Thursday, April 16, 2009
Tuesday, May 27, 2008
Look out for hidden pitfalls in the stock market.
The stock market is a savage beast. I know more people who end up with a net loss in the stock market than those who have actually made any money on their own. When the economy is good, gains are simple, when it heads south, losses are more common than gains. I tend to keep clients away from it. Believe it or not, over the long term, bond market and the stock market gains are very close. What most people don’t know is that AAA rated bonds can offer the possibility of high yields without taking credit risk.
Why do I say the stock market is a savage beast? Because there are so many different factors that must go right for an investor to meet with success in the stock market. In the bond market there are rules that apply to each individual bond and they will apply to that bond until it comes to maturity and the investor’s principal is returned. The bond market is roughly six times larger than the stock market. Until about 20 years ago the bond market was most commonly used by institutions and the ultra wealthy. Now, the bond market is open to the average investor.
Bonds will follow a simple set of rules. Certain circumstances will occur and the investor will have certain things happen with their bonds according to those rules. The stock market and funds have a very complex set of rules. The rules for bonds are simple as compared to the rules of the stock market. A bond’s rules are like a game of checkers and the rules that apply to the stock market and funds are more like a 3 dimensional game of chess. Case in point -Enron- where high level forensic accountants took years to figure out something was up. Take a look at the stocks for Lowe’s and Home Depot. We just went through the largest period of home building and home improvement in the history of the United States. Those who invested in Lowe’s did well, while the investors in Home Depot did poorly because the CEO took a huge sum in bonuses and stock options. There was no way for the investors planning on profiting from the housing boom to know that this was going to happen before they bought into Home Depot. I’m not here to bash the stock market, there are some great opportunities to make money there and if you’re making money there I urge you to continue. The point I’m trying to get across is that the bond market is a larger yet simpler market. It still has its hidden pitfalls (subprime mortgages) just not as many as the stock market. The stock markets rules are at times broken, in the case of Enron, and there are things that can surprise investors that cannot be seen when the initial investment is made. When you invest in government agency or government backed bonds you cannot be ripped off by some rogue CEO who thinks it’s more important that he gets rich before the investors.
Keep reading this blog and we’ll have postings about all different kinds of bonds and bond investment strategies. You’ll learn how to structure bond portfolios, how to increase your possibilities for high yields on AAA rated government and government agency backed bonds, how to receive tax free income from your bonds, and more.
Why do I say the stock market is a savage beast? Because there are so many different factors that must go right for an investor to meet with success in the stock market. In the bond market there are rules that apply to each individual bond and they will apply to that bond until it comes to maturity and the investor’s principal is returned. The bond market is roughly six times larger than the stock market. Until about 20 years ago the bond market was most commonly used by institutions and the ultra wealthy. Now, the bond market is open to the average investor.
Bonds will follow a simple set of rules. Certain circumstances will occur and the investor will have certain things happen with their bonds according to those rules. The stock market and funds have a very complex set of rules. The rules for bonds are simple as compared to the rules of the stock market. A bond’s rules are like a game of checkers and the rules that apply to the stock market and funds are more like a 3 dimensional game of chess. Case in point -Enron- where high level forensic accountants took years to figure out something was up. Take a look at the stocks for Lowe’s and Home Depot. We just went through the largest period of home building and home improvement in the history of the United States. Those who invested in Lowe’s did well, while the investors in Home Depot did poorly because the CEO took a huge sum in bonuses and stock options. There was no way for the investors planning on profiting from the housing boom to know that this was going to happen before they bought into Home Depot. I’m not here to bash the stock market, there are some great opportunities to make money there and if you’re making money there I urge you to continue. The point I’m trying to get across is that the bond market is a larger yet simpler market. It still has its hidden pitfalls (subprime mortgages) just not as many as the stock market. The stock markets rules are at times broken, in the case of Enron, and there are things that can surprise investors that cannot be seen when the initial investment is made. When you invest in government agency or government backed bonds you cannot be ripped off by some rogue CEO who thinks it’s more important that he gets rich before the investors.
Keep reading this blog and we’ll have postings about all different kinds of bonds and bond investment strategies. You’ll learn how to structure bond portfolios, how to increase your possibilities for high yields on AAA rated government and government agency backed bonds, how to receive tax free income from your bonds, and more.
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