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Unfortunately, even the AP article (via Zions Direct) is a bit overly simple - so is it boomers that don't know the basics, or financial reporters?
Nothing wrong per se, but a fair amount of incomplete statements. A few amendments:
- Financial institutions beefing up their bond literature could reasonably be taken as a sign that bonds are more complex than they previously made them out to be; it is not a sign that bonds are more complex than stocks (especially if one has not bothered to compare the volume/sophistication of bond literature vs. stock literature). IMHO bond performance is much more precise and mathematical (which in part is why with bond funds more so than stock funds, expenses are paramount - everything else with bond pricing is clear).
- While it is true that muni bonds are loans to governments, in the case of private activity bonds, that's just a thin veneer (much as saying that a variable annuity is an insurance product and not a fund investment). The government has no liability - the money is funneled to the private activity (like a stadium). And it is the private company that has the obligation to service the debt.
- Yield - while coupon rates are usually fixed (e.g. 4% of par value), this is often not the case. The rate may still be technically fixed in the sense that it is determined by some well-defined metric (e.g. market participation, such as 90% of the change in the S&P 500, or linked to the inflation rate as with TIPS), but it can also be even more vague. Some bonds have resets where the rate is periodically adjusted to current market rates. Fixed, yes, in the sense of pre-defining how the rates work. But not fixed in the sense that a new investor would understand the term.
- Investing in multiple bonds (as with a bond fund) increases, not decreases, the risk of a default. Think about it - are you more likely to see a bond default if you own one bond (with say, a 10% chance of default), or two bonds each with a 10% chance of default? With more bonds, it is more likely that one of them will blow up. What diversification does is shift the probability distribution - instead of having a 10% chance of losing everything (assuming for the moment that we define a default as all or nothing), with two bonds you've got a 1% chance of losing everything, an 18% chance of losing half (one of the two bonds failing), and an 81% chance of staying whole. (Everyone remember binomial distributions?) That feels (and is) a whole lot better; with enough bonds, even though the risk of default gets pretty high, the amount you lose gets swamped by the profits from the other bonds.
- In addition to the types of default mentioned in the article (failure to make timely payments, whether interest or principal), there are also technical defaults (failure to comply with any other conditions of the loan). These may not affect your cash flow, but can have an effect on the market price of the bond, and in any case, will keep Meredith Whitney very happy
- Omitted is reinvestment risk. With interest rates so low, it may seem impossible not to be able to get the same (or better) interest on new bonds (paid for out of the interest received), but I'll bet people were saying the same thing six months ago. Less of a risk now (rates have even less room to fall), but still a possibility, and in any case, something to include in a background article on bond basics. That would lead naturally to zero coupon bonds, and American Century Zero Coupon funds. (The more recent muni target funds are not zeros.)
- Omitted also is call risk - which relates to interest rate risk (you need to look at yield to worst, since you may be forced to sell the bond early) and to reinvestment risk (what you do with the principal if you get it back early).
As to the boomers, or anyone for that matter; the ability to learn/study the basics of investments or particular sectors has never been easier; especially in the last 10 years and the development and placement of educational materials at the click of an icon at a web site. In the wayback days, one had to track down similar info via a visit to the library and/or with reference and recommended reading from the Wall St Journal or Barron's. In the time it would take for some of this exploration, vs today; one could have already found more than enough online topics to aid in learning.
The article did not note where the bond investors were "from"; as to monies invested through retirement plans at their work, via advisors or individuals making their own informed choices.
The bond article itself reveals the basic relationship of bonds in the investing world to outside factors and places a good starting point for knowledge.
We already know the vast majority of those investing monies are likely only using the most basic of reference for choosing where to place their money.
If the investors are not taking some time to discover what can affect an investment of any kind; then they place themselves in harms way and may only rely upon shear luck of choice.
Agreed, the article does serve as a good introduction, for people who have the interest in learning more. And columnists still do have inch limits.
And it is also true that it's much easier than ever before to get information than it ever was.
The concern I have is that people don't take the time to learn about their investments. I cannot tell you how many responses I've posted over the years amounting to RTFM - where people's questions were clearly answered in the mutual fund prospectus. What have we done since then? Dumb down the prospectus. Force the users to take extra steps to get information - request statutory prospectuses. I understand the theory - if information is one page long and nearly vacuous, at least more people will read it.
Other than continually helping (one on one) people to learn how to fish, I don't have any good ideas.
(BTW, the page I found for the saying has a great variant: Give a man fire, keep him warm for a day. Set a man on fire, and he's warm for the rest of his life
DividendRank Energy Toplists At sister site Dividend Channel, we screen through our coverage universe of dividend paying stocks each week, and we look at a variety of data — dividend yield, book value, quarterly earnings — and compare it to the stock's trading data to come up with certain calculations about profitability and about the stock's valuation (whether we think it looks ''cheap'' or ''expensive'').
