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CA renter.
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January 12, 2013 at 3:22 AM #20447January 12, 2013 at 5:52 AM #757593
EconProf
ParticipantRun, don’t walk, away from those friendly Chase bankers.
The article you cited gives a good explanation of why: bonds have had a great run for three decades because of declining interest rates. With interest rates now near zero, this can’t continue. If rates merely stay at their current level those bond funds won’t have the stellar rate of return they’ve had recently. If rates creep up, those bond funds will quickly generate very negative returns.
In effect, closed end bond funds have doubled down on their bet that interest rates will continue to fall. They have done this by using leverage plus being close-ended, such that their market value can exceed or be less than their face value of their holdings upon liquidation.
Does this mean you are stuck with near-zero rate of return (actually negative, considering inflation) on your liquidity until you need it? Yes. Thank you, Ben Bernanke.
There is growing evidence we are in a giant bond bubble, much like the housing bubble of 2006. One site pushing that theme is PrudentBear.com.January 12, 2013 at 3:37 PM #757600equalizer
ParticipantThe two biggest bond managers and what they have to say on bonds:
http://www.learnbonds.com/5-investment-recommendations-from-pimcos-bill-gross/
http://www.learnbonds.com/6-market-predictions-from-bond-guru-jeff-gundlach/
Total Return for the 10 Year Treasury in 2013 – 3%
So good case is +3% bad case is -5%, doesn’t seem worth the risk.If you still want some bonds may want to look at diversified bond fund with low volatility like Janus Short-Term Bond T JASBX. Expect 1-3%, no free lunch.
January 12, 2013 at 3:50 PM #757602henrysd
ParticipantI agree with the professor. Bond is designed to investors who really understand it. If you are still reading Bond 101, stay away from it at this low interest environment.
There are too many variables involved in bonds and you need understand at least the following before start bond investing:
1) Price/Yield relationship and the ability to calculate YTD from cash flows.
2) Many risks assocated to bond. General interest risk, sector risk, credit risk, default risk, call risk, risk of losing tax exempt status due to legistation.
3) Understand duration of bond.
4) Understand bond convexity.
5) Understand how different types of bond work – Government bond, muni bond, zero-coupon bond, mortgage bond, corporate bond, junk bond, inflation protected bonds.
6) Understand tax consequence of bond. For muni bond there may be portion of income subject to AMT.I assume you only have a vague idea of price up when yield down, then it is really not good to you.
January 12, 2013 at 4:03 PM #757601Participantduplicate
January 12, 2013 at 7:39 PM #757603
CoronitaParticipantI stand by what I said before… Loan your money to your kid(s) so they can buy a place for something like 3% for 30 yrs. You get a stable stream of income from trusted people (assuming your kids are trustworthy) and your kids has access to slightly cheap money without all the hoops to jump through, and more than likely will have a property that starts to appreciate. When you pass away, the loan is owed to your estate, which most likely is inherited by them too.
Without assuming much more risk, it’s probably one of the more decent options, especially if your kid(s) have not purchased their own place yet and are currently paying a landlord.
Look at the alternative. You put the money into a “bond fund”…You risk it going down…
Ok fine, even if it doesn’t go down… Let’s say you earn some money from it…Gain from it gets taxed.
And your kid still doesn’t own a home and subject to paying a landlord. Your kid(s) that need to purchase a home borrows money from a bank, has to come up with 20% down or so, and subject to various scrutiny that may/may not make them borrow worthy….And then ends up sending his/her money to a bank..
Meanwhile, when you pass away, your money (assuming you pass it to your kids via your estate) ends up being subject to estate taxes…which hopefully for you is exempt thanks to the latest fiscal cliff deal (first $10million is exempt for a couple via by-pass trust)…But nevertheless has other side effects wrto what your kid(s) would pay for gains from investment (assuming for example if you bought stock shares and never sold)…
At any rate, imho you’re better off helping your kid now, versus leaving it to them later, since God knows what our government will decide to do later to your money.
I would totally do this right now if I had a child that was working but still renting.
Better to take care of your own than to let the government take your money and waste it will it tries to make other people whole (when it really can’t)…No one else is gonna take care of your kids, and everyone else expects you to pay for everyone else that doesn’t want to pay.
