Monthly Archives: October 2010

Rising Rate Portfolio Prep


Interest Rates 1970-2010, as of 12/17/2010

When interest rates go up, the price of bonds goes down.  

Take a look at this graph of interest rates going back to 1970.  Rates are at 40 year lows, aside from a short lived blip during the 1st quarter of 2009 when the economy nearly halted.

In the short term, it is possible that rates stay here or go down more.  But in the long run an increase in rates is inevitable, with the enormous deficit and the amount of money being printed.  Once the economy starts to pick up steam, we will see a reversal in rates and UP will be the new long term trend.

If you hold fixed income investments such as bonds, you need to take a look at the duration in your portfolio.  Duration is different than maturity– this is an important distinction.  Duration can be used to calculate the effect each 1% increase in interest rates will have on your investment.

The economy is still soft, and the fed intends to keep rates low.. for now.  Once the economy picks up however we may see a vicious cycle of rate increases and the subsequent decrease in the price of bonds.

Duration matters.  Now is a good time to evaluate your investments and prepare for the future.  There are steps you can take to reduce the interest rate risk in your portfolio.  Call us today to discuss appropriate strategies.

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No Social Security Increase for 2011

No surprise, as the COLA is tied to CPI-W, which set the last high watermark in 2008.  Good news is no increase in earnings limits or any other categories that normally change annually.

Official press release here

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Are You Fearful or Greedy?

It was 2 years ago this week (10/16/08) that Warren Buffet wrote his “Buy America, I am.”  Op-ed article in the New York Times.  Buffett encouraged investors to “be fearful when others are greedy, and be greedy when others are fearful.”  In the 2 years since the article was written, the S&P500 has gained +29.1% on a total return basis through the close of trading last Friday (10/8/10).

Buffet is clearly a natural at removing any emotional connection to investing.  In May 2009 I wrote about the risks of investing based on your emotions in Buy Low, Sell High.  Where are we now?, and I still find the chart a valuable resource in analyzing the emotional analysis of where we are in the market any given day.

In my daily conversations, I ask everyone I talk to what they think of the economy and where they think the markets are going.  In summary: There  is not a lot of greed in today’s environment. 

If you ask me, I would point directly between HOPE and RELIEF on the chart.  What do you think?

take the emotions out of investing

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The Muni Bond TEY Party

It’s time to consider municipal bonds. 

Especially if you think tax rates are going up.  As your tax bracket goes up, so does your TEY. 

Last year I wrote about the power of municipal bonds here: 2 reasons to love munis.  Below are the updated rates and TEY’s.

 Rates as of 9/27/2010. 


Remember: it’s not what you earn, it’s what you keep.


Did you know…

  • Municipal Bond interest is Federal income tax-free, but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT). 
  • As interest rates rise bond prices fall because rates are inversely related to bond prices
  • Nobody knows where interest rates are going in the future.  A bond ladder can strategically balance current income needs while reducing the risk of reinvesting at tomorrow’s interest rates. 
  • The purchase of bonds is subject to availability and market conditions
  • Some bonds have call features that may affect your income.

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