History has shown that the bulk of the stock market's returns are delivered by dividends, and so we pay special attention to dividend history. And of course, only consistently profitable companies can afford to keep paying dividends, so profitability is of critical importance. Dividend investors should be most interested in researching the strongest most profitable companies, that also happen to be trading at an attractive valuation — maybe there is a company-specific reason causing the stock to be ''cheap'' or maybe the entire sector is taking a hit, but whatever the reason, we think there is great value in ranking the Energy Stock Channel coverage universe weekly using our proprietary DividendRank formula, and sharing the list of the week's top ranked energy stocks with our subscribers.
These are the energy stocks our DividendRank system has identified as the top most ''interesting'' in the Energy, and Utilities categories ... this is meant purely as a research tool to generate ideas that merit further research.
*(updated 23 hours, 51 minutes ago) Yield calculations vary and may not be reliable nor comparable. Not all publicly traded securities are ranked; data may be incorrect or out of date. Rankings are for informational purposes only and do not constitute investment advice. Full disclaimer Utilities DividendRank Symbol Dividend Recent Yield* #1 WWVY Q 1.04 8.03% #2 ETR Q 3.32 4.93% #3 CNP Q 0.79 4.18% #4 AEP Q 1.88 5.01% #5 FTR Q 0.75 13.66% #6 CNSL Q 1.55 8.42% #7 EXC Q 2.10 4.94% #8 QRE Q 1.90 9.61% #9 IDA Q 1.20 3.08% #10 POR Q 1.06 4.46% #11 WM Q 1.36 4.45% #12 CTL Q 2.90 7.96% #13 UNS Q 1.68 4.77% #14 LG Q 1.66 4.21% #15 HTCO Q 0.56 5.38%
Comments
Nothing wrong per se, but a fair amount of incomplete statements. A few amendments:
- Financial institutions beefing up their bond literature could reasonably be taken as a sign that bonds are more complex than they previously made them out to be; it is not a sign that bonds are more complex than stocks (especially if one has not bothered to compare the volume/sophistication of bond literature vs. stock literature). IMHO bond performance is much more precise and mathematical (which in part is why with bond funds more so than stock funds, expenses are paramount - everything else with bond pricing is clear).
- While it is true that muni bonds are loans to governments, in the case of private activity bonds, that's just a thin veneer (much as saying that a variable annuity is an insurance product and not a fund investment). The government has no liability - the money is funneled to the private activity (like a stadium). And it is the private company that has the obligation to service the debt.
- Yield - while coupon rates are usually fixed (e.g. 4% of par value), this is often not the case. The rate may still be technically fixed in the sense that it is determined by some well-defined metric (e.g. market participation, such as 90% of the change in the S&P 500, or linked to the inflation rate as with TIPS), but it can also be even more vague. Some bonds have resets where the rate is periodically adjusted to current market rates. Fixed, yes, in the sense of pre-defining how the rates work. But not fixed in the sense that a new investor would understand the term.
- Investing in multiple bonds (as with a bond fund) increases, not decreases, the risk of a default. Think about it - are you more likely to see a bond default if you own one bond (with say, a 10% chance of default), or two bonds each with a 10% chance of default? With more bonds, it is more likely that one of them will blow up. What diversification does is shift the probability distribution - instead of having a 10% chance of losing everything (assuming for the moment that we define a default as all or nothing), with two bonds you've got a 1% chance of losing everything, an 18% chance of losing half (one of the two bonds failing), and an 81% chance of staying whole. (Everyone remember binomial distributions?) That feels (and is) a whole lot better; with enough bonds, even though the risk of default gets pretty high, the amount you lose gets swamped by the profits from the other bonds.
- In addition to the types of default mentioned in the article (failure to make timely payments, whether interest or principal), there are also technical defaults (failure to comply with any other conditions of the loan). These may not affect your cash flow, but can have an effect on the market price of the bond, and in any case, will keep Meredith Whitney very happy
- Omitted is reinvestment risk. With interest rates so low, it may seem impossible not to be able to get the same (or better) interest on new bonds (paid for out of the interest received), but I'll bet people were saying the same thing six months ago. Less of a risk now (rates have even less room to fall), but still a possibility, and in any case, something to include in a background article on bond basics. That would lead naturally to zero coupon bonds, and American Century Zero Coupon funds. (The more recent muni target funds are not zeros.)
- Omitted also is call risk - which relates to interest rate risk (you need to look at yield to worst, since you may be forced to sell the bond early) and to reinvestment risk (what you do with the principal if you get it back early).
In the wayback days, one had to track down similar info via a visit to the library and/or with reference and recommended reading from the Wall St Journal or Barron's. In the time it would take for some of this exploration, vs today; one could have already found more than enough online topics to aid in learning.
