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Are Bond and Bond Funds Safe Investments in an Economy of Rising Interest Rates?

Let’s say you are on the conservative side and decide bonds appeal to you. You are not going to live forever, so a long-term bond is out of the question. You have a choice between US Treasuries, corporates, and various mutual funds. It is tedious to follow individual bond pricing, and most people tend to rely upon a recommendation from their broker. Regardless of the method you arrive at a specific bond investment, many people feel safe and contented knowing their interest and principal are guaranteed.

That being said, if you hold a your investment until maturity you will receive interest and the return of your principal. What if you need your money before your bond matures? Will you be able to sell and get all your money back? Well, that depends on a variety of factors; the most important factor is the direction interest rates have moved since you purchased your bond.

If rates have risen since you purchased the bond, you will receive less than you initially invested. If interest rates have fallen, you will receive more than your initial investment. There is an inverse relationship between bond yields and bond prices. When rates rise, your bond is worth less. If interest rates fall, you will receive more than your initial investment.

Bond funds are also susceptible to principal price fluctuations, and the same thing happens in these funds as investors experience in individual bonds. It stands to reason that the longest term bonds tend to be the most volatile as there is no way to ascertain what rate fluctuations can occur over a 30 year period of time. As maturities shorten, there is less rate fluctuation.

I should also note that junk bond valuations are more often a function of the underlying guarantor of the instrument, as oppose to rate fluctuations, though they are susceptible to rate fluctuation, too. Junk bonds tend not to fluctuate in price with rates as high grade corporates as they are often priced and traded on the fundamental condition of the issuer.

How much can you expect to lose if interest rates rise?

In a bond fund, you can check the average maturity of the bonds held in the fund’s portfolio and roughly equate that number to basis points of loss for each 1% of rise in the current yield. Let’s assume you are in a bond fund that has an average maturity of 5.4 years. So, if a market bond yields climb 1%, your bond will decline 5.4%, in theory. It doesn’t always work perfectly, but it’s a very good method for estimating potential for earning when investing in bonds.

Logically, bond funds perform well in a time of falling interest rates and underperform when rates are low, as they have little room to fall.

In summary, I have said that bonds pose no risk if you hold them until maturity. However, should you need to liquidate your investment before maturity you stand realize more or less than your original investment. Rising interest rates force bond prices down and falling interest rate cause bonds to appreciate. This also holds true for bond funds.

How To Get Prepared For Working In the Hedge Funds Industry

Working in a hedge funds company has never been easy. A lot of preparation is required before you even get started in the industry. From character traits to abilities to basic knowledge of terms that are used in the industry, you need to know a lot of things before you start looking your first job in the industry. Before stepping down in a company for job you should take a look on the following things:

  1. Analysis and skills sets required
  2. Basic knowledge related to hedge funds
  3. Internship, mentors and networking
  4. Defining a role where you can fit easily

Once you’ve taken a closer look on these things, you should start looking for the job. The culture of hedge funds is hyper, risk-taking and pressurizing in nature. Since recession the hiring has dampened in industry. But still there are enough jobs for skilled professionals in the industry.

The very first step that you should take before entering this industry is analyzing your personality against the pressurized work environment of hedge funds. The competition of outperforming your peers remains insanely high in this industry and you need to consider whether you really can thrive under that pressure or not. You should also have the ability of evaluating data frequently for keeping the edge.

The second step you’ll need to take is being aggressive with networking. You need to get very comfortable with networking and you need to avoid the rejections instead of taking them personally (something that most people fail in doing). Leverage whatever contacts you’ve, because you won’t get a chance of walking into a hedge funds conference. Their business remains under wraps, so no such gathering are organized in this industry. Focus on clarity and brevity when you’re networking with hedge funders. Convey everything with clarity; especially your qualifications, your desires, reasons behind your desires and the benefit that they’ll get from you. If you can’t convey these things with clarity then either you’ll be ignored or you’ll be seen as annoyance.

Since a lot of metrics are used in hedge funds, you need to be specific while presenting your accomplishments. Use numbers wherever they seem good.

Never forget doing your homework before you approach a fund. You need to know the type of investments that your target fund makes. This job isn’t for “faint of the heart” or “lazy” type of people. You need to be a workaholic and strong hearted for surviving in this industry.

Best Mutual Fund Investment Portfolio for 2014-2015

Many investors know that the best mutual fund investment portfolio includes both a diversified stock fund and a bond fund, but few venture a step beyond in their quest for the best investment portfolio for the long term. In uncertain times like 2014 and 2015, you might want to broaden your horizons and add more balance to your investment portfolio.

Uncertainty in 2014 and 2015: with the stock market rally turning 5 years old in 2014, and interest rates threatening to rise, the best mutual fund investment portfolio should include more than just diversified U.S. stock funds and bond funds. Neither of these ever-popular categories looks real attractive, so you might want to reduce your holdings a bit in both. So, let’s look at the best mutual fund alternatives to add to your investment portfolio to further diversify and increase balance going forward.

Balance is the key to making your money grow over the long term while avoiding heavy losses because you had too much invested in an asset class that went out of favor. The best mutual fund types to add to your portfolio to broaden your balance fall into the stock category called “specialized equity” vs. “general diversified”. The advantage is that they specialize in particular sectors vs. the market in general. Here we will focus on the following sectors: gold, natural resources like oil, real estate, and foreign equity (stock).

By including these funds you can create the best investment portfolio because you have added a new dimension to your portfolio: funds that can march to the beat of a different drummer. For example, if the U.S. stock market falls like a rock diversified stock funds fall with it. This is not necessarily true in regard to funds that specialize in gold, natural resources, real estate, or foreign stocks. All of these have proven in the past that they can swim against the tide from time to time… and offset losses in a falling U.S. stock market.

Gold, for example, has often gone up in value in times of high uncertainty and a bad stock market. During such times gold stocks and mutual funds that invest in them have gone up in value even more on a percentage basis. This has also been the case, at times, for natural resources like oil. The price of oil can go up in a bad stock market. In such times the best mutual fund to own is one that specializes in oil (natural resources) stocks.

Rising interest rates are no friend of real estate investments, and higher rates are ALWAYS the mortal enemy of bond funds. But real estate stocks and funds can be a best investment when the stock market tanks (like in 2000 to 2002). They can swim against the tide; and sometimes foreign stock funds can outperform the diversified U.S. variety as well. If you want to go forward with the best mutual fund investment strategy, broaden your horizons.

The biggest and best mutual fund companies (families) offer a broad array of investment options. And sometimes the best funds are not the ever-popular diversified and/or bond variety. Just in case 2014 and 2015 are full of surprises, it’s a good idea to rethink your idea of the best mutual fund investment portfolio for the years ahead. Don’t demolish your present portfolio. Just consider a few minor changes by adding some funds that could enhance balance and stability in your total portfolio.