The future of fixed income investing, 2010-2020?

[rj.phila]

Hello all, I'm wondering if you may have any opinions, thoughts, or nooks and crannies of resources that I am just not privy to.

Over the decade of the aughts, I put the bulk of my investing funds in long-term, high-yield CD's. They average about mid-5%. I staggered them, so they will leapfrog, but over the next 2-7 years, they will start to mature(2012-2017). Obviously, a rate of over 5% on that kind of product is a pipe dream for the immediate future, and possibly for a long time.

My question: do any of you foresee a means of earning anything close to 5% on a fixed income product, starting around 2012? Anything with an inherent risk-stocks, MF's, MMF's, etc is just not an option. As it relates to risk, and fixed income investing, I am aware of the "inflation boogieman" that every dumbass CFP i talked to 5 years ago tried to scare me into MF's with, didnt work then, not working now. That 5.75% rate that seemed so low to them 3-5 years ago is looking fantastic to me now.

I've looked around, and the best I am finding are domestic online savings accounts(1%-ish), to jumbo CD's(2%-ish at best). Is there anything out there I'm overlooking, or is my own stupid little personal interest rate dream about to just plain go away? If there were a way I could GUARANTEE myself a secured 5-6% return on something, it would, in a very literal sense, be HUGE. Thanks!

[disneysteve]

How about good quality corporate bonds?

GE maturing 12/2017 5.25%
UPS 1/2018 5.5%
WalMart 2/2018 5.8%

Just a sampling.

[rj.phila]

Thanks, disneysteve. so are the inherent risk of corporate bonds related to the company filing for bankruptcy, essentially? my reticence to invest in anything with risk kept me from looking at these, but wal-mart's odds of going belly up seem pretty damn slim. hmmmm. gonna do some research, thanks.

[disneysteve]

Everything has risk. There is principal risk, market risk, inflation risk, etc. Putting all of your money in fixed-rate CDs is risky because you may not earn enough to keep up with inflation and meet your future financial needs. Investing in bonds is risky because the company could default on the payments. Investing in stocks is risky because the value of the shares could drop or the company could even close up and leave you with worthless stock. There is no such thing as a risk-free investment.

[rj.phila]

thanks steve, i understand what you are saying. however, in an applied, real-world way, i consider there to be a defining line between a product that actually has risk to the principal(stock/mutual fund), and one that doesnt(FDIC insured product). in one that doesnt, inflation becomes what i would not technically classify as a "risk", but more a caveat to its future usage(you WILL make money off a mature CD, inflation just calls into question what that future return will actually buy). but i know that we could enter into a semantic discussion over this til both our eyes are a collective blue.

i'd love to hear any real world feedback stories about corporate bonds. anyone that either lost or gained money on one, that would be really helpful. thanks.

[disneysteve]

I don't personally own any corporate bonds but I sit on the finance committee of my synagogue and I know we hold some in our portfolio. They are doing just fine and making their 6-8% interest payments each month as scheduled.

Remember that with bonds, the value of the bond itself does fluctuate so if you would need to sell before maturity, you could lose principal. If you hold the bond until maturity, you would not lose principal (unless the company went under, of course).

You could also look at municipal bonds which are issued by government entities. They have a somewhat lower yield but are exempt from certain taxes depending on the issuer and your state of residence so they can work out to be equivalent or even better than a corporate bond but with lower risk of default, although still some degree of risk.

[Slug]

I bought some BP bonds this summer at the height of the media frenzy. They're paying close to 10%. Look for beaten down companies that have very little chance of going under. The ones mentioned above are solid and their yields are decent. Most trading platforms have search engines that allow you to screen for only the highest rated bonds. Good luck.

[jpg7n16]

Like all good investment decisions, buy low. Sell high.

Slug got in on BP bonds when they were trading abnormally low (beaten down in the media, but not in real danger as a company). So his return will be higher - because he bought low.

The main risk you want to avoid is default risk - the bankruptcy non-payment issues you were talking about. Is Wal-Mart going bankrupt before 2018? I doubt it. So 5.8% bonds with Wal-Mart are likely a good fit for you; You should ask your financial advisor to see if they fit your overall situation.


I'll always refer people to go check out The Intelligent Investor from your local library. It deals with bonds as well as stocks, and gives excellent information on what to consider when you look at buying bonds.