Bond Funds?

17 years ago

I had asked for help a while back regarding Annuity Accounts and thanks to everyone, we didn't do it. Now the financial person at our bank (Chase) talked us into putting (what's left) of our 401 into a Bond Fund which will pay a fixed amount each month. There is a upfront, one time fee of $7,400.00. We will receive $2,100.00 a month.

Again, I'm asking for advice. We need to find something which will generate dividends to live on as we lost so much money with the market crash. CD's and money-markets are paying hardly anything. My husband is semi-retired, in his 70's.

Jane

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Comments (11)

triciae
17 years ago
Here's an article on bond funds. Only you & your DH can determine if a fund is right for your circumstances.

/tricia

Here is a link that might be useful: Smart Money - Bond Funds
jane__ny
Original Author
17 years ago
Thanks Tricia, I printed it up for him to read.

Everything was so simple (it seemed) 2 years ago. Now, forget it!

Jane
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Nicole, if you leave the money in for ten years, you would not be paying a penalty at all. The term is ten years. If you left it in you would have pretax income of about $45,000 on an initial investment of $100,000. That is a pretax income number. You only have to pay the penalty if you withdraw before the 120 month term. The APY, net of the penalty would be 0.250%, not 0.030% The risk you are taking is that deposit rates are currently about as low as they can get and will likely increase before the end of the term. Let's say this happens in two years, that means you will have invested your money for two years in an instrument with an APY of essentially 0.250%. I think it's a pretty safe bet that rates will rise, so if it were my money, I'd park it in a money market account (same bank has one for 1.10%) until I thought that deposit rates were stable and then I would buy a long term CD. Putting the money in a liquid account will allow you to maximize your earnings on the cash both now and later. But, YMMV.
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. I also have about 13,000 in my 401K account that I will either have to rollover to an IRA or take the distribution from my old job. I 'think' it would be best that you roll it over, and totally avoid distribution. From the link below: "Your 401k withdrawal options are as follows if you are under 59 Ã¯Â¿Â½ -Take a lump sum distribution, in which case your 401k plan provider will write you a check for the value of your account less a 20% withholding tax mandated by the IRS, and a 10% withdrawal penalty. The 20% tax that is withheld, but NOT the 10% penalty, will be counted against your income tax payable or will be counted towards any refund due for the tax year when you file your tax return. Some 401k penalty free withdrawal exceptions are here. -You can do nothing and leave it with your previous employer as long as the amount is greater than $5,000. Amounts less than $5,000 will usually be distributed to you, less a 20% withholding tax, regardless of you age. (Check with your plan sponsor) -Do 401k rollover into an IRA or a solo 401k (if you are planning to open your own one person business) Here is a link that might be useful: 401k Withdrawal Options
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Carol, I found your post a few weeks ago on a search. For some reason, I keep thinking about your questions and the advice you got, and I finally decided to log on and comment. Here are a few comments about your post: 1) You make a good point about being able to get better returns with mutual funds over a MM. 2-3% is very achievable. On the other hand, it is also quite possible to lose 2-3% - or more- with mutual funds. This is the trade-off between risk and reward that is inherent in investing. Typically fixed income investments, such as MM, T-bills, and government bonds are called "risk free" investments. Equities, such as stocks, and stock mutual funds are typically considered to be riskier. In general, the "riskier" the investment, the higher the rate of return. 2) You mentioned investing in a mutual fund. Another aspect of risk/reward is diversification. Again, in general funds that are spread among several different investments are at lower risk (Dont put all your eggs in one basket). Taking this a step further, risk is reduced more by making sure the different investments are sufficiently diverse. Some examples of diversity would be bonds vs. stocks, growth stocks vs. value stocks, US stocks vs. foreign stocks, etc. 3) Everybody has a different risk tolerance. Your husband seems to be very risk averse. You seem to be more risk tolerant. The level of risk is a personal decision that both of you must feel comfortable with. 4) I would like to suggest that you visit a website called www.ifa.com. This is a company of investment advisors that specialize in mutual funds by Dimensional Fund Advisors (DFA). IÂm not suggesting you use DFA at this time. What I am suggesting is that you and your husband take the risk survey that IFA has on their website. It is free, and you donÂt have to sign up or give them your E-mail address. The risk survey is about 20 questions. The results give you an idea where you are on the risk taking spectrum. Based on the results, IFA will suggest one of 20 different portfolios that fit in with your risk tolerance. Again, I wouldnÂt necessarily suggest those portfolios for you, but they will give you a general idea of the types of investments that would be consistent with the level of risk you and your husband would like to take. I may make a few people angry, but I need to comment about the advice you have been given: First, the good advice. 