Category Archives: General

U.S. Unemployment rate falls to 6.6%. Will interest rate rise?

Unemployment Rate-2014The Federal Reserve will probably have to return to more “traditional” policy-making now that the U.S. jobless rate has fallen to 6.6 percent, so close to the U.S. central bank’s existing 6.5-percent threshold for considering an interest-rate rise, a top Fed official said on Wednesday.

St. Louis Fed President James Bullard, speaking on a panel at the New York Stock Exchange, said the Fed will have to adjust its so-called forward guidance on monetary policy. He expects the Fed to drop its economic thresholds and have to “make more qualitative judgments” on when to tighten policy.

As it stands, the Fed has said it expects not to raise benchmark rates until well after the unemployment rate falls below 6.5 percent, especially if inflation remains below target.

Instead, Bullard said qualitative guidance on rates is the “natural thing to do” since it is how the Fed will make policy over coming decades, and it would allow the Fed to take into account “all encompassing” measures of the health of the labor market.

The idea accords with what new Fed Chair Janet Yellen said on Tuesday.

Testifying to U.S. lawmakers, Yellen stressed that broader measures, such as the number of part-time workers and the long-term unemployed, should be considered in assessing the overall labor market.

The Fed’s mandate is for maximum sustainable U.S. employment, and low and stable prices. Based on published projections, the Fed aims for an unemployment rate between 5.2 and 5.8 percent; it targets 2 percent inflation.

Let’s talk Bond language (not 007!)

Bond Definition:

An instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals (semiannual, annual, and sometimes monthly!). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond on the second market it becomes highly liquid.

Thus it’s a form of loan or IOU: the holder is the lender (creditor), the issuer is the borrower (debtor), and the coupon is the interest. They provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or short term commercial paper are considered to be money market instruments and not bonds: the main difference is in the length of the term of the instrument.

Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e. they are investors), whereas bondholders have a creditor stake in the company (i.e. they are lenders). Being a creditor, bondholders have absolute priority and will be repaid before stockholders (who are owners) in the event of bankruptcy. Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks are typically outstanding indefinitely. An exception is an irredeemable bond, such as CONSOL’s, which is a perpetuity, i.e. bonds with no maturity.


What to know about bonds:

  • Type- Bonds may be issued as either secured or unsecured. Secured bonds are backed by physical assets which revert to the bondholder if the company cannot honor its obligations. Unsecured are called debentures and are backed only by the faith and credit of the issuer; obviously more risky than secured bonds. If a company does claim bankruptcy, bondholders are given priority over stockholders to any recovered funds.
  • Maturity date- which is the day on which the issuer pays back your loan in full. This date can range typically between 3 and 10 years. In exchange for lending the company funds, the bond pays out interest (the coupon rate). These interest payments are generally made on a semi-annual basis, annual, quarterly, or even monthly.
  • PricesBond prices move inversely with prevailing interest rates.
    • When interest rates go up, bonds with lower interest rates will trade at a discount because investors can now buy them at higher rates.
    • When interest rates go down, bonds with higher interests will command a premium because they pay a better rate.
    • Ff interest rates rise when you already own a bond, you may miss out on the opportunity to buy the same bond for a higher rate of return. Also, the price of the bond will fall. This shouldn’t affect you If you’re intending to hold the bond until maturity. The only drawback is you will be earning less interest until it matures.
  • Risks– If a bond goes into default, investors may lose some or all of their principal. Although rare with investment-grade bonds, but it’s always a possibility.
  • The Yield is the rate of return received from investing in the bond. It usually refers either to
    • Current yield, or running yield, which is simply the annual interest payment divided by the current market price of the bond (often the clean price), or to
    • Yield to maturity or redemption yield, which is a more useful measure of the return of the bond, taking into account the current market price, and the amount and timing of all remaining coupon payments and of the repayment due on maturity. It is equivalent to the internal rate of return of a bond.

Note- The stock market and bond market are inversely correlated; as one rises, the other falls.

Click Here to understand why choosing bonds is safe for any portfolio


I’m a new investor: What is asset allocation? and what are my options?

