The Spot Price Of A Non-Dividend-Paying Stock Is 40 2011 Bond Bubble Vs Boomers Vs Best Funds to Invest In

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2011 Bond Bubble Vs Boomers Vs Best Funds to Invest In

Before 2011 ends a bond bubble could replace the baby boomers as front page news and even the best bond funds could spell trouble. That’s bad news if you are heavily into bond funds, but good news if you’re sick of hearing about the boomers. No matter your age you likely own these funds. So, listen up. If the bond bubble deflates you’ll want to own some safe investments as well as some of the best funds available.

As a boomer turning 65 in 2011, bond funds (also called INCOME funds) in general don’t strike me as the best funds going forward. Having been into investing for almost 40 years, and still active in the markets, I don’t like the risk vs. reward situation in the present bond (debt) market. At the same time, my opinion is that most people should invest in a variety of funds for the long term, for the diversification and professional management they offer. This includes stock AND income funds… as well as safe investments called money market funds.

Now, what’s a bond bubble and why do I view 2011 with trepidation? Second, what are the best funds to invest in to avoid unnecessary losses if the bubble deflates? A bubble is simply highly inflated prices, and in the debt market that’s what we’ve got. When prices go up, yields (interest income divided by price) go down. The trend since 1981: higher prices and lower yields. In simple terms, this means less income for those who own bond funds and more risk. Because when interest rates go up bond prices (values) will fall vs. going up as they basically did from 1981 through 2010.

In 1981 the world’s safest 10-year bond (a U.S.10-yr Treasury note) hit a yield of 14%. Recently that yield fell to 2.5%, virtually the lowest in modern times. Some of the safest and best bond funds own these, but that does not make them the best funds or truly safe investments. Even the longest-term (30-yr) Treasuries are safe investments in the sense that our government is committed to paying the interest promised and to pay investors back upon maturity. But in the meanwhile they trade in the bond market, and long-term bonds of all types will get clobbered if interest rates spike upward. The reason for this: the fixed interest income they offer becomes less attractive vs. the new higher rates available.

I like to look at risk vs. profit potential, and for all but the best of bond funds I don’t like what I see for 2011 and beyond. Since 1981 investors in bond funds have earned more interest income than they could get at the bank; plus, over the years the value of their fund shares have gone up as interest rates fell. Do you see interest rates falling much further in 2011-2012? How much risk are you willing to take to earn interest income of 3% or more a year? Now let’s move on to the best funds, remembering that most younger people, boomers and folks beyond boomer age all need safe investments, bond funds and stocks funds in their investment portfolio.

The best funds that are safe investments: money market funds and short-term bond funds. The best funds for higher income: intermediate-term bond funds with average maturities of 7 years or less. Avoid long-term funds with average maturities of 20 years or more unless you think interest rates will continue to fall and/or stay at today’s low levels. The best funds for higher profit potential and dividend income: equity income funds that invest in high-quality large-company stocks with good dividend-paying records.

Whether you are a baby boomer or not, check your accounts (including 401k and IRA) and get to know the funds that you own. Odds are you own some. Unless you’re willing to accept higher risk in pursuit of big profits in 2011 and beyond, look for the best rates on safe investments and give our best funds above some consideration. Sometimes it’s better to be safe than sorry and I fear that’s the case in 2011.

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