Say no if you're inclined to plunk your entire bond allocation into long-term funds because they have the highest yield.
They have already done the first: easing the rules on foreign lending to India, to try to attract short-term funds.
Despite the activities of central banks, fearful financial institutions are having to conserve capital to offset the lack of short-term funds.
This is assumed to be the average post-crisis cost of long-term funds to Ireland that incorporates both a term and risk premium.
FORBES: How Much Would Ireland Benefit from Replacing the Promissory Notes with a Long-Term Bond?
In addition, there has always been an onus on discount window borrowings, which imply that banks can't get the short-term funds they need from other banks.
That allows banks to use short-term funds raised from the sale of products to buy the longer-term assets that have the higher yield banks need to give investors the promised return.
Since weighing risk in equity investments is less attractive than putting money in safer bonds and long-term funds during economically unstable periods, it may be a less conservative investor who can play in these fields.
Tuesday, Treasury Secretary Henry Paulson told the Chamber of Commerce that investment banks should be more closely scrutinized by the Federal Reserve (make that scrutinized at all, really) now that they enjoy the privilege of borrowing short-term funds directly from the central bank, just as commercial banks have been allowed to do for years.
If you own bond funds, you can either opt for funds with shorter durations or create a fund barbell by mixing long-term and short-term bond funds.
FORBES: How To Get More Diversification With Less Interest Rate Risk
And stick to shorter-term bond funds that have less sensitivity to interest-rate changes.
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That prospect makes it harder to tap institutional investors for long-term development funds.
Osterweis Strategic Income has more credit risk but lower interest-rate risk (due to shorter average duration) than some intermediate-term bond funds.
FORBES: 5 Reasons Why Bond Funds Can Help You Navigate Bond Market Headwinds Successfully
Short-term bond funds also take at least one day to liquidate, and some may have penalties to prevent rapid trading into and out of the fund.
Consider alternative investments for your intermediate-term goals like short-term bond funds, municipal bond funds or income funds that include dividend-paying stocks in the mix but watch for bonds with long maturities.
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Long-term mutual funds reported net outflows for 23 consecutive weeks from May to mid-October of this year, but those flows have finally reversed as investors position themselves for a second round of quantitative easing.
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Charles Schwab ( SCHW - news - people ) is fending off dozens of class actions, and an SEC warning about possible civil action, related to alleged misrepresentation of its YieldPlus short-term bond funds.
In the second scenario, a sudden jump in interest rates, short-term and medium-term bond funds take an immediate hit in their value and then take about two years or more to climb back to their starting value.
The yield curve is flattening in America (the gap between the short-term federal funds rate and yields on ten-year Treasuries is only a smidgeon more than one percentage point) and in Britain it is inverted (long bonds yield less than shorter ones).
The only options for investors were to buy contra funds or strategically shift to holding bond funds, particularly long-term government bond funds.
In a recent article titled Index Fund Portfolio Reign Superior, I created 10, 000 portfolios using actively-managed U.S. large cap funds, international large cap funds, and intermediate-term municipal bond funds.
Investors in funds that employ short term trading strategies will typically lose more of their returns to taxes than investors in funds that employ longer term, buy-and-hold strategies.
More emerging market bonds in the hands of long-term investors, instead of the more short-term oriented hedge funds, should mean less volatility.
Before other publications did, FORBES developed an increasingly sophisticated system of grading the long-term performance of funds, in both up and down markets.
Yale's Spiegel recommends intermediate-term corporate bond funds in tax-favored savings accounts.
Other than parking cash for a few years in short-term bond index funds to beat money markets, lazier investors might do better with actively managed broad-spectrum bond funds.
Devault says that until proven otherwise in the longer term, value funds should still trump growth--and with a bit less conviction he says that small-caps should still outpace large-caps.
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