Why long term bonds are a bad deal at this time

[golfguru]

Just look at this diagram. It shows the official debt of each country as a percentage of it's GDP and the unfunded liabilities for promised social programs.

These mountains of debt can never be paid with existing currencies. They will be dealt with by printing fiat money. And that means any long term fixed income investments will lose value of principal in a huge proportion.

[elleng]

1. May be correct for listed countries, but there are others, right?

[golfguru]

2. Yes, some other countries are in better shape

Since we North Americans buy mostly North American bonds, those are the most risk prone. The European PIIGS country bonds have even bigger risks.

Someday economy will bounce back, and interest rates will jump up. Bond price is inversely proportional to interest rates. So there is the risk of capital loss. Then again the economy could stay weak for 5 years. Time to buy LT bonds is when interest rates are at high levels.

[elleng]

3. Consulting with financial advisor, decide where to go with all this.

Can't afford capital loss, so will be studying the world.
Thanks

[golfguru]

4. What it all boils down to is...

there is just no good place to park your money. CD rates are abysmal. LT Bonds are risky. I am watching situation in Europe to resolve somewhat, and if it does, I may start getting back in stocks.

[elleng]

5. Will likely have a widely diversified portfolio.

Just came into some cash, and MUST park, grow, and add to income with it, LONG TERM.

Thanks

[golfguru]

9. Do not be hasty

My gut feeling is you will pick up index funds at 10-15% discount over prevailing prices, sometime in 2012.

That is a lot better than buying a CD or utility stock. Especially avoid long term bonds.

[elleng]

10. Will confirm w financial advisor once funds available. Want to decide w/in 1-2 months,

and can change pieces of portfolio over time, I think.
He's sent suggested plans already, but my 'goals' have changed somewhat since we first spoke. I don't think there are any index funds in the plans he suggested, but I'll check. There are bonds of varying terms.

Thanks

[golfguru]

11. Just for my curiosity, how do you pay the advisor?

Is it a flat fee, commission, percentage?

[elleng]

12. 1.2%/year, payable quarterly.

[A HERETIC I AM]

13. Is that on the AUM or on the gain? n/t

[elleng]

14. AUM, I think!

Haven't begun yet; accumulating my assets.

[A HERETIC I AM]

6. "So there is the risk of capital loss"

Only if you sell the bonds.

[golfguru]

7. aha....

if inflation and interest rates pick up, and you hold bonds to maturity, you will get your 1000 dollars back but they will buy a lot less. A 30 year bond purchased 30 years ago for 1000 dollars has lost enormous purchasing power.

[A HERETIC I AM]

8. Fair enough, but that's not "capital loss".

That's interest rate risk and inflation risk.

[OllieLotte]

15. Yeah, quite frankly I'm a bit frightened when I look at something like this.

I expected inflation to be worse than what we have. I still expect it to get ugly, but it's taking far longer to ramp up than I had anticipated.

[golfguru]

16. Are you aware that gov't inflation numbers exclude

food and energy prices? My grocery bill is escalating 4 times faster than my raises
and gasoline has more than doubled in 3 years. My children's college tuition went up
a whopping 23% last year (univ of Wash). And then there are those pesky healthcare
costs. My health insurance premiums are escalating much faster than my raises also.

[OllieLotte]

17. Understood. When they mention the inflation they usually state that it excludes food & energy costs

Several things which are keeping inflation in check are wages, housing and weakness in overseas currency/economies. Can you imagine if the government is unable to sell all of the treasuries, the glut of homes is finally erased (5 more years)? Inflation is going to be really high. I'd like to buy more gold (stocks) but think there is a good chance of a minor meltdown in Europe in 2012, which will give me more bang for the buck on all kinds of equities.

[golfguru]

18. My current strategy....

Europe is far from out of the woods. Spain is one example where unemployment is growing by the week and economy is shrinking. My daughter is studying in a university in Spain and I am shocked how many holidays they have. Spain will be next Greece in 2012 and it is too big to be bailed out.

Most of my money is in very short term bonds and gnma's. Only equity exposure on a small scale is in REIT's. I concur there is a huge buying opportunity coming in equities. Do not get caught with your pants down (all in, no cash).

[OllieLotte]

19. Europe is getting really interesting.

Money is pouring out of Greece and Spain. Two year German bonds are paying negative interest. I am somewhat relieved that Europe seems to be playing out in some form or fashion. Having the overhand of Europe was getting old.

[wordpix]

20. does Spain have more holidays than US?

A private university near me has a full month off at Xmas time, a week of spring break at end of Mar., and classes end Apr. 30 with exams the week after that. So basically, students are there from late Aug. - late Apr. with Xmas month + Thanksgiving and spring break week off. That's 8 mos - 1.5 mos. for breaks = 6.5 mos. And for this, the tuition is $37K for two semesters, not including books, health insurance, room, board or fees. I am sure these are another $25K/year in my area, at least, even with roommates and group houses/condos.

[golfguru]

21. First hand experience in a Spanish university

my collegian kid just came back from Spain after studying at a university in Spain
as a foreign exchange student for 5+ months. The number of days without classes
was just amazing. My kid had enough time off to visit England, Ireland, France, Italy,
Germany, Czech repub, Morocco, and 7 trips to various places in Spain itself! All in a
time span of just over 5 months! And on top of that many weekends were sans any
travel!!

[Billy Patterson]

22. Keep Commenting !