January 12, 2013 at 8:02 PM #757607CA renter
ParticipantTotally agree with EconProf and the others who are warning you away from this. The housing bubble is just one effect of the larger credit bubble — it’s what is most visible to people who don’t usually follow the various markets. While none of us has a crystal ball, the one thing we do know is that interest rates are at historic lows, and much more likely to go higher than lower, over the longer term (when this happens is anybody’s guess).
If you need the money in the next few years, and can’t risk losing any of it, consider a mix of shorter-duration bonds/debt instruments. Mostly Treasuries, some “teaser rate” CDs, savings, or money market deposit accounts (only accounts covered by FDIC). You can consider investing a (smaller, IMHO) portion of this money in some shorter-duration corporate and/or municipal bonds if they are highly-rated AND you do your own due diligence WRT credit risk, etc. Personally, I would not buy bonds with maturity dates more than 3 years out at this point, but that’s just me, and I’ve been wrong about the direction of interest rates in the past.
If you don’t expect to need the money any time in the near future, flu’s idea is also excellent. Just make sure that both sides understand the relationship (e.g. whether or not you’ll foreclose in the event of a default, etc.), and use formal documents to record the transaction.
January 12, 2013 at 9:35 PM #757613scaredyclassic
ParticipantI don’t think I would’ve liked owing my parents money. At all.
This could severely strain a relationship.
Or not. It depends.
This would not be a good idea for student loans.
January 13, 2013 at 7:37 AM #757627ParticipantSorry to veer way off topic here, but I differ with flu’s approach to money entanglements with one’s offspring–or any relatives or friends for that matter. He described a scenario that may be economically optimal or tax-wise, but that interferes with the kids’ taking full control and responsibility for their own financial affairs. If the parents have taught deferred gratification lessons, required budgeting of their children, and not bought their affection with material goods, the kids will do just fine once on their own. And if they go through lean times in the process, all the better to learn from. Above all, they need the pride of accomplishment that comes from earning their way on their own. Parental help can rob them of that experience.
I admit I have been overly generous at times with my own kids, so I don’t always practice what I preach.
The financial advisor Dave Ramsey points out that once you loan money, give money, or form a partnership with a friend or relative, you change that relationship forever. At the outset, everything seems fine…but then things change, events intrude, outlooks start to differ as the future unfolds. Partnerships are especially treacherous, and are notorious for ending friendships and gaining an enemy.
In sum, give them the right financial tools while they are growing up, then get them out of the nest. If they come back, charge them rent, even if only a token amount.January 13, 2013 at 8:38 AM #757629Participantfor instance, if my kid didn’t choose my “paperless statement” option, Id get all pissed off… i’d be like what’s up, man, why are you “ignoring” my request for paperless statements? and he’d be like, I wasn’t ignoring it, I was just waiting toconsider it for a later time. and i’d be like, do you know how much it costs me to send youa statement every month? and he’d be like…
January 13, 2013 at 9:08 AM #757631CoronitaParticipant[quote=EconProf]Sorry to veer way off topic here, but I differ with flu’s approach to money entanglements with one’s offspring–or any relatives or friends for that matter. He described a scenario that may be economically optimal or tax-wise, but that interferes with the kids’ taking full control and responsibility for their own financial affairs. If the parents have taught deferred gratification lessons, required budgeting of their children, and not bought their affection with material goods, the kids will do just fine once on their own. And if they go through lean times in the process, all the better to learn from. Above all, they need the pride of accomplishment that comes from earning their way on their own. Parental help can rob them of that experience.
I admit I have been overly generous at times with my own kids, so I don’t always practice what I preach.
The financial advisor Dave Ramsey points out that once you loan money, give money, or form a partnership with a friend or relative, you change that relationship forever. At the outset, everything seems fine…but then things change, events intrude, outlooks start to differ as the future unfolds. Partnerships are especially treacherous, and are notorious for ending friendships and gaining an enemy.
In sum, give them the right financial tools while they are growing up, then get them out of the nest. If they come back, charge them rent, even if only a token amount.[/quote]I completely disagree here.. What I have learned is
1. A good % of americans are spoiled and self entitled….Those who try to take the higher ground by not giving their kids an sort of advantage is pretty much putting their kid at a disadvantage since, well, everyone else seems to try to put their kids at an advantage.
2. It has been proven that if you save and try to leave your money to the kids in the end that our government will just about make everything up to try to redistribute it to everyone else anyway (so that they can piss it away), because most every other person in this country have no sense of fiscal responsibility and expects everyone else to pay for things. So your only chance of making sure your money is spent responsibly is by taking matters into your own hands, teaching your kids about fiscal responsibility and having them work for the seed (unlike other families who would just piss it away).
