Financial Security for You and Your Family

Question from Paul Evans: I am retired, with a financial adviser (fee-only), and had everything invested in mutual funds for many years. Performance very satisfactory. Now I was approached by a large, well-known investment company advocating direct stocks, etc., investing because of larger yield and less expense than mutual funds. Your opinion, please.

JBQ: No! No! No!

Individual stocks are much too risky and you can never beat professionals who know more than you do and are trading all the time.

Think of all the widows who thought they were safe with big bank stocks. You are happy with your mutual fund performance. Congratulations for finding a place that has done well for you, and don't let any big-name, so-called advisers peel you off.

Question from a guest: Are bond ladders relevant for retirement in the current interest rate environment?

JBQ: Interesting question. Many advisers suggest bond ladders when interest rates go up.

They prefer ladders to mutual funds because when rates go up, you can see the share values of mutual funds go down. Of course, the market value of the bonds in your ladder go down, too. You just don't see it.

I have two problems with bond-fund ladders:

1. You are buying individual bonds with fixed interest rates, so when interest rates rise you can't get that increase rate income. You have locked yourself into a lower income.

2. If you have to sell any of those bonds before maturity, you will take a big haircut on the price.

Plus a third objection: You need a broker to manage this ladder; not only do you pay commission, you also pay a big markup in price when you buy bonds from a broker at retail.

If you buy a mutual fund instead, the manager is buying at wholesale prices. Your annual fee will be low and you have access to the money if you need it.

CSP: Just to add on to those points ... Jane, I agree with everything you said; another point to consider is when you invest in individual bonds you want it to be a diversified portfolio just as you do for your stocks. And to diversify bonds, you need well over $100,000.

Because interest rates are somewhat tenuous, I would consider a short- to intermediate-term bond fund with maturity of anywhere from [two to five] years so that you can be prepared to reap the benefits as interest rates go up.

What Other Investments Might I Need Besides a 401(k)? >>