If you are presently investing money or plan to invest money in bond funds you should understand what effect a bond bubble would have on your investment if the bubble bursts in 2013 or 2014. What's a bond bubble, and which funds are most dangerous to invest money in?
All bond funds (also called INCOME FUNDS) invest money for their investors in debt obligations called bonds (debt securities) and pass the interest income they earn to investors in the form of dividends, which are often automatically reinvested to buy the investor additional fund shares. A bond bubble is like any other bubble (like a stock bubble) in the financial markets. When prices reach EXTREME levels that are not sustainable, you've got a bubble. When that bubble bursts prices fall like a rock.
Average investors have been investing money in bond funds for years while selling stock funds; and fund companies, as well as the U.S. Government, have been investing money heavily in debt securities as well. This heavy buying activity sends bond prices up and interest rates down. And interest rates have hit EXTREME record lows, which means that bond prices are extremely high - hence, a bond bubble.
Why should you care about the bond bubble? Remember, these debt securities trade in the open market after their original issue, just like stocks do, so they fluctuate in price. Investors invest money in them for the relatively high interest income they pay. When interest rates go down bonds go up in price because they pay an interest rate that is fixed, making existing bonds more attractive relative to other income producing alternatives. When rates go up, debt securities and bond funds that hold them go down in price (value).
In 2012 you could invest $1000 in the highest quality 30-yr bond and earn 3% a year, or $30 a year in interest income for the next 30 years. What would you be willing to pay for that same investment if you could earn 6% or $60 a year in a new issue of the same security in 2013, 2014 or beyond?
If you are presently investing money in a high-quality long term bond fund, the fund owns the debt securities. You own fund shares, and a very small part of a large investment portfolio. A bursting bond bubble means that bond prices fall off a cliff - resulting in higher interest rates and big losses for investors. The problem with long term funds is that they hold bonds that are locked into low interest rates for a long time (20 years or more). In July of 2012, the highest quality bonds in the world, which are the U.S. 30-year Treasury bond, fell to an interest rate yield of less than 2 ½%... having been as high as 14% in 1981!
That's why bond funds have been a good place to invest money, basically for more than 30 years. Interest rates have been falling. In 2013 and 2014 we're likely looking at the flip side and a bond bubble because rates can't get much lower, but could go up significantly. Few investors today have a handle on what happens when interest rates go up. The last time bond fund investors got rocked was between 1977 and 1981 when rates just about doubled. What happened to long term bond funds? They lost almost ½ of their value. Long term funds are the most dangerous to own in 2013, 2014 and beyond.
Bond funds that hold debt securities that on average mature in like 5, 6, or 7 years vs. 20 or more pay lower dividends; but are a much safer place to invest money to avoid heavy losses if the bond bubble bursts or at least deflates. Why? The securities they own, and the investor is investing money into, are in fixed income securities that have an interest rate that's only locked in for a few years vs. 20 years or more. Upon maturity (in 5, 6, or 7 years) the securities are redeemed, and owners (like fund companies) get their principal (like $1000) back and the security no longer exists (like a loan you pay off). The fund then simply replaces the security with another one to stay fully invested.
The bond bubble bursting could send your investment portfolio into a tailspin in 2013 or 2014 if you are holding bond funds that hold long term maturities. Remember, these funds have been good steady performers for years, even in the recent environment of lower and lower interest rates. The reason investing money here has been quite profitable for many investors is NOT because they have earned high interest rates and paid investors high dividends in recent years. Their dividends have been only relatively high compared to earning less than 1% at the bank.
Investing money in bond funds has been profitable because lower interest rates have sent bond prices (and hence bond fund share prices) higher. But remember, these funds involve risk. If the interest rate trend reverses in 2013 or 2014 bond funds will lose money. If the bond bubble unravels severally and in a hurry, many bond fund investors will get hit hard. Take a look at the AVERAGE MATURITY of your bond funds. Look for funds with an average maturity closer to 5 to 7 years vs. 20 or more.
