Until tonight, this is Fashion Week in New York. It's that lovely semi-annual extravaganza where big white tents take over Bryant Park and women trip over their heels just to get a glimpse of next season's looks. This was especially meaningful since it was the last time Fashion Week will be based in Bryant Park. The September shows will be held in Lincoln Center, tear, sniff. I was lucky enough to attend 2 shows this weekend. The first was men's designer Simon Spurr on Sunday where with a few friends I watched and picked out what I liked and didn't like and then chatted about the looks over brunch. The second show I went to was Monique Lhuillier (ready to wear, not bridal) where again I could see what I liked didn't like but in addition I went with a friend who is a designer and could verbalize specific trends and styles. Basically after listening to my designer friend discuss the different elegant looks that strutted passed us, I realized that without knowing the specifics of a dress and how it is made, one cannot know whether or not a dress would truly be a good fit for them. This holds true for bonds as well. While you may like the look or yield of a bond, without knowing the specific details, how can you tell if it's a perfect fit or something that will make you look dowdy or default? Below are the details of bonds and what each part means to you, the buyer.
Every bond has a coupon, it may be zero, but either way it is fixed at the time of issuance. The coupon is what you are paid out every year. If the bond has a 0% coupon, you buy it at a discount and the interest compounds on itself as though it were paying a coupon and you get all your interest at maturity. A bond's maturity is it's ending date. That is the date you get your principal (face value of how much you originally bought) back. A bond's call date is when the issuer has the option to call the bond in (usually at 100) to give you back your principal early and stop paying interest. Once a bond hits its call date, the issuer has the option to call the bond anytime after that with 30 days notice to the bond holders. Some bonds are non-callable which is usually advantageous to the buyer. Bonds have 2 forms : Book Entry and Registered. Book Entry just means that your bond is held in electronic form so you don't hold the actual paper and have to worry about losing it. Nearly all bonds are in book entry form now. Bonds that are Registered have the option to be printed on to actual documents you can hold. The powers that be are not a fan of this because it is difficult to track and now charge at least $150 just to have your bond printed. Not worth it in my opinion. Moodys and S&P (Standard and Poor) are the 2 main rating agencies which will tell you what your bond is rated from AAA all the way down to NR. A third rating agency is Fitch which actually keeps ratings up to date a little more than the other two. The last and most important facet of your bond is your yield to worst. This is your true yield on your investment. Whether you paid a premium (above 100) or a discount (below 100) your SEC Yield/Yield to Worst is what you want to know. If the bond is a premium, your yield to worst is the yield to call and if your bond is a discount your yield to worst is the yield to maturity.
Once you take a look at the details of a bond and know what each mean to you, looking over each part is like trying it on. If you like what you see, make the purchase. If you think it's a little too long and would need it hemmed a bit, you might want to wait and see what comes around next time. Moral of the story is, you can't just buy a bond because of it's pretty color (yield).
Tuesday, February 16, 2010
Monday, February 8, 2010
Converse are to Mizunos as Bond Funds are to Bonds
At some point Converse sneakers were considered acceptible athletic wear for actually playing sports. Since then, the sneakers have morphed into comfotable gear to thrown on for a walk on a Saturday as opposed to a work out. Instead, through some genious engineering, we now have sneakers like Mizuno to break a sweat in. It's almost laughable at this point to picture someone participating in any athletic even while wearing their favorite Chuck Taylors. We simply know better now. Some sneaks are for strolling while some are for really workin' it.
When it comes to investing our money, we never actually want to be strolling because let's be real, we work hard for our money and our money should be workin' it hard for us! Basically Converse which in this case can be thought of as bond funds aren't the best way to get some muscle outta your money.
When you buy a bond fund, it is comprised of a bunch of different bonds. The broker presenting this fund rarely knows what the specific underlying bonds are in the fund so basically has no idea what he or she is putting your money into. When you buy an individual bond, you know exactly what is paying your interest and how. Bond funds also do not have a specific maturity date (day you get your principal back). This means that when you put your money in a 7 year bond fund, 5 years later you still own a 7 year fund. When you put your money in a 7 year individual bond, 5 years later you have a 2 year bond. If you need to sell, an individual bond is much better because a 2 year bond that has the same quality as a 7 year bond is always more expensive. This is due to duration risk. The longer the bond, the more time there is for something to possibly go wrong with it. Costs are a third consideration. Generally when you buy a bond fund, you end up paying a fee on it every year which really eats into your profit. When you buy an individual bond you pay the ask price while the broker selling it to you paid the bid price the spread is the only profit in it for the broker. Being a bond salesperson, if I thought bond funds were good investments, I would most certainly sell them because they are incredibly profitable (for the broker) and there's not much I love more than a new pair of running sneaks! The problem here is that when investing your money, you want it to be most profitable for you, not your broker or brokerage house.
