Saturday, December 27, 2008

Corporate bonds no longer offer a safety net for investors

The trite conventional wisdom has always been that older investors should have a larger percentage of their wealth in bonds, because bonds were inherently safer.

In fact, we remember that back in the 1980s Michael Milken had developed the ad hoc theory that junk bonds could be as “safe” as conventional corporate bonds.

But bond funds have taken big hits during the “Collapse” just like faults, and this even includes the tax-free muni funds. There are many reasons for all this, including downgrades, defaults, the working through of bankruptcies and the uncertainties associated with the auto industry bailout. Some funds appear to have taken on some liabilities for credit default swaps. So it’s pretty confusing and all the rules changed.

There is an article in the New York Times, December 26, 2008, by Tara Siegel Bernard, “Your money: Older investors should examine the risk of bonds”, link here. Lehman Brothers and Washington Mutual bonds were considered good, until they weren’t, she writes. The link for the story is here.

The article suggests some international diversification, as well as TIPS, or Treasury Inflation Protected Securities (we seem to be printing money like we were the Weimar Republic, even if right now we still have deflation). She also suggests CD’s, FDIC bonds, Ginnie Mae, and pre-funded municipals.

But we seem to be in a “2 to 3 percent environment” as far as any sense of safety is concerned.

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