1) I agree with much of what jkom51 says in the first reply. Although you probably donÂt need a CFP, it wonÂt hurt as long as you can find a good one. 2) Chisue suggested treasuries and CDs. These can be good alternatives to MM, but you should research the advantages and differences. 3) Great advice f lphacat. American Funds are "load funds". That means when you buy them, a salesman gets a commission, usually about 5.25%. If you invest $400,000, you will LOSE $21,000 immediately. The big problem with this is that there are "no load" funds out there that will do just as good if not better, and you can get them for about $30 per fund. If you have 10 funds, that would be $300 verses $21,000. Too often an advisor who is recommending a load fund has his best interests at heart instead of yours. I wouldnÂt even consider load funds if I were you. 4) Alphacat also suggested DFA funds. He is correct; almost any DFA fund runs rings around American. They are all no load and have much lower annual fees as well. On a $400,000 investment, the difference in ER between DFA and American can run $4000 per year. With compounding, this is about $60,000 over 10 years that you are giving up. 5) The absolute best advice you got was f lphacat when he recommended you go to www.fundadvice.com. Go there and read every article, especially this one (sorry, I canÂt get the link to work, so I just copied the whole address) http://www.fundadvice.com/articles/buy-hold/the-ultimate-buy-and-hold-strategy.html. Paul Merriman gives great advice to folks. He is also a financial advisor who you might want to consider. I think he will work on a percentage of assets or I know he will give advice on a per hour basis (around $200/hr). This may be your best option. For about $400 you can get some really first rate advice on how best to invest. For disclosure purposes, I donÂt invest with Merriman, but I do read his site quite often. Also, for disclosure, all my IRA assets are invested in DFA funds. Now for the bad advice: 1) The average investor has absolutely no business investing in individual stocks. If you put your money in 10 mutual funds you are invested in 10,000 stocks. Now if one of your stocks goes bankrupt, would you rather lose $40,000 ($400,000/10 stocks) or $4 ($400,000/10,000 stocks). This goes back to diversification. You just canÂt minimize the risk enough with individual stocks. 2) DonÂt bother going to Morningstar.com, or Forbes, or Money . Frankly I consider most of what they put out to be financial ography. They are trying to entice and tempt you with the "hot" stock, the " " stock, the investment that will make you filthy rich. But if you go back and look at last yearÂs "hottie" chances are it is a dog this year. For now, read everything you can at fundadvice.com. Another good site is www.diehards.org. That is a forum primarily by index investors. Go there and post the same message you put on this web, and you will get some fantastic advice (much better than I can give you). Just a few more comments. 1) The best portfolio for you and your husband will probably be one that includes MM, bond funds, and stock funds. Again, your risk tolerance will determine the best portfolio for you. 2) One more article at fundadvice.com is this one. http://www.fundadvice.com/portfolio.html Merriman provides several suggested portfolios with different fund families such as Vanguard and Fidelity. Most of these funds are index funds. Some are managed funds, but all are no load with low fees. 3) Many people prefer index funds. These funds track an index such as the S&P 500 or others. They typically have lower fees than managed funds and studies show that managed fund usually underperform index funds over the long term. You can get a good explanation of this at fundadvice.com 4) You asked for a few good funds. Several are listed in the site referenced in #2 above. 5) Good luck with your investment . Jeff
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joyfulguy
17 years ago
When interest rates are low, usually the payout offered by an annuity is low, as well.

Once an annuity is bought ... that rate continues throughout its life.

Some say that interest rates will remain low, but I don't think so. Your country has been printing money like it's going out of style ... plus, carrying huge debt earlier, is going much more heavily into debt, and it looks as though these bailouts aren't nearly over.

Which leads one to think that the value of the dollar will shrink, and would-be borrowers, including the government, will need to offer major incentives in order to induce(seduce?) potential lenders to free up their money ... which usually amounts to offering higher interest rates ... you know what rates junk bond borrowers need to pay.

