Alternative Energy Funds presents - The Best Bond Fund
Here on Alternative Energy Funds we are pleased to present you with articles from our guest writers on a wide variety of alternative energy topics. We hope you enjoy this one:
The Best Bond Fund
By James Leitz
The best bond fund for most average investors could be a high-yield, or long-term, or corporate bond fund. Then again, maybe not. This article takes you back to bond basics to find the best bond fund for most investors. Read on. You could save thousands, or make additional thousands based on the information presented here.
Getting back to bond basics, folks invest in bonds and bond funds primarily to earn higher income than they can get from stocks and savings vehicles like bank CDs. Few average investors invest in individual bond issues, because that requires significant knowledge and experience.
Bond funds, on the other hand, are professionally managed and offer investors diversification, sometimes at a reasonable cost. These funds hold bonds in their portfolio, and these bonds pay interest. This interest is passed on to investors in the form of dividends.
There is only one way I know of to get rich with bond funds. Wait until interest rates get historically high, as in the early 1980’s. Then, borrow a ton of money, and buy as soon as rates start to fall. Now, let’s get back to reality because interest rates are near historical lows.
When you buy shares of a bond fund these days, you are simply trying to get the highest income you can, without taking on heavy risk. As I have said in other articles, bond funds have interest rate risk. This means that if you invest now and interest rates go up in the future, the value of your investment will fall. Who wants a bond(s) that pays 6% when new bonds are paying 9%? Investors will buy it … but only at a reduced price.
NOW, let’s look for the best bond fund available. We will play “elimination” and weed out the risky ones and the losers. First, high-yield bond funds pay higher dividends for one reason. They hold high-risk bonds that are often referred to as JUNK. Second, long-term bond funds pay higher than average yields (dividends) because they have higher interest rate risk. Third, foreign bond funds are riskier because the value of the dollar fluctuates, and this could work against you.
Now, let’s eliminate bond funds because they pay lower dividends. Government bond funds invest in the likes of U.S. Treasury bonds, which are the safest on earth. And short-term bond funds are relatively safe because they hold bonds that mature in a few years. The problem is that neither of the above pays dividends worth taking any risk to get.
Now, we’re ready to zoom in on the best bond fund, which would probably be a higher-quality intermediate-term bond fund. We don’t need the highest quality, because we want good dividends.
I have in front of me such a fund, and it has a dividend yield of over 6%. But this is not the best bond fund I can find. The reason is that even though it is offered by one of the biggest and best mutual fund companies, it is rather expensive to buy and to own.
If you invest $10,000, 4% comes off the top for sales charges. Then, as long as you stay invested, 1% a year is taken to pay for expenses.
Now we save/make some money. The best bond fund is similar to the above, except that it costs you zero to buy it and yearly expenses are less than .25% a year vs.1%. This bond fund is a no-load, intermediate-term BOND INDEX FUND.
After all, we are not out to make a killing here, and a dollar saved is a dollar earned when it comes to bond funds.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com
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Alternative Energy Funds presents - Variable Annuities And Why They Make Sense
Here on Alternative Energy Funds we are pleased to present you with articles from our guest writers on a wide variety of alternative energy topics. We hope you enjoy this one:
Variable Annuities And Why They Make Sense
By Thomas Corley
Annuities have so many advantages over other investment vehicles, including mutual funds, that it makes one wonder why everyone doesn’t consider them more often. When you think about variable annuities think about mutual funds on steroids.
Everyone pretty much understands how mutual funds work. The fund managers invest in a variety of publicly held companies, usually with a track record of strong earnings growth or strong earning potential. If the mutual fund sells any of its investments (public company stock) the gains are passed through to their individual mutual fund investors (you and me) and taxed as capital gains. There may also be dividends that the mutual fund passes through to its investors, which, likewise, come from the dividends paid to the mutual fund by the public companies the fund owns.
