My Personal Finance Blog

The best bond fund for 2011 and beyond might be labeled as an INCOME fund, and finding this fund can be compared to a balancing act on a high wire. Lean toward the safest bond funds and you earn 1% a year in interest income. Lean the other way and make 7% or more without a safety net. Let’s sort these and other income funds out in search of the best.

For most people, neither of the two examples above will likely be the best bond fund for 2011 or in the near future. The first is a short-term fund that invests in the world’s safest income securities, U.S. Treasuries that mature in about 3 years. That’s why it only yields or pays 1% a year in interest income in the form of dividends, for a dividend yield of 1%. Our second example is a high-yield income fund that invests your money in bonds of lower quality with higher credit risk. The risk here is that some of the “junk” bonds in the portfolio could default on interest payments and/or even principal. That’s why it yields 7% or more, because it’s risky. Some of the securities held might not pay interest as promised, and some could become worthless.

There are two basic ways to earn higher interest income in bond funds. Accept lower quality in the bond portfolio or buy funds that hold securities with longer-term maturities. Both increase your risk. Long-term income funds have higher interest rate risk, and lower quality funds have a higher risk of default. On the other hand, the safest bond funds with little risk of default and short-term average maturities (of like 3 years) are hardly worth buying if they only pay 1%. Welcome to the balancing act in bond investing today.

When looking for the best bond fund in terms of risk vs. reward, remember that TOTAL RETURN is what really matters: interest income (dividends) plus the change in value of fund shares equals total return. If you earn 7% in dividends and your fund shares drop 20% in the same year, you’ve lost money. So, you’ll need to balance bond quality with a number called AVERAGE MATURITY (explained shortly) to limit your risk and still get a good return. The real risk in bond investing today focuses on the interest rate risk associated with longer-term bonds and funds that invest in them, so let’s take a look.

You can get a yield of over 3% today in a long-term fund that holds bonds of the highest quality. Average maturity of the fund is 25 YEARS, which means that it holds bonds (with fixed interest rates) that are long-term in nature that on average mature in 25 years. Interest rate risk is high. If interest rates go up the value of the bonds held in the portfolio will fall significantly in the bond market, because the interest income they pay becomes less attractive to investors compared to the new higher rates. And the rates are fixed, on average, for 25 years.

Hence, investors in a long-term bond or income fund will have a negative total return (lose money) when interest rates go up significantly. Now, you can increase your yield to 5% in a long-term fund today if you downgrade from highest quality to medium-to-high quality bonds in the portfolio. But this isn’t the best bond fund for most people because interest rate risk is still high. So, let’s play the balancing act by focusing on bond funds with shorter average maturities and relatively high (but not the highest) bond quality.

Intermediate-term income funds have average maturities of 5 to 10 years, which greatly reduces interest rate risk. If you want the highest quality in your bond portfolio (Treasury securities) you can get a 2% yield. Settle for a high quality corporate bond fund with an average maturity of about 7 years and you can get 3% to 4%. In my opinion, that’s the best bond fund for 2011 and beyond for most people. The problem is that no investment salesperson can sell you such a fund. I’ll explain.

When you buy an income fund from a registered representative (financial planner, stock broker, etc.) there will likely be a sales charge or commission up front of about 3% and/or yearly expenses of 1% or more. If you pay 3% up front you’ve just given up your first year’s interest income. Then you give back 1% or more a year in the form of yearly expenses, which reduces your return. But if you know where to look, you can cut the cost of investing and increase your total return by investing on your own with one of the largest fund companies in America.

Vanguard and Fidelity are the two largest fund companies and both offer NO-Load funds with no sales charges or commissions. Yearly expenses for some funds offered amount to less than ¼% or .25%. Look for a TOTAL EXPENSE RATIO of about.25% for an intermediate-term high quality bond fund with an average maturity of about 7 years. That’s your best bond fund for 2011 and beyond, and the best deal you will find for your money in this author’s opinion.

In order to obtain financial success, you must begin with a reliable personal financial planning program. This program will help you address important factors relating to how you handle your everyday finances so you can maximize what money you got. With proper budget planning, you can get more value out of your money and avoid experiencing financial crisis.

Your first step is recognizing the importance of having a personal financial planning program so you can determine how you can reach your goal and what else can motivate you towards achieving it.

Getting Started With Personal Financial Planning

Today, when most people hear the word “budget”, it readily implies a negative connotation. They think that budgeting is only for those experiencing financial shortage or crisis. However, even with enough financial resources as of the moment, an effective financial planning program will ensure that you will be able to maintain your financial status.

Therefore, personal financial budgeting involves the following:

1. Financial budget for your day-to-day finances while not depriving yourself of what provides you enjoyment and satisfaction.

2. Setting up larger financial goals to which your daily budget and planning is aim towards.

3. Making sure that you have enough savings in case of emergencies or unexpected financial struggles.

The Importance of Budget

Others think that by creating a budget for your finances, it is similar to lack of financial freedom. However, it is of the exact opposite. By creating a budget, you are able to create a financial safety net so you have enough money to spend on things that you want without hurting your financial condition.

Regardless of how little or large you earn on a monthly or yearly basis, budget enables you to take an effective step towards a healthier financial foundation. Hence, you can easily realize whatever financial goals you have.

When making a budget, it is important to keep track of every detail in your expenses – even up to the last cent. Hence, you can also evaluate your spending habits. It allows you to determine whether you are placing your money on important things or whether you can do without it.

How To Set Financial Goals?