I've just been reading an article about a financial advisor who appears to have some qualifications who, when asked how long one should carry a certain type of investment, similar to a bond, if I remember correctly, said that it should be about as long as one held a grenade between the time that one pulled the pin and threw it.

Actually, one can hold it for some time, safely - just as long as one holds the lever down by hand that the pin secured in place previously ... just be careful not to relax your grip, so that the lever can't spring up, unnoticed.

Good wishes for making choices regarding your assets that you'll continue to be pleased with, later ... and later ... and later.

Many say that quality stocks are on sale.

They may be on fire sale later.

But for money that I don't figure to need for the next five years or so, I think that it's wise to put at least part of it into well-chosen equities.

Not bought in big chunks at a time, though ... unless one can be sure that that time is the bottom of the market!

Having celebrated my 80th birthday earlier this year, I'm about 80% invested in equities ... but there's a major proviso: living fairly frugally (I spent much of 10 years helping refugees with nothing get back on their feet) I live on less than my pension income ... so you could make a good case for claiming that my invesments are sort of like play money, not the kind that I depend on to put bread on the table in the near future.

ole joyfoul
joyfulguy
17 years ago
Hi again, jane of N Y,

Sorry - I meant to add a link to a story about the financial advisor that I referred to (some of whose articles a colleague in an investment group that I attend sent to me).

ole joyfoul

P.S. If you want some bonds ... why not buy some directly, thus avoiding the commission and the management fee that the fund managers charge, eating up a substantial portion of the earnings.

o j

Here is a link that might be useful: Story about Donald Coxe, financial guru (some claim)
dreamgarden
17 years ago
"Now the financial person at our bank (Chase) talked us into putting (what's left) of our 401 into a Bond Fund which will pay a fixed amount each month. There is a upfront, one time fee of $7,400.00. We will receive $2,100.00 a month."

Your not alone. A lot of people are struggling to find safe investments that pay a decent dividend.

Here is a link to another article (that talks about bonds) that may be useful:

FDIC-backed bank bonds: Too safe?
www.bankrate.com/dls/news/investing/
20090227-FDIC-backed-bank-bonds-a1.asp
dreamgarden
17 years ago
One more thing.

JP Morgan Chase has a bank rating of C (hold). I don't know what kind of bonds are in the fund you invested in but I would be cautious about using any bank that has this rating. Here is an excerpt from a German publication that talks about the dangers of having your money in a bank that could be in trouble.

"Financial Crisis Caused by a 'Culture of Complicity'

Manager Magazin: Professor Galbraith, you suggest that banks that suffer from bad assets should simply be declared insolvent, instead of rescuing them with taxpayers' money. Why?

James Galbraith: We need a correct assessment of the degree of losses suffered by a bank which is functionally insolvent. But as long as the old management is in place, there are no incentives to cooperate in the evaluation you need to make. That's the first problem.

The second problem is: When a bank is insolvent, the incentives for normal banking practice disappear. They become perverse. The incumbent management has good reason to gamble excessively and to make capital losses. This is because it appears that the regulators could soon close down the bank.

Beyond that, if the situation for the bank is truly hopeless or if the management is truly corrupt, then the incentive is to loot the institution, to take as much money out of it -- e.g. in the shape of bonuses and dividends -- before the true state of the books is discovered.

Links that may be useful:

Rate your bank
www.thestreet.com/screener/index.html?src=ratingsindex&tab=3

Financial Crisis Caused by a 'Culture of Complicity'
www.spiegel.de/international/business/0,1518,614297,00.html

'O FOR OLD, D FOR DUMB'
How German Seniors Lost Nest Eggs in Lehman Collapse
www.spiegel.de/international/germany/0,1518,613102,00.html
triciae
17 years ago
dreamgarden,

"JPMorgan Chase has a bank rating of C (hold)."

The OP is not wanting to purchase stock in JPMorgan Chase. So, thestreet.com's rating is not relevant to her circumstances.

The bank rating that's important is its CAMEL rating & those are never released to the public. They are known only by the institution's executive management & the regulators.

Bankrate.com provides a rating similar to the CAMEL but it should not be confused with the official rating. It's just another analyst based review. Bankrate.com then assigns a Star Rating to each institution.

Bankrate.com gives JPMorgan Chase a **** rating...pretty darn good.

An investor who might purchase stock has a different criteria than a person looking for a depository institution.

Note: "Chase" is the consumer & commercial banking division of JPMorgan Chase.