Annuities are very much like mutual funds in that they too have fund managers who invest in various publicly held companies. However, unlike mutual funds, any gains or dividends realized by the annuity are not taxed to the annuity investors (called “contract owner”). All income and appreciation in the annuity investments grow tax deferred. Annuities are not taxed until the contract owner begins withdrawing money out of the annuity. This allows 100% of the annuity investment to compound year after year, without being reduced by any income taxes.
Tax deferred growth is the main reason annuities are favored over mutual fund investments. There are other advantages as well. Most annuities come with what is called a death benefit. This death benefit is paid to the annuity contract owner’s beneficiary upon death. The very nature of the death benefit provides annuity investors and their heirs with a guarantee of sorts on the annuity investment.
For example, suppose John Smith invests $200,000 in a deferred variable annuity and the next two years the stock market collapses 15%. If John were to pass away shortly thereafter and this money was, instead, invested in a mutual fund, John’s estate would be entitled to only $170,000. If John’s money was, rather, invested in a variable annuity his beneficiaries would receive $200,000, his original investment. You see, annuities make it possible for conservative investors to gamble their money on the stock market, hoping for the big wins, without losing their investment, as is possible in a mutual fund.
Also, many annuities permit the contract owner to lock in the gains they have realized in their annuities by stepping up the death benefit to the value of the annuity at a certain date. For example, suppose John Smith’s annuity investment of $100,000, which included this step-up feature, were to grow to $150,000 at the end of year two but fell to $90,000 in the beginning of year three. Now if John Smith were to pass away shortly thereafter his beneficiaries would be entitled to $150,000, not the $90,000 value at death. If John were invested in a mutual fund his estate would only receive the $90,000 value at death.
More good news. Most mutual funds charge an investor some type of commission commonly referred to as a “load”. These commissions can be as high as 8.5% but typically average about 4%, and for those mutual funds called “A Shares”, this commission comes right off the top of the amount you just invested (”front load”). Thus a $5,000 investment in a mutual fund may mean that only $4,575 ($5,000 minus 8.5%) is going to work for you. So right out of the gate you may have to make a 10% return on your money just to get back to where you began.
The great majority of variable annuities do not charge a commission to the investor. Whenever you invest in any annuity, 100% of your investment goes right to work for you, immediately. When you invest in an annuity, money grows and compounds tax-deferred indefinitely. The only time you pay income taxes is when a withdrawal is made, and you only pay taxes on those withdrawals that are considered accumulated growth or interest, not on monies received that are considered a return of your original investment.
Annuities come in three flavors: fixed, equity-indexed and variable. Fixed annuities are like CD’s on steroids. They guarantee a fixed rate of return and your underlying investment is guaranteed by the insurance company. It is the most conservative annuity investment available. Equity-indexed annuities are fixed annuities whose return is not a guaranteed rate of return but rather a variable one that is linked to an index such as the S&P 500. Equity-indexed annuities seem to have it all: guaranteed minimum contract value, the opportunity to participate in the long-term growth of the stock market, no loss of accumulated earnings (no downside) and no investment decisions to make. Indexed annuities are fast becoming the annuity of choice to conservative investors who are not satisfied with the conservative returns offered by their pure fixed annuity brethren.
Variable annuities are the celebrities in the annuity family. They are the glamorous cousins to the fixed and index annuities. For all of the reasons mentioned above, variable annuities are the true kings of the annuity world. They offer variety, security, upside potential, limited downside risk and a way to pass along your estate to your heirs without having to go through the difficult probate process. Variable annuities offer those investors previously burned by the stock market, the ability to jump back into the market without the worry of losing money it has taken them a lifetime to accumulate. In a variable annuity you truly get to have your cake and eat it too!
Tom is a Certified Public Accountant, a Certified Financial Planner, CLTC (Certified Long-Term Care) and President of Cerefice & Company, the largest CPA firm in Rahway, New Jersey. Tom works with clients helping them manage their money, retirement planning, college savings, life insurance needs, IRAs and qualified plan rollovers with an eye towards maximizing tax benefits and minimizing taxes. Tom is founder of the Rich Habits Institute and author of “Rich Habits.”
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