Definition: In simple terms- asset allocation is about choosing how much to invest in each asset class.
Asset class: Well, there are three major asset classes: stocks, bonds and cash. Moving beyond these common asset types, however, and you could invest in real estate, private equity, natural resources, foreign currencies, and more.
It doesn’t matter if your investment account is an IRA, 401(k) or 403(b), or a regular brokerage account, asset allocation works for any portfolio.  You can select from among different stocks, bonds, mutual funds, exchange traded funds, Treasuries, and money market accounts. Your portfolio mixture is determined by your investment goals.
In investing, you never want to be overly invested in one asset class and avoid investing in assets of poor quality. The proper asset allocation is to provide the ideal mix of investments that gets you the greatest long term gains for a minimal amount of risk.
Determining your asset allocation: Consider the following factors: your age, years to retirement, goals, and risk tolerance of course. Rule of thumb- maximum stock market exposure tends to be riskier. Always have a balanced portfolio tailored to your goals, and needs. Younger investors can be aggressive and invest more into stocks (75% and up); since they have time to make back their losses if market tanks (like it did back in 2008/09). While older investors will primarily focus on capital preservation, then tend to invest less in stocks and more in bonds or cash, since they rely on their nest egg for annual income and can’t afford losses.
The objective of asset allocation is broad diversification and minimizing risks as much as possible.  Diversification gives you the opportunity to make money with one asset class even while another declines.
If you have any questions on this matter, don’t hesitate to contact me.

Perfect depiction of asset allocation below (courtesy CNNMoney) asset-allocation-grocery-basket

Investing vs. gambling

All investing involves risk. But there’s a big difference between smart investing and gambling. Trading a few stocks without knowing what you’re doing is gambling. Diligently setting aside money, putting it in the best stocks or funds for your goals, and leaving it put for the long run. That’s investing.
If you love researching stocks and making fast trades in search of short-term profits, fine. It’s fun. I just don’t recommend doing it with more than 10 percent of your money.

Market volatility & what it means to you

Last week, we had $23.3B of Securities outflow, and $14.8B Bond funds inflow. Does that mean we are heading towards a market correction. Personally I would wait on sidelines. As an investor, you must think long term: buy on the dip and hold. Those market swings are just scary. If you’re a swing trader, tread carefully!

16 Vanguard funds on the “Money 50” list

Money magazine selected 16 Vanguard mutual funds and exchange-traded funds (ETFs), including our Target Retirement Fund series, for its “Money 50″ list of recommended funds, published in the magazine’s January/February 2014 Investor’s Guide.

The “Money 50″ list is a more concise rendition of the annual “Money 70″ list, as the publication eliminated fund and ETF duplications, removed several active funds that have consistently underperformed, and reorganized the categories based on investment goals to help simplify investor decisions.

This year, once again, Vanguard has more funds on the list than any other fund family, with nearly three times as many as the next largest competitor. In addition, Vanguard is also the only fund family that has funds listed in each of the magazine’s new categories: building-block funds (9 of the 14 listed), custom funds (5 of 32), and one-decision funds (2 of 4).

This is the 13th consecutive year Money has recognized Vanguard on its list of recommended funds. The criteria for inclusion on the list are based on a low expense ratio, a strong record for putting shareholder interests first, a consistent investment strategy, experienced and trustworthy managers, and long-term performance.

The following Vanguard funds made this year’s “Money 50″ list, arranged according to the magazine’s categories:

Building-block funds (9 of 14 listed):

One-decision funds (2 of 4 listed):

Custom funds (5 of 32 listed):


Questions about Vanguard funds?

If you’re new to Vanguard, call 800-252-9578. If you’re already a Vanguard client, call 800-888-3751.

How to open an account »

Most recent performance data for all Vanguard mutual funds »


Do financial housekeeping

Start the New Year by reviewing all of your finances to reassess your financial priorities and make sure you’re still on track to reach your goals. Build up your emergency fund to keep at least six months’ worth of essential expenses in a savings account. Rebalance your portfolio so your investments match your time horizon and risk tolerance, especially if some have performed much better than others over the past year. Start using a budgeting program if you haven’t already.

Balanced portfolio consist of Stocks & Bonds

One minute it’s stocks getting all the attention (and the glory), then the next it’s bonds. When one asset swings up and the other is down, it’s natural for your focus to swing too. But we believe both can play vital—and not mutually exclusive—roles in a well-balanced portfolio.  Read the full article at Vanguard: Stocks and bonds: Not an “either/or” proposition