/tricia

Here is a link that might be useful: bankrate.com
joyfulguy
17 years ago
U.S. stocks are on sale.

They may be on fire sale later (maybe not) but folks who love to shop for bargains should consider some of the high quality ones, now ... or after while.

They're different from consumer goods - most pay a benefit, annually. And may well increase in value, over time.

Many consider that, considering the massive U.S. debt, much of it held abroad, a major portion in China, and the huge current deficit, considering the costs of the Iraq adventure, and the large bailouts, with more to come, plus the major printing of money, that the U.S. Dollar is likely at risk.

In such a situation, quite a number feel that it would be a good idea to hold part of one's assets denominated in the currency of at least one other country, possibly of several.

US$1.00 buys CA$1.25, these days.

Can I interest you folks in some Canadian bank stocks?

A recent evaluation by a respected international agency considers them about the strongest in the industrialized world. They are heavily regulated, were carrying most of their own mortgages. Some were rather heavily involved with the U.S. financial fiasco, but some were not. One that was not has taken a fairly heavy battering, along with the others and I think is good value now.

They are paying from 5.6 - 8.7% dividend and many think that there is but slim risk of them cutting them.

On the other hand ... how about an oil or gas pipeline? They've held their value reasonably well.

Or some oil and gas stocks? Canada is the U.S.' largest out-of-country supplier of petroleum ... when you pay high prices at the pumps ... it doesn't hurt so much if you own some oil stocks.

Some, agreeing to pay most of their income in order to avoid tax liaility, have been paying about 15%, but with lower oil prices may likely cut their payment levels ... and are required to reorganize in a couple of years ... but many feel that they may lower their payments only slightly, then.

Good wishes for incresingly skillful use of your income and assets.

ole joyful
jane__ny
Original Author
17 years ago
Thanks all. Very confusing and as a result I probably made a mistake by pulling out of the Fund. It was a fund of over 1500 different municipals and some high rated corporate funds. I felt the cost was too high to get in but I am hearing that is a normal amount. None of the bonds were JPMorgan (as far as I could see). Too many to keep track of.

I think we'll have to go to one of those places like Schwarb to figure this all out.

Thanks for the good information
Jane
dreamgarden
17 years ago
tricia-"The bank rating that's important is its CAMEL rating & those are never released to the public. They are known only by the institution's executive management & the regulators. Bankrate.com provides a rating similar to the CAMEL but it should not be confused with the official rating."

Should not be confused with the 'official rating'?

If the Bankrate.com site doesn't provide the REAL rating then why did you direct the OP to a link that isn't accurate?

"Bankrate.com gives JPMorgan Chase a **** rating...pretty darn good."

In Aug of 08', Consumer advocate Clark Howard, reported that before IndyMacÃ¢ÂÂs failure, it was a pretty loosely held secret within the banking industry that IndyMac was facing severe financial trouble. Up until the day that IndyMac closed its doors, it had a Ã¢ÂÂSuperiorÃ¢ÂÂ rating according to BankRate.comÃ¢ÂÂs Ã¢ÂÂSafe & SoundÃÂ®Ã¢ÂÂ rating system.

Thanks again, for reminding those of us who are being asked to subsidize corrupt, failing banks, that only privileged 'insiders' are allowed to know this most vital information.
triciae
17 years ago
No, dreamgarden. You're not understanding. The CAMEL rating & an analyst's rating are different animals. You provided a rating commonly used to evaluate investment potential in a company (financial institution or otherwise). It's not unreasonable at all for someone to consider a financial institution safe as a depository but still not want to be a shareholder.

"Thanks again, for reminding those of us who are being asked to subsidize corrupt, failing banks, that only privileged 'insiders' are allowed to know this most vital information."

Dreamgarden, (sigh), a financial institution's CAMEL rating can be influenced by anything from a short-term absense of a CFO due to sudden illness or it could be affected by something more of a systemic issue. It's a snapshot in time.

Here's a good balanced discussion of CAMEL ratings from the Federal Reserve Bank of San Francisco.

Bankrate.com provides, as I said, a similar rating but it doesn't include information known only to executive management & the regulators.

The point of my post was to highlight the different types of "reviews", their meanings, & the typical useage of each.

/tricia

Here is a link that might be useful: Federal Reserve Bank of SF - CAMEL

Bond Funds?

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