Moral of the story is while it was fine to excersize in Converse when we didn't know any better, now that we know about more supportive shoes, our ankles and toes love us more. The same goes for bond funds, now you know better, so get your money into some stable sneaks (bonds)!
When it comes to investing our money, we never actually want to be strolling because let's be real, we work hard for our money and our money should be workin' it hard for us! Basically Converse which in this case can be thought of as bond funds aren't the best way to get some muscle outta your money.
When you buy a bond fund, it is comprised of a bunch of different bonds. The broker presenting this fund rarely knows what the specific underlying bonds are in the fund so basically has no idea what he or she is putting your money into. When you buy an individual bond, you know exactly what is paying your interest and how. Bond funds also do not have a specific maturity date (day you get your principal back). This means that when you put your money in a 7 year bond fund, 5 years later you still own a 7 year fund. When you put your money in a 7 year individual bond, 5 years later you have a 2 year bond. If you need to sell, an individual bond is much better because a 2 year bond that has the same quality as a 7 year bond is always more expensive. This is due to duration risk. The longer the bond, the more time there is for something to possibly go wrong with it. Costs are a third consideration. Generally when you buy a bond fund, you end up paying a fee on it every year which really eats into your profit. When you buy an individual bond you pay the ask price while the broker selling it to you paid the bid price the spread is the only profit in it for the broker. Being a bond salesperson, if I thought bond funds were good investments, I would most certainly sell them because they are incredibly profitable (for the broker) and there's not much I love more than a new pair of running sneaks! The problem here is that when investing your money, you want it to be most profitable for you, not your broker or brokerage house.
Moral of the story is while it was fine to excersize in Converse when we didn't know any better, now that we know about more supportive shoes, our ankles and toes love us more. The same goes for bond funds, now you know better, so get your money into some stable sneaks (bonds)!
Tuesday, February 2, 2010
Wear it, Wash it, Throw it Away : Work it, Earn it, Give it to the Government
I pretty much think it's common sense that when you buy a $10 shirt or dress pretty much anything from either Forever 21 or H&M it's not going to last as long as a piece of clothing that was made with higher quality material and therefore is more expensive. While these clothes are fabulous and every Spring you can catch me at Forever 21 stocking up on their comfy inexpensive sundresses, I don't expect these items to last more than one season. The stores don't actually come out and say that their clothing is of less quality than say a Ralph Lauren shirt or dress, but from the cost and material the clothes are made of, sometimes we have to draw conclusions from the facts at hand.
A couple months ago, I posted about how taxes are going to be raised a lot come 2011. Considering the White House has taken the stand that nearly everyone is wealthy now, these taxes are going to hit any individual making over 200k/year and joint income of 250k/year. While this is the first time the White House has come out and said that taxes are going to be raised, like the H&M shirts, this is the type of thing we need to have a little foresight with. That being said, if you are in that range, I'd start buying tax free bonds as soon as possible because they are going to be worth a lot more to you when your tax bracket is in the 40%-50% range. Just to give you an idea, in the highest federal bracket now is 35% the taxable equivalent on a 4.5% municipal bond is 6.92%, once your bracket is raised to maybe 45% that same 4.50% will be equivalent to a 8.18%. AND the bond (if you buy quality) will definitely last you longer than any bargain dress you get!
A couple months ago, I posted about how taxes are going to be raised a lot come 2011. Considering the White House has taken the stand that nearly everyone is wealthy now, these taxes are going to hit any individual making over 200k/year and joint income of 250k/year. While this is the first time the White House has come out and said that taxes are going to be raised, like the H&M shirts, this is the type of thing we need to have a little foresight with. That being said, if you are in that range, I'd start buying tax free bonds as soon as possible because they are going to be worth a lot more to you when your tax bracket is in the 40%-50% range. Just to give you an idea, in the highest federal bracket now is 35% the taxable equivalent on a 4.5% municipal bond is 6.92%, once your bracket is raised to maybe 45% that same 4.50% will be equivalent to a 8.18%. AND the bond (if you buy quality) will definitely last you longer than any bargain dress you get!
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