The article did not note where the bond investors were "from"; as to monies invested through retirement plans at their work, via advisors or individuals making their own informed choices.
The bond article itself reveals the basic relationship of bonds in the investing world to outside factors and places a good starting point for knowledge.
We already know the vast majority of those investing monies are likely only using the most basic of reference for choosing where to place their money.
If the investors are not taking some time to discover what can affect an investment of any kind; then they place themselves in harms way and may only rely upon shear luck of choice.
Take care,
Catch
And it is also true that it's much easier than ever before to get information than it ever was.
The concern I have is that people don't take the time to learn about their investments. I cannot tell you how many responses I've posted over the years amounting to RTFM - where people's questions were clearly answered in the mutual fund prospectus. What have we done since then? Dumb down the prospectus. Force the users to take extra steps to get information - request statutory prospectuses. I understand the theory - if information is one page long and nearly vacuous, at least more people will read it.
Other than continually helping (one on one) people to learn how to fish, I don't have any good ideas.
(BTW, the page I found for the saying has a great variant: Give a man fire, keep him warm for a day. Set a man on fire, and he's warm for the rest of his life
http://www.etftrends.com/2011/11/etf-spotlight-emerging-market-bonds/?utm_source=iContact&utm_medium=email&utm_campaign=ETF Trends&utm_content=
wallstreet bully commentary
http://www.theetfbully.com/2011/11/eurozone-turbulence-won’t-stop-battering-equity-etfs-anytime-soon/
also got this link from my FA - dividendchannel
DividendRank Energy Toplists
At sister site Dividend Channel, we screen through our coverage universe of dividend paying stocks each week, and we look at a variety of data — dividend yield, book value, quarterly earnings — and compare it to the stock's trading data to come up with certain calculations about profitability and about the stock's valuation (whether we think it looks ''cheap'' or ''expensive'').
History has shown that the bulk of the stock market's returns are delivered by dividends, and so we pay special attention to dividend history. And of course, only consistently profitable companies can afford to keep paying dividends, so profitability is of critical importance. Dividend investors should be most interested in researching the strongest most profitable companies, that also happen to be trading at an attractive valuation — maybe there is a company-specific reason causing the stock to be ''cheap'' or maybe the entire sector is taking a hit, but whatever the reason, we think there is great value in ranking the Energy Stock Channel coverage universe weekly using our proprietary DividendRank formula, and sharing the list of the week's top ranked energy stocks with our subscribers.
These are the energy stocks our DividendRank system has identified as the top most ''interesting'' in the Energy, and Utilities categories ... this is meant purely as a research tool to generate ideas that merit further research.
Energy
DividendRank Symbol Dividend Recent Yield*
#1 DK Q 0.15 1.33%
#2 BBEP Q 1.74 10.24%
#3 VLO Q 0.60 2.87%
#4 NKA Q 1.40 15.64%
#5 TNK Q 0.60 15.11%
#6 AE A 0.57 2.27%
#7 LINE Q 2.76 7.65%
#8 CVX Q 3.24 3.36%
#9 APL Q 2.16 6.28%
#10 XTEX Q 1.24 8.01%
#11 NSH Q 1.98 6.68%
#12 GEL Q 1.71 6.53%
#13 PAA Q 3.98 6.20%
#14 NAT Q 1.20 9.50%
#15 WMB Q 1.00 3.33%
*(updated 23 hours, 51 minutes ago) Yield calculations vary and may not be reliable nor comparable. Not all publicly traded securities are ranked; data may be incorrect or out of date. Rankings are for informational purposes only and do not constitute investment advice. Full disclaimer
Utilities
DividendRank Symbol Dividend Recent Yield*
#1 WWVY Q 1.04 8.03%
#2 ETR Q 3.32 4.93%
#3 CNP Q 0.79 4.18%
#4 AEP Q 1.88 5.01%
#5 FTR Q 0.75 13.66%
#6 CNSL Q 1.55 8.42%
#7 EXC Q 2.10 4.94%
#8 QRE Q 1.90 9.61%
#9 IDA Q 1.20 3.08%
#10 POR Q 1.06 4.46%
#11 WM Q 1.36 4.45%
#12 CTL Q 2.90 7.96%
#13 UNS Q 1.68 4.77%
#14 LG Q 1.66 4.21%
#15 HTCO Q 0.56 5.38%
http://news.investors.com/Article/592799/201111251619/arrow-dwa-fund-uses-relative-strength-with-etfs.htm
6 turkeys to keep off your investment table
http://www.marketwatch.com/story/6-turkeys-to-keep-off-your-investing-table-2011-11-24
etfs are ideal investing tools for stratgeic allocations
http://news.investors.com/Article/592800/201111251619/etfs-are-ideal-for-investorsand8217-strategic-asset-allocation.htm