This will be more so, because more people will end up being in the category of having less, so more of them will end up expecting more of the fiscal responsible people to pick up the tab…3. IF you kids ends up having an entitlement issue, he/she is no worse than the majority of others is this country. And your kid won’t need to worry about the small percentage of remaining people that would be more fiscal responsible them them…The government will take care of those people by penalizing them with ridiculous taxation rules to ensure everyone else is “made whole”.
4. The loan to kid is no different than IF the bank was to loan your kid any money. The only difference is you get your 3-4% interest versus the bank (which is a win for you), and your kid probably can avoid coming up with a 20% down and avoid bending over getting an FHA loan (which is a win for your kid), and his/her mortgage interest deduction he/she can still claim on schedule A (provided the government doesn’t try to take that one away, which it is as part of the wealth redistribution plan,again…)…
…In fact, since most FHA loans will probably default anyway (since many people who get them have bad credit or unable to otherwise afford a home), you’re actually doing the rest of us a favor by ensuring your kid isn’t one of them that gets an FHA loan and possibly later defaults, resulting in the rest of the taxpayers being on the hook for… So it’s a win for taxpayers too.
Come on… Look around at what’s going on. Do you really think the old way of thinking about saving and working “hard” is really going to work moving forward? Do you really think the government is gonna start “rewarding” people to be more fiscally responsible? Look around. Look in asia. Where the majority of the younger generation who “work hard” can’t even afford a simple basic home…because things are so out of wack… We’re headed down the same way….
The government is gonna encourage even more people to try to spend to oblivion. Home prices aren’t gonna crater. They’ll weaken the dollar and inflate everything else and keep rates low or lower to try to keep this shame system running…
Is it really “fair” your kid should try to come up with all that “fiscal independence” to come up with “hard earn” 20%+ down and compete with the likes of say Blackrock which directly or indirectly is using other people’s money or worse part of the taxpayer borrowed money to purchase SFH and directly competing with little guys/gals like your kid(s)?
Psss… No one is at the same playing field..Some people/organizations have “seed money”, they just like to pretend they don’t…The only difference is they have better connections than you do. Government and companies have the largest connections there is…
BTW: econprof, I really hope things work out for your apartment with the bed bugs. I really hope your tenant isn’t like many sue-happy americans and try to “make some money” at your expense from this….Because I think a lot of people (especially in CA would)…Which goes back to my original point… I doubt given the same situation if your tenant is your kid, you would be worried about them suing you…
January 13, 2013 at 9:11 AM #757634SK in CV
Participant[quote=flu][quote=EconProf]Sorry to veer way off topic here, but I differ with flu’s approach to money entanglements with one’s offspring–or any relatives or friends for that matter. He described a scenario that may be economically optimal or tax-wise, but that interferes with the kids’ taking full control and responsibility for their own financial affairs. If the parents have taught deferred gratification lessons, required budgeting of their children, and not bought their affection with material goods, the kids will do just fine once on their own. And if they go through lean times in the process, all the better to learn from. Above all, they need the pride of accomplishment that comes from earning their way on their own. Parental help can rob them of that experience.
I admit I have been overly generous at times with my own kids, so I don’t always practice what I preach.
The financial advisor Dave Ramsey points out that once you loan money, give money, or form a partnership with a friend or relative, you change that relationship forever. At the outset, everything seems fine…but then things change, events intrude, outlooks start to differ as the future unfolds. Partnerships are especially treacherous, and are notorious for ending friendships and gaining an enemy.
In sum, give them the right financial tools while they are growing up, then get them out of the nest. If they come back, charge them rent, even if only a token amount.[/quote]I completely disagree here.. What I have learned is
1. A good % of americans are spoiled and self entitled….Those who try to take the higher ground by not giving their kids an sort of advantage is pretty much putting their kid at a disadvantage since, well, everyone else seems to try to put their kids at an advantage.
2. It has been proven that if you save and try to leave your money to the kids in the end that our government will just about make everything up to try to redistribute it to everyone else anyway (so that they can piss it away), because most every other person in this country have no sense of fiscal responsibility and expects everyone else to pay for things. So your only chance of making sure your money is spent responsibly is by taking matters into your own hands, teaching your kids about fiscal responsibility and having them work for the seed (unlike other families who would just piss it away).