Showing posts with label Funds. Show all posts
Showing posts with label Funds. Show all posts
Wednesday, 31 October 2012
Tuesday, 23 October 2012
How To Choose the Best ISA Funds For You
The Individual Savings Account (ISA) provides an incredible opportunity for UK tax payers to protect a significant proportion of their annual savings from the tax man, allowing you to keep the entire rate of interest and capital growth enjoyed within the account without a huge chunk being passed to Her Majesty's Government. Though many still wish to keep their funds in relatively more secure cash options, the opportunity to invest in stocks and shares within your ISA can provide great rewards, but finding the best ISA funds is essential to keep your money as safe as possible but still make the returns that are going to create a future that is a whole lot brighter.
Performance:
When trying to select the best investment potential, performance is key. Use ISA comparison sites to compare the historical growth that has been achieved from the providers that appeal to you and balance the latest offers available with details of historical performance both in terms of recent years and over a longer period to gain an overview of what you can expect in the future. Contrast these statistics against other funds that you have considered as well as the economy as a whole to see which have faired the best. Though this is no guarantee of future performance, it does give you an idea of the quality of the fund you are considering and an indication of which provider you can be most certain of in the future.
Fees:
When investing in an ISA fund, the stocks and shares are normally selected for you by a fund manager. This individual will have vast experience in choosing the types of investments that are going to exploit the growth within the financial market whilst maintaining an acceptable level of risk for the profile of those who invest. However with such in depth knowledge comes a price and that cost will be applied in terms of set up and management fees for your account. Look out for special offers or discounts which will reduce this drain on your investment, but always keep in mind that you get what you pay for and a well managed, high value fund could repay back higher costs quicker than a cheap fund that shows little signs of growth.
Term:
Historically it has always been the case that the longer you are able to tie up your funds for, the better the rate of return. Fixed rate funds can provide incredible growth to your initial capital but beware of high penalties should you need to withdraw your funds early. Ensure you are fully informed on what happens after any period of guarantee to discover whether you are free to transfer your funds to an alternative rate to improve your return and make sure you have made a note of when that date is to avoid being left on a low residual tariff that could off set any advantages from the initial offer.
By keeping these three points in mind when considering your new account you can be more confident that you have chosen from the best ISA funds for you to ensure that every penny of your savings is working as hard as it possibly can to achieve a future that you can enjoy.
Performance:
When trying to select the best investment potential, performance is key. Use ISA comparison sites to compare the historical growth that has been achieved from the providers that appeal to you and balance the latest offers available with details of historical performance both in terms of recent years and over a longer period to gain an overview of what you can expect in the future. Contrast these statistics against other funds that you have considered as well as the economy as a whole to see which have faired the best. Though this is no guarantee of future performance, it does give you an idea of the quality of the fund you are considering and an indication of which provider you can be most certain of in the future.
Fees:
When investing in an ISA fund, the stocks and shares are normally selected for you by a fund manager. This individual will have vast experience in choosing the types of investments that are going to exploit the growth within the financial market whilst maintaining an acceptable level of risk for the profile of those who invest. However with such in depth knowledge comes a price and that cost will be applied in terms of set up and management fees for your account. Look out for special offers or discounts which will reduce this drain on your investment, but always keep in mind that you get what you pay for and a well managed, high value fund could repay back higher costs quicker than a cheap fund that shows little signs of growth.
Term:
Historically it has always been the case that the longer you are able to tie up your funds for, the better the rate of return. Fixed rate funds can provide incredible growth to your initial capital but beware of high penalties should you need to withdraw your funds early. Ensure you are fully informed on what happens after any period of guarantee to discover whether you are free to transfer your funds to an alternative rate to improve your return and make sure you have made a note of when that date is to avoid being left on a low residual tariff that could off set any advantages from the initial offer.
By keeping these three points in mind when considering your new account you can be more confident that you have chosen from the best ISA funds for you to ensure that every penny of your savings is working as hard as it possibly can to achieve a future that you can enjoy.
Wednesday, 12 September 2012
Mortgage Investment Corporations - MIC Funds
What is a Mortgage Investment Corporation? (MIC)
In a nut shell, a Mortgage Investment Corporation or MIC for short is an investment vehicle (corporation) that enables investors to invest in a diversified pool of real estate mortgages.
