerage account may or may not have an annual or quarterly fee (maintenance fee or custodial fee), so you just need to be aware of that -- I'm not sure what's the more common practice now.

iscred, I dislike the idea of starting out purely in a bond fund, especially considering your goal, because indeed if interest rates go up significantly (due either to inflation or a strengthening economy) the bond fund can lose substantial value.

Over time you can carve out some nice diversification among several funds, but even from dollar one you can get into a much more diversified mutual fund that more or less replicates a well-diversified portfolio containing stocks, bonds, and money-market instruments, maybe some REITs.

One suggestion is to look for an "Equity Income" or "income" or "balanced" fund with some international exposure as your first purchase. This type of fund would contain both bonds and dividend-paying stocks. The mixture tends to smooth out the "beta" (risk) and give a more consistent return.

No I haven't tried one. That's why I asked the questions for more information.

If they still charge per transaction or custodial fee then that is a fee that you will not have if buying from the fund family so how is the cost the same?

The snide comments seem to be picking up on this board lately. You can be helpful without being an ass. Try it sometime.


saladdin

Kevin20,
Thanks....and you're right. Scottrade's funds that we are looking at are no load, no fee funds. There ARE funds that charge for either of those (or both), but we're steering away from that. There are no quarterly fees associated with these funds. No charge at all.

No....we haven't completely made up our minds about bond mutual funds. You'll probably want to shoot me but we just found funds in Money magazine that have performed well and we're researching those. Again, now I'm scared to do this again.

"Over time you can carve out some nice diversification among several funds, but even from dollar one you can get into a much more diversified mutual fund that more or less replicates a well-diversified portfolio containing stocks, bonds, and money-market instruments, maybe some REITs."

So what kind of fund is this you're talking about? Not a mutual fund but what?

Scottrade is an excellent discount broker. I used to utilize them; however, I consolidated all of my assets over to Fidelity because, mainly, Scottrade doesn't offer free dividend reinvestment on individual stocks. Otherwise, Scottrade is a fine choice.

That being said, you should invest based on your goals and objectives. While no-load funds might be preferable, I wouldn't steer clear of an otherwise great fund just because it carries a load or transaction fee. One needs to look at the entire long-term picture.

Take, for example, Dodge and Cox's Balanced Fund (DODBX). It has been closed for the last 4 years (approximately), but it has recently reopened to new investors. DODBX, historically, has been an excellent fund to build wealth. It is available at Scottrade for a whopping $17 fee to buy. If one is going to plop down one large amount of cash in this fund, $17 amounts to nothing. However, if one is trying to dollar cost average (DCA) into the fund, the $17 fee becomes prohibitive.

It's important to know what you're buying, and why you're buying it. It's also important to know how you plan to buy and/or sell -- DCA or lump sum.

But, IMHO, it's most important to know how much you're paying to OWN the fund. A no-fee/no-load fund might not cost anything to buy and sell, but the cost of ownership can really eat away at your wealth. The cost of ownership is measured by the fund's expense ratio (e/r). The higher the e/r, the more costly it is to OWN the fund.

Take MUTHX and TESIX as comparisons, for example purposes. These two funds hold identical investments! MUTHX's e/r is .84%, while TESIX's e/r is 1.10%. Had you put $10,000 in MUTHX at inception, you'd have about $10 million more than if you owned TESIX. TESIX has a front-end load of 5.75%, which would anount to only $575. The load cannot possibly account for the $10MM difference in value. The difference is due to the higher e/r.

BTW, your cost of owning any mutual fund is skimmed off the total return of the fund. You don't see this event; nonetheless, it occurs. Pay close attention to a fund's e/r!



Disclaimer: I do not own shares of any of the funds I have mentioned, but I will probably own DODBX soon.

Regards,
Dave

Actually, places like Scottrade and Fidelity charge a transaction fee on certain funds or fund families. However, IMO, the cost is reasonable and is usually far cheaper (in the long run) than holding the fund at the fund family itself.



I agree. I believe that equity funds would be more appropriate ... again, in the long run.



I also agree. It's always nice to see occasional income rolling in. I mentioned DODBX in an earlier post, and I think it's a good long-term investment. $10,000 invested 10 years ago would be worth slightly less than $25,000 today, all without a lot of risk.

Regards,
Dave

Fair criticism Saladdin, my apologies, fingers outracing the naturally empathetic sensitivities I'm known for.

Anyway iscred, sorry to be unclear, I was referring to the types of funds I mention in the following paragraph:

"One suggestion is to look for an "Equity Income" or "income" or "balanced" fund with some international exposure as your first purchase. This type of fund would contain both bonds and dividend-paying stocks. The mixture tends to smooth out the "beta" (risk) and give a more consistent return."

Iscred:

You have already gotten some very solid advice here, advice you'd have paid a broker a lot of $ for.

One other suggestion.


Unless you want to make a hobby of investing, one of the very best ways to do what Kevin is talking about is to buy a 'target retirement' fund. These funds, instead of investing in one class of invesments like international or large-cap growth stocks, makes the allocations amongst the different categories for you. These funds are intended to be a 'all in one' investment portfolio, designed for someone retiring in a specific year. For example, T Rowe Price has a Retirment 2040 fund, which is designed for someone planning to retire in 2040. They pick an aggressive allocation when you are younger, then get more conservative as you get closer to retirement. One of these could be the only fund you'd need to hold I recently added this to the menu of options at my company's 401K plan, and I think they are the greatest thing since sliced bread.

Since you mentioned you have Money Magazine, you can find these Target Retirment funds as a category on their Money 70 list. They especially like Vanguard and T. Rowe Price.




This would also be good advice. If yook at your Money magainze 'The Money 70' list under 'actively managed funds' and then "Large-cap", "blend " or "value" style, you'll see some very solid, no-load options. They aren't as well diversified as the target retirment funds, and you should probably add a 'foreign' fund too, but if you buy and hold it you won't regret it.

Its not worth agonizing over the exact details of what you do: index fund vs. actively managed, target retirment, growth stock vs. value, US vs. Foreign, etc... Not that these issues are of of no importantce, but you wont go very far wrong either way you go. The key is you want to be investing, primarliy in stocks, and something diversified (i.e. for what you're doing you DON'T want a sector fund, like an 'energy' or 'gold' or 'technology' fund), and you want to start now.

What is important is that you start investing, and do it soon. Every year you delay beginning investing costs you tremendously over the long run. Just to repeat the good advice others have already given you:
1) Stocks should be the core of what you are doing, because they return much better than anything else in the long run.
2) Don't buy and sell, don't try to time the market. Pick something, and stick with it. Don't look at the price every day. Stocks go down. This is the best time to buy.

Good luck, and don't worry!

I use a discount broker but still recommend fidelity or vanguard to people who are buying MF. Much better support and easy research interface, especially fidelity.

(muni) bond funds with post tax money can be a good deal for people in high tax brackets.