Archive for October, 2013

One of the hardest things to understand for newcomers to the holy trinity of investing (cash, stocks and bonds) are the basic rules and the relatively intricate nuances that all three hold. Today’s blog is going to focus on Bonds and, with that in mind, we’ve put together 5 Steps that will help you to better understand the Bond market and help you to make more sound investments. Enjoy.

  1. What exactly is a Bond? A bond, basically, is just a loan and, like most loans, it involves a lender (you)and a borrower (the organization issuing the bond). A predetermined interest rate and a maturity date that don’t change are also hallmarks of a bond, as well as the fact that bond issuers, like consumers, have credit ratings. These ratings are based on the likelihood of the lender (you) being paid back and makes them either more or less expensive to borrow. Typically sold in increments of $1000, bonds have a face value or “par” value equal to their exact dollar amount.
  2. How do you make money with Bonds? When you purchase a bond you’re contracting with the bond “issuer” who agrees to make two payments to their “creditors” (that would be you) a year until the time that the bond reaches “maturity”. Once this happens you get your original “principal” (your original investment amount) back in one lump sum.

The actual amount of your bi-annual payment is determined by the bond’s fixed interest rate. If you’ve ever heard of the term “fixed income investment” it’s because of bonds and because of the fact that, no matter what happens in the market, that payment will be exactly the same for the life of the bond. This is one of the reasons that retirees like bonds in particular, because they know exactly the amount of money that they’re going to get twice a year.

Let’s take a 10 year Treasury bond with a 5% “coupon” or interest rate as an example. If you purchased 10 of these bonds ($10,000.), every year for the 10 year duration of that bond you would be paid $500. a year ($250. every six months) and then, once the 10 year mark passed, you would also get your initial $10,000 investment back. In 10 years you would thus make $5000. on your initial $10,000 investment

  1. Do interest rates affect Bonds? Changes in interest rates can and will affect the current value of any bond just like credit scores will raise or lower the amount of money it costs to borrow. When interest rates go up, for example, bond value goes down and vice versa. This “inverse relationship” is one of the most confusing parts for most people about fixed income investing.

It’s vitally important to remember that, no matter the current market value of any bond, the amount of money that they pay every six months as well as the actual face value of the bond will never change. These value changes, or what they refer to in the bond market as “paper losses” and “paper gains”, would only affect you if you were to actually sell a bond ahead of its maturation date.

  1. Who issues (sells) Bonds?  The United States government is the largest and most popular borrower (issuer) of bonds. New Treasury bonds are issued with relative frequency and can have maturity times from 30 days up to 30 years. States, cities, corporations and other government agencies (like Fannie Mae) can also issue bonds, as well as foreign governments. As with most any other type of investment, there are some bonds whose issuers are considered to be safe and reliable and there are others that are considered to be much more risky.
  2. Where can you buy Bonds and who buys them the most? As we mentioned earlier, because they are a safe and predictable source of income retirees are very fond of bonds. Pension funds, investors looking to diversify their portfolios and people who invest in low-risk opportunities also purchase bonds regularly.

Due to this wide appeal there are many different bonds (literally thousands) as well as bond mutual funds and fixed income ETF’s. You can find them through most investment companies or purchase them directly via the Treasury Direct service from the United States government. A piece of advice, if you haven’t opened up an online brokerage account then you are missing out. Personally, I setup a pre-authorized contribution each month to make a deposit into my brokerage account, and I have been doing so for years. With this sort of automation I don’t even miss the money going to my account since I’m not used to having it around anyways.  Over the past few years I’ve really had an opportunity to watch it build and grow.

That, dear readers, is a quick and concise overview of what bonds are, how they work and why they make a relatively safe and low risk investment. If you have any questions about bonds including which ones are the “best”, where to buy them or any other questions, please let us know and we’ll get back to you with answers and options ASAP.

If you’re looking for a great vehicle to meet some of your financial goals, the Vanguard Dividend Appreciation (NYSEARCA: VIG) exchange traded fund (ETF) is definitely one you should consider.

ETF’s are investment funds that, like standard stocks, are traded on the various stock exchanges. The big difference is that they track either the performance of a number of different assets (like VIG), a commodity like gold or silver or an index like the S&P. The reason that we like Vanguard is that it follows the NASDAQ Dividend Achievers Select index, an index that has a variety of stocks that have faithfully, year after year, increased their dividends. For investors this means protection from the volatility of the stock market and an investment that delivers reliable dividend revenues due to buyers that are seasoned professionals.

Unlike mutual funds where money is pooled by do-it-yourself investors and then given to a professional fund manager to invest, ETF’s are traded throughout the day. What’s good about both of these options is that, since there’s no need to continually monitor the stock market, they are great for everyday investors. While mutual funds have a minimum investment however, ETF’s don’t and generally will deliver more “bang for your buck” as they are more tax efficient.

With a 9.9% gain for the year (compared to 8.8% for the S&P) the ETF from Vanguard Dividend Appreciation has solid returns and a 2.17% 12 month yield. While it doesn’t gain as much as some other well managed mutual funds, since it focuses on quality it’s less of a risk. On the plus side the fact that VIG is so passive means that expense rates are ridiculously low and  thus profits are higher. Indeed, most similar holdings and mutual funds have an expense rate that hovers around 1% while VIGs expense rate comes in at 0.13%, or 88% lower!