Investing in a MIC is similar to investing in a mutual fund in that the investor is investing in a series of mortgages as opposed to investing into a single mortgage. The advantage of this model is that it removes the impact of a single mortgage going bad by spreading the risk over the entire pool.
Investor returns are typically between 8% and 11% and the minimum investment ranges from $5,000 to $10,000.
MICs may be considered more stable than various other money market funds in that it invests in real property (tangible assets) versus other forms of securities which may invest solely on personal or corporate guarantees.
One of the reasons to invest in a MIC is that it is suitable for investors who do not have the time or interest in assuming the administrative responsibilities attached to running a mortgage portfolio. Essentially, the MIC allows investors to share in the benefits of the lucrative and relatively secure mortgage business back by the added security of real estate. Depending on individual circumstances, MIC's can be an appealing investment to all types of investors. In other words you don't need to have a high net worth to invest in a MIC.
A MIC is given special designation by Revenue Canada, highlighted in Section 130.1 of the Income Tax Act. To qualify as a Mortgage Investment Corporation for Canadian income tax purposes, the Fund must comply with the following:
At least 50% of the Fund's assets must consist of residentially orientated mortgages and/or cash;The Fund's only business activity is investing funds of the corporation and not managing or developing any real property;The Fund must not hold any investments secured by real property situated outside Canada or have debts owing to it by non-resident individuals, other than debts secured by real property situated in Canada; andNo shareholder may own more than 25% of the issued shares of any class.
MIC investments are able to be held in registered accounts including RRSPs, RRIFs, RDSPs, RESPs, and/or TFSAs.
MIC's are a slow process of creating wealth. Stocks markets are exciting but many times there is little reason for a stock going up or down. This volatility makes it difficult to plan for the future. Mortgages on the other hand have a fixed rate of interest which is due and payable in a set pattern so you know what's happening from day to day. MIC's offer stable and predictable returns in what one might call a "boring" investment. "Boring" but very successful!
In a nut shell, a Mortgage Investment Corporation or MIC for short is an investment vehicle (corporation) that enables investors to invest in a diversified pool of real estate mortgages.
Investing in a MIC is similar to investing in a mutual fund in that the investor is investing in a series of mortgages as opposed to investing into a single mortgage. The advantage of this model is that it removes the impact of a single mortgage going bad by spreading the risk over the entire pool.
Investor returns are typically between 8% and 11% and the minimum investment ranges from $5,000 to $10,000.
MICs may be considered more stable than various other money market funds in that it invests in real property (tangible assets) versus other forms of securities which may invest solely on personal or corporate guarantees.
One of the reasons to invest in a MIC is that it is suitable for investors who do not have the time or interest in assuming the administrative responsibilities attached to running a mortgage portfolio. Essentially, the MIC allows investors to share in the benefits of the lucrative and relatively secure mortgage business back by the added security of real estate. Depending on individual circumstances, MIC's can be an appealing investment to all types of investors. In other words you don't need to have a high net worth to invest in a MIC.
A MIC is given special designation by Revenue Canada, highlighted in Section 130.1 of the Income Tax Act. To qualify as a Mortgage Investment Corporation for Canadian income tax purposes, the Fund must comply with the following:
At least 50% of the Fund's assets must consist of residentially orientated mortgages and/or cash;The Fund's only business activity is investing funds of the corporation and not managing or developing any real property;The Fund must not hold any investments secured by real property situated outside Canada or have debts owing to it by non-resident individuals, other than debts secured by real property situated in Canada; andNo shareholder may own more than 25% of the issued shares of any class.
MIC investments are able to be held in registered accounts including RRSPs, RRIFs, RDSPs, RESPs, and/or TFSAs.
MIC's are a slow process of creating wealth. Stocks markets are exciting but many times there is little reason for a stock going up or down. This volatility makes it difficult to plan for the future. Mortgages on the other hand have a fixed rate of interest which is due and payable in a set pattern so you know what's happening from day to day. MIC's offer stable and predictable returns in what one might call a "boring" investment. "Boring" but very successful!
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