This will be more so, because more people will end up being in the category of having less, so more of them will end up expecting more of the fiscal responsible people to pick up the tab…3. IF you kids ends up having an entitlement issue, he/she is no worse than the majority of others is this country. And your kid won’t need to worry about the small percentage of remaining people that would be more fiscal responsible them them…The government will take care of those people by penalizing them with ridiculous taxation rules to ensure everyone else is “made whole”.
4. The loan to kid is no different than IF the bank was to loan your kid any money. The only difference is you get your 3-4% interest versus the bank (which is a win for you), and your kid probably can avoid coming up with a 20% down and avoid bending over getting an FHA loan (which is a win for your kid), and his/her mortgage interest deduction he/she can still claim on schedule A (provided the government doesn’t try to take that one away, which it is as part of the wealth redistribution plan,again…)…
…In fact, since most FHA loans will probably default anyway (since many people who get them have bad credit or unable to otherwise afford a home), you’re actually doing the rest of us a favor by ensuring your kid isn’t one of them that gets an FHA loan and possibly later defaults, resulting in the rest of the taxpayers being on the hook for… So it’s a win for taxpayers too.
Come on… Look around at what’s going on. Do you really think the old way of thinking about saving and working “hard” is really going to work moving forward? Do you really think the government is gonna start “rewarding” people to be more fiscally responsible? Look around. Look in asia. Where the majority of the younger generation who “work hard” can’t even afford a simple basic home…because things are so out of wack… We’re headed down the same way….
The government is gonna encourage even more people to try to spend to oblivion. Home prices aren’t gonna crater. They’ll weaken the dollar and inflate everything else and keep rates low or lower to try to keep this shame system running…
Is it really “fair” your kid should try to come up with all that “fiscal independence” to come up with “hard earn” 20%+ down and compete with the likes of say Blackrock which directly or indirectly is using other people’s money or worse part of the taxpayer borrowed money to purchase SFH and directly competing with little guys/gals like your kid(s)?
Psss… No one is at the same playing field..Some people/organizations have “seed money”, they just like to pretend they don’t…The only difference is they have better connections than you do. Government and companies have the largest connections there is…[/quote]
I don’t normally include this much of prior posts in my comments, but i think both of these comments have a lot of merit. Getting involved with loans and business transactions with family is loaded with possible problems. But that doesn’t mean they should always be avoided. Sometimes they do work.
But your point #2 here flu is pretty much BS. It has never been proven, in fact there is no evidence that it’s been true at all for the last 10 years. I’m guessing that since your kid(s) were born, you have never been in a position where you and your wife would be subject to estate taxes, or if you were, it would mean that the vast majority of your combined net worth would still pass on to your kids, free of any estate taxes.
January 13, 2013 at 10:49 AM #757640ltsddd
Participantbirmingplumb,
If you’re not sure where to invest your money then just park it in a saving account or short-term CD for now until you have figured out the proper investment vehicle for your $$. FWIW, I have Janus Flexible Bond T (JAFIX) in my portfolio for the last several years and am extremely happy with it.As for the idea of loaning the $ to your kid to purchase a house. Just about everyone will tell you it’s a bad idea so I won’t get into that here. Strictly from the investment perspective, 3% may sounds decent today but in a few years you might hate yourself for having that big chunk of money locked down for such a long time with such a low return. Besides, the “borrower” may default down the road and you might be stuck with a house that you never wanted in the first place.
Good luck.
January 13, 2013 at 10:52 AM #757641Participantone of the terms of my mortgage to my kid is he must come over every friday night for dinner.
well, i see flu’s point.
it would be cool if I were ina position to someday help my kid.
one big problem i see is with having different kids in different life situations. I might think one of them is an idiot for buying a house ina particular situation, while another one is extremely stable and sharp and ready.
one of the worst things parents can do is play favorites. it is very very damaging. ibelieve in fairness amongst kids,a nd it would be difficult to achieve utter fairness as a lender.
what if my kid started haggling with me over his laon rebate cause his appraisal came in high?
therefore i think this should only be done in single kid families or where loans are freely available at all kid’s discretion.
but then would you get to shoot them down if the third kid wa sbuying too much house in your opinion?
January 13, 2013 at 10:56 AM #757642Participanti think the right answer is, there is no safe way to get a totally safe 5% after tax (or pre-tax) return on money today.
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