From: darkness39@yahoo.com
Newsgroups: misc.invest.financial-plan
Subject: Re: Fixed Income investing and alternative minimum tax question
Date: Mon, 19 Feb 2007 08:11:52 -0600
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On Feb 18, 5:38 pm, louise  wrote:
> I have a good deal of cash from a life insurance policy,
> most of which, (about 400,000), I am investing in safe
> instruments to insure a small but reliable income flow which
> I need for living expenses.
>
> The the rest of my investments, mostly in retirement
> accounts, are much more aggressively invested.

My apologies, in my earlier reply I missed this point, which makes
some of what I posted irrelevant.

If this is only about safety, then you want to look at:

- credit rating of the assets in the fund - higher is better
- duration of the fund (longer = more risky if interest rates rise)
- after tax yield of the fund

(apologies if you know all the verbiage below)

In general, the safest assets from a credit point of view are US
federal government securities, then some state governments and
municipalities (but not all) as well as revenue bonds tied to
particular pieces of infrastructure.

Less safe are mortgage backed securities, corporate bonds and bonds of
foreign countries, especially so called 'emerging market' bonds, and
the securities known as 'high yield' or 'junk'.

Those seeking fixed income and safety should avoid most of the latter
categories, and be mindful of more than say 40-50% exposure in their
portfolio to mortgage-backed securities and/or corporate bonds.  There
are specific sets of economic conditions which can cause corporations
to get into financial trouble at the same time*, and which can cause
mortgage backed securities to do poorly as a group**.

There are some foreign governments (France, Switzerland, UK, Germany,
Canada, Australia) which have excellent credit records, if not quite
(except for the UK) the 230 year record of the US Treasury.  However
an investor in these bonds is taking on the risk that the US dollar
will appreciate relative to those currencies, wiping out any gains
from a higher rate of interest.  There aren't many stable countries
now, whose securities pay a lot more in interest than the US
government.

High yield and emerging market bonds you are effectively playing with
fire.  They are subject to periodic 'crises' and waves of default
which can leave investors with little or no return of their capital.

* conversely, if there is a big fall in interest rates, many (perhaps
most) corporate bonds are 'callable' by the issuers, and the owner of
the bond is left with their money back, and the problem of reinvesting
at much lower rates of interest.

** mortgage backed securities have a particular role to play in the
current US 'housing bubble' and unwinding that may be very painful for
bond holders.  Additionally, when interest rates fall, householders
tend to refinance, inflicting the same problem as a 'bond call' on the
holders of mortgage backed securities.


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