Financial goals serve as the endpoint of all efforts toward controlling your finances. Therefore, you need to clearly state what your goals are when it comes to your finances and what steps you need to achieve it.

Step 1: Choose a specific goal. It could be saving for your house’s down payment, sending one of your kids to college, buying a new computer, or going on vacation.

Step 2: Your main financial goal is typically long-term. Hence, you need to break it down into smaller goals, which will serve as your stepping stone towards that bigger goal.

Step 3: Inform yourself about ideas or strategies that will enable you to effectively handle your finances. There are several books or materials over the internet that provides the information you need.

Step 4: Keep track of your goal. Evaluate your financial records alongside your spending habits. Then, you can determine whether you are following the necessary steps that will lead towards your goal.

Therefore, you must get started on devising ways to maximize your finances and enjoy it to the fullest. A personal financial planning program would help you establish the steps that will lead towards more financial success in the future.

Perhaps this is an unnecessary statement of the obvious, but the point of insurance is to give people a financial safety net. Should an emergency or disaster strike, money you would struggle to find is paid out by your insurance company. But the squeeze has been on for the last decade as medical costs and the prices of essential drugs have been rising fast. In fact, so fast that the insurers cannot pass on all the increases to their policyholders. It was hard to raise premium rates while the economy was doing well. It became impossible to raise premiums when the recession hit without there being investigations by each state’s Commissioners for Insurance and complaints from everyone else. There comes a point when the insurer cannot get any more blood from the stone and has to sacrifice profits. This has left the medical profession, the hospitals and clinics in a winning position, while the pharmaceutical industry’s profits have continued to rise despite the recession. At the other end of the spectrum, the patients are the losers. There are some who discover the small print in their policies denies cover for the very illnesses they have. There are others whose savings are not enough to pay the deductibles and co-payments. And then there are those whose policies are cancelled when they make a claim for a chronic disease or disorder.

There is a new piece of research from the Commonwealth Fund, an independent, non-profit body. In 2007, it carried out a detailed survey among 2,600 people aged between 19 and 64. When their coverage was analysed, 20% were found significantly underinsured. Why was this happening? Because they were already spending more than 10% of their income on health coverage, whether as premiums, deductibles or both. When the underinsured were added to the uninsured, this represented 42% of adult Americans. Like the uninsured, this forces the underinsured to think twice before they have treatment with more than half either refusing treatment or struggling with debt because of treatment.

In the push for healthcare reform, the focus has been on the uninsured. But this fails to recognize the injustice suffered by the underinsured. No one should be forced to choose between refusing needed treatment and potential bankruptcy. It is therefore going to be an interesting year in prospect as the reform slowly comes into force. Both the poor and the middle class need access to cheap health insurance with reasonably comprehensive coverage. This will further squeeze the insurance industry because it will be denied the right to refuse coverage to those with pre-existing conditions and will be forced to establish group health insurance for those who have struggled to find affordable plans. In all of this, the key to success will be the ability of government and the insurers to impose more control over costs. President Obama has negotiated with the pharmaceutical industry and there is some agreement to hold down prices for those in Medicare and Medicaid. The for-profit healthcare industry also sees some self-interest in moderating its price increases and has given undertakings to the Administration. If some of the pressure is removed from the insurance industry, premium rates will stabilize and the reforms should offer a more fair system to all with a health plan. We can only hope for the best while we wait and see what happens.

A CFD is a financial agreement between two trading partners to swap the difference between the opening and closing value of a contract. They can be traded without actual ownership of the underlying financial instrument in the market in which you are trading. In other words, it is a financial derivative.

Two of the key features and attractions of a CFD, for many investors, is the ability to use them to go short or long and to use leverage. Going short is selling against a backdrop of falling prices in the market. Thus, you can potentially profit whether prices are going up or going down. A CFD is traded using leverage; in other words traders typically pay a deposit or percentage of the total trade value.

As your position in the market is greater than your invested sum, you can potentially stand to profit more than you would without using leverage. It is important to be aware that leverage can also work against you, because losses are also potentially magnified by the use of leverage.

CFDs relate to, but do not entail, ownership of the underlying financial instruments in the market you are trading in. As a result, CFD traders do not have to pay stamp duty in the UK.*

Potential Risks of Trading CFDs

The use of leverage can be potentially risky, because both profits and losses can be magnified beyond the value of your initial deposit. If not monitored or stemmed at a manageable level, the falling value of your trades can result in serious losses.

CFDs, however, can be traded using risk management tools. Whether or not you think the market will fall or rise in value, you can start your trade with a guaranteed stop loss order. A guaranteed stop loss order acts as a safety net; it will stop your potential losses at a level predefined by you and beyond which you are not comfortable trading.

This means that you can calculate, in advance, the level of your losses at a point in the market. Whichever level you decide is a good place to terminate your position can be regulated using a guaranteed stop loss order.

As it is a financial derivatives product, which means you do not actually own the underlying financial instrument, you can use CFDs to trade a number of different markets. Some of the most common are the FTSE 100, the Dow, gold and crude oil.

There is a range of CFD trading companies like IG Markets however note that opening in account isn’t guaranteed. All applications are subject to terms and conditions.

CFD trading does carry a high degree of risk to your funds and can result in you losing more than your stake. It might not be appropriate for all investors. Before you start trading, make sure that you fully appreciate the risks that are involved. Only trade CFDs with capital that you can afford to lose. Where required seek independent financial advice.

* Tax law is subject to change or may differ if you pay tax in a jurisdiction other than the UK.