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With potential interest rate changes, the value of my portfolio

has declined drastically. I was...
With potential interest rate changes, the value of my portfolio has declined drastically. I was mostly invested in long term insured municipal debt. For a number of years the interest I was getting from the bonds was a substantial part of my annual income. I sold some of the bonds recently, but they all took serious losses, and the only offers I received on some of the remainder were very low. One $50,000 issue got no bids over $38,000, and some were much worse. I believe I will need to sell some of the bonds to pay for my daughter's college education, which begins in five years. Am I better off taking my losses now, and looking for someplace else to invest which would also produce income, or would these same bonds be worthless in a few years? Many of these bonds go out past 2020 before maturity. After selling some bonds at a loss, I still have a little over $200,000 worth of bonds at the current market rates. The original investment was a little over $250,000 on these bonds. I am trying to find a source of income to replace these, if I sell them. Are they likely to keep losing value if I hold them for 4-5 more years?
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Answered in 11 minutes by:
9/21/2013
Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 12,883
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane :

Hi,

Lane :

Im so sorry, but your intuition may be good ... as interest rates posibly go up, the value of these bonds COULD go down

Customer:

I am having trouble reading your answer. It looks like Just Answer has some kind of pop up blocking most of the screen

Lane :

The problem here, is that (as I'm sure you understand) as rates begin to go back ... and they may not do so tomorrow (based on the Fed's decision yesterday) BUT THEY WILL, nowhere to go but up form here - investors looking to buy bonds will buy the newer bonds (issues at those increasing rates) and MIGHT buy your bonds, but would only do so at a discount, that would make them generate the effective higher rate being offered with the new bonds that come to martket

Lane :

Have you tried using the scroll bar to look back up at eh answer?

Customer:

I still can't see most of the screen because of some kind of Just Answer popup

Lane :

(sorry for the typos ... hopefully you got the gist of that) .. OK let me contact the moderators and see what they can do So sorry I am having no ntrouble on my end

Customer:

There is a big popup which shows part of my question and includes the Just Answer logo and says awaiting customer action

Lane :

I've sent an email to the moderators

Lane :

Can you try turning on the p[opup blocker in your broweer?

Customer:

Ok this never happened before

Lane :

system HAs been very buggy tonight

Lane :

What about moving to "Q&A" mode ... that may her

Lane :

help

Customer:

All I saw was your last phrase about the system being buggy

Lane :

ok ;;; I'll move us to Q&A ... we can still continue our dialogue, just not in real time

Customer:

how do i do that?

Customer:

I am not sure how to get into Q&A

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Hi CHris,

Is this better?

(I know it's not chat but we can still go back and forth here)

Lane

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The problem here, is that (as I'm sure you understand) as rates begin to go back ... and they may not do so tomorrow (based on the Fed's decision yesterday) BUT THEY WILL, nowhere to go but up form here - investors looking to buy bonds will buy the newer bonds (issues at those increasing rates) and MIGHT buy your bonds, but would only do so at a discount, that would make them generate the effective higher rate being offered with the new bonds that come to market.

 

 

This is that inverse relationship between rates and bonds.

 

 

 

 

 

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Is this better?

The problem you have is what we all have right now.


Rates just aren't what they used to be..

If you like the idea of bonds, you may want to look at high yield bonds.

They will be less sensitive to interest rate changes BUT have a higher default risk.

Te other side of that coin, is that we HAVE gotten lot of the "dead wood" out of that market now.

Lane
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Customer reply replied 4 years ago

Essentially, my question is will the prices for my bonds keep getting worse? If I have to sell now, I am looking for a way to generate income and preserve capital. Growth is not as important.


I believe that they will...


As i said before .. maybe not tomorrow (Fed just yesterday said that they will not stop buying treasuries right away) BUT rate, again, will, begin to go back up at some point.

And that, as always, will coincide with a reduction in the price of existing bonds.

If you'd like to to discuss this more, we can... but to answer your question, ... If you stay put, you will see principal staying level for a while and eventually start down when the Fed finally starts backing off on buying treasuries (which keeps rates where they are).

As I said before, rates have nowhere to go but up, from here.

And when that starts to happen, bond prices will go down.

Hope this helps

Lane


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Customer reply replied 4 years ago

If I sell these bonds, is there someplace which will provide income but, almost as importantly, preserve capital? I haven't found any mutual funds which are safe and provide income rather than growth.


Now were back to that problem that we're all having today.

Money markets are paying about 1/2%, the 10 year Treasury bond (also safe) is at 2.73% today.

If you look at Corporate bonds in VERY safe blue chip companies, the bond yield (actual return based on today's prices) are about the same (with potentially more risk than treasuries).




We're in an environment right now where there are no easy answers.

IF you know that the money is going to be there for a business cycle of 6 years plus, then it becomes fairly predictable that if you invest in a diversified portfolio that includes stocks, bonds, treasuries, commodities and value & small cap stocks, you'll have a very good chance at achieving returns ON AVERAGE of 7 to 8% ... but if you want guarantees right now (please don't shoot the messenger) high 2's is as good as it gets.




BotXXXXX XXXXXne? IF you don't need this money for the short term, I believe that investing in a diversified portfolio as mentioned above can generates returns 2 to three times better than anything fixed... but that only becomes predictable over business cycles of 6" years.



Hopefully you'll rate my answer on it's thoroughness and accuracy, rather than any good news/bad news content. (That's the only way we're paid here)

Hopefully, having all the facts will help you "see around some corners."

IF you have more questions on THIS issue, however, please come back here, so you won't be charged or another question.

Lane

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Customer reply replied 4 years ago

It seems like my problem will be needing to raise cash in five years. Would a conservative allocation mutual fund be likely (No, I'm not asking for a guarantee) be something that could be liquidated in five years with the principal being secure?


In terms of probability, that IS the most likely.

You may want to look at one of the target date funds.

Such as these: They change the portfolio to become more and more conservative, as you get closer to the point where you need the funds/

https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList?WT.srch=1

There are many other fund companies That do this.

But again. TODAY, Treasuries (high 2's) are the safest way to do this ... and I believe that (given your time frame) that may actually outperform you municipal bonds.

DO be sure, however, to factor in what the tax free nature of your bonds is dong for you ... If your income is high enough buying a laddered portfolio of municipal bonds (buying bonds one month at a time) may make the most sense.

Here's an excellent article on that.

http://bonds.about.com/od/munibonds/a/How-To-Calculate-Municipal-Bonds-Tax-Equivalent-Yield.htm

Lane

Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 12,883
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified
Lane and 87 other Finance Specialists are ready to help you
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Thanks Chris!

Let me know if I can help further.

Lane



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Thanks again Chris

Lane
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Lane
Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 12,883
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Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986

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