I don’t consider myself a novice when it comes to investing but I am no professional. For the longest time I believed that one invested their money in a fund run by people like Janus or Fidelity, but I kept noticing that the performance of those funds by and large were below the average increase in the market. Okay, sure, a couple had really great returns for one year, but never the fund I invested in. So I decided to try investing in the stock market myself. Amazingly, I always had a better performance than the funds I was investing in. Lately I am finding it hard to justify buying any stock. In general, the whole process doesn’t make any sense. The stock market seems to be geared for speculators to make money rather than investors like me making money because a company does something really well without doing anything evil (you know like charging $5 a month for a debit card or foreclosing on people’s homes even when they are up to date on their mortgage payments or spilling oil all over the ocean or polluting drinking water). So I says to myself, self, why not invest in bonds – they should be simple, straightforward, none of the silliness of the stock market. Boy was I wrong.
The lingo was all Greek to me. Actually it might have made more sense if it was Greek. Zero-coupon, mandatory-put, sinking-fund, are just some examples. It was not the simple, straightforward experience I was expecting. If you are thinking of investing in the bond market, here is some advice I can offer:
1) I would stay away from Zero-coupon bonds. The coupon is like the interest rate the bond pay each year normally over two payments. A zero-coupon bond doesn’t pay any yearly interest. Instead it pays the face value of the bond on the maturity date. So the buyer pays a much lower amount when they buy the bond and the difference will be the interest they earn. That is if the issuer doesn’t go bankrupt in the mean time. Our government sells bonds like this which is why you always hear about the interest rate and the price going in different directions. It is really saying the same thing twice but people like you and me understand interest rates better than price for these kinds of things. When figuring out the interest rate you also have to take into account taxes as some government issued bonds will pay interest either or both Federal and State tax free.
2) Watch out for callable bonds. A callable bond is one the issuer can buy back at a specified price on a specified future date. If you don’t pay attention to the call value, date, etc. then you could loose money. Sinking funds seem to fall into the callable category. With a sinking fund the issuer can buy back some of their bond each year reducing (I guess that is where the sinking comes from) their debt load. Seems to me this is more of a loan than a bond but who am I to judge.
3) Look for insured bonds. The insurance adds safety to your purchase. It won’t guarantee your interest but it keeps you from loosing all your money if the issuer does go bankrupt.
4) Watch out for Greeks bearing bonds. Okay, that wasn’t called for. But still, you probably don’t want to take a ‘haircut’ on your bond. So don’t invest in a group that has a lot of debt already. Personally I wouldn’t buy a Bank of America bond, as an example, unless I was Warren Buffet and could a) risk loosing my money and b) demand special terms.
5) On the other hand, look at U.S. municipal bonds. Okay I may be going against the trend with that recommendation but I think it has been decades since a municipality didn’t pay back their bondholders while companies seems to go bankrupt at any time. Sure I wouldn’t buy any municipal bond, but in general I think these are a good and safe investment.
6) Look at the minimum purchase. A lot of bonds will be out of the range of the small investor. I have seen some that start at $50,000. Even if I had that kind of money to invest at one time I wouldn’t put it all in one place. But who know, maybe I will win the lotto and have to figure out how to invest my new found millions.
7) Bond prices (for non zero-coupon bonds) typically are somewhere near 100. But if the minimum is 5, for example, then that is actually 50 times the price in dollars or $5000. Don’t ask me why. You will also have to pay for any accrued interest, so that will increase the price a little more. If the price of the bond is much less than 90, you might want to take a good look at who is issuing the bond as the low price typically means the seller thinks the issuer is going to go bankrupt. If the bond price is over 100 then you are paying more for the bond than the original buyer did. You might want to ask yourself why you think it is worth it.
I am sure this doesn’t cover everything and I don’t promise accuracy but what I do suggest is that if you have any time and desire then invest your money directly rather than using funds and you can earn a better return on your investment. Otherwise, look at bond funds or the like, for example Marshall’s Intermediate Tax-Free Fund (MITFX) or Aberdeen’s Asia-Pacific Fund (FAX).