And, even though they’re on the passive side, VIG still conducts screenings to make sure that their firms are financially strong and, when necessary, dumps the ones that aren’t.

Even better for the average consumer is that, since Vanguard has holdings in a lot of companies that the average consumer uses daily, investing in their ETF can be very satisfying. Companies like Coca-Cola, Procter & Gamble, Wal-Mart and Pepsi are included in their top 5 holdings and they also have holdings in energy, healthcare and other major industries. Quality, strong balance sheets and modest risk are they common themes that all of these companies share and that Vanguard vigorously seeks out.

So, as we stated at the beginning of this blog article, Vanguard Dividend Appreciation is definitely one of the better exchange traded funds that you going to find on the market today and worth your consideration if you’re looking for a low risk, relatively high return investment. It’s also something that the average consumer can invest in with confidence.

If you have questions about investing, the stock market, stocks, ETF’s or any other personal finance questions, please let us know and will get back to you with options, advice and solutions ASAP.

If you are a holder of Disney stock, their decision to push back the release dates of 2 of their Pixar films might have come as a surprise to you as, to analysts, it certainly was. It’s also causing many to revise their earnings estimate for one of the world’s media giants.

Disney announced on Wednesday, September 18 that their next Pixar film, “The Good Dinosaur” will have its release pushed back by 18 months and will now open in November 2015. They’ve also decided to release the sequel to “Finding Nemo”, entitled “Finding Dory”, in June of 2016, seven months later than the previous release date.

It’s actually not unusual to have movies shifted from one release date to another but, as far as Pixar is concerned, this means that there will be no Pixar film in 2014 and will be the first time since 2005 that the computer animation powerhouse won’t be releasing at least one film during a regular calendar year.

The bottom line is that Pixar films are almost always huge blockbusters for Disney and typically gross $500 million or more. This year’s newest Pixar film, “Monster University”, is actually one of 2013’s best performing films and, with over $730 million earned worldwide, it’s the 4th  best performing film in the United States of the year so far.

This means that Disney’s studio division is going to face some very tough comparisons in the next fiscal year due to the fact that they will have one less film released in 2014. Their consumer product segment is sure to be impacted with the lack of a 2014 Pixar film as it usually gets a huge boost following any of their releases. This is due of course to the fact that Pixar movie characters are, in general, extremely popular. Whether the move is enough to cause earnings expectation adjustments during the next fiscal year is a question that Wall Street analysts are already considering.

The reason that Pixar and Disney have decided to delay both films is simply that they needed more time to put out the best films possible. A spokesperson for Pixar had this to say “We continue to believe at Pixar, ‘quality is the best business plan’ and we live by that. It is because of this we have decided to move the release date of ‘The Good Dinosaur’ to November 27, 2015, to ensure we make the best film possible.”

Trading of Disney shares is at an all-time high right now and this move comes with 2 of their films holding the 1st  and 4th  spot for most successful films of 2013. For the most part, Disney seems comfortable with the delayed release dates and, if what they’re saying is true, would rather wait for a quality Pixar film than to risk releasing one that doesn’t live up to the usual standards of the computer animation giant. It’s also of note that “Planes”, their other release of this past summer, didn’t exactly get off to a “flying” start with film critics but is still doing rather well at the box office.

As the market nears a historic high on the S&P 500 some analysts are concerned that it’s looking a bit complacent. Maybe even bored.

The fact is that, while many have assumed that the Syria “problem” has gone away, that the economic data coming out of China will continue to improve and that the yield for US 10 year treasury bonds will stay in a range of high 2% to low 3%, all of these assumptions are far from a certainty.

Indeed, in the next few weeks there are at least 4 different events that could definitely shake up the markets.

  1. Fed tapering. Wall Street seems to be convinced that there’s not going to be tapering or what they call “taper light”. What this is is a cut of only $10 billion in treasury purchases with little or no cuts in mortgage-backed securities. While that’s all good and well, if there’s a $20 billion taper, it’s not going to be priced into the market.
  2. The federal government’s continuing spending resolution. On October 1, unless the federal government produces a continuing spending resolution, there’s going to be a complete government shutdown. Since a part of the deal that House Republicans want is Obama care restrictions, this is a brewing mass that could very easily blow up and cause all sorts of market ramifications.
  3. The debt ceiling hike. This is also part of the continuing spending resolution deal however, as of yet, House Republicans have not even said what they want. That’s never a good sign.
  4. Germany’s September 22 elections. Two things are clear in Germany right now: the German electorate definitely does not want endless bailouts (of Greece, Spain or any other country) and Merkel is having a much tougher time winning the race than she anticipated. Recent polls show that, even though the electorate wants to continue with the European Union, they would like it to be much smaller. What’s expected by traders is that Greece will be quietly moved out of the EU during the following year. As far as the market is concerned, this is definitely not priced into it.

Yet, despite all of these concerns, at 14 and change the CB0E Volatility index is remaining near its lows for the year. What that leaves the market with is the S&P that nearly historic highs, a bunch of macro events that could potentially rattled the market over the coming weeks and VIX near lows. As far as risk is concerned, it appears to be on the downside.

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