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1.       Anyone in retirement or close probably needs some bonds in their portfolio. But, retirees and other investors should stop thinking about interest yield, dividends, and other income producing assets and begin thinking of a total return portfolio that can generate an income stream though a combination of growth and income.

2.       In a total return portfolio,  bonds serve to reduce the overall risk in the portfolio, provide a store of value to fund future income needs, and only secondarily to produce income.

3.       Interest rates are low. Deal with it! Normally higher rates are available on longer term bonds or higher risk bonds. Chasing yields, attempting to find higher rates means you are taking a large risk that you may not understand.  These risks are not generally rewarded by higher returns. For instance, a 20 year Treasury Bond, which most people think of as low risk,  is as volatile (risky) as the S&P 500 yet has less than half the long term return. If you are going to take that much risk, take it where you are likely to get appropriate returns.

4.       Bond prices are inversely related to the general interest rate in the economy. If interest rates go up, existing bond prices fall. The longer the time until the bond matures, the more you will see the price fall. To avoid this risk, stay short term, perhaps no more than 3 years until maturity on your portfolio.

5.       Some investors believe that if the price of their bond declines,  they have no risk if they hold a bond to maturity. But they are simply refusing to acknowledge a very real capital loss if the price of their bond has fallen. That’s because if they sold the bond they couldn’t get their original investment back. And,  if they had the original investment they could invest for higher income.

6.       There is almost no more insanely profitable business for a brokerage than trading bonds. They are not required to disclose what they paid for the bonds and infrequently traded bonds are marked up by obscene levels. Unless you have hundreds of millions of dollars to invest and a great deal of expert knowledge, you are far better served to buy bond index funds than individual issues.

7.       Bond index funds have the advantage of broad diversification, convenience, and very low operating costs (typically less than one tenth of a percent per year). For individuals it’s the lowest cost, lowest risk to obtain access to the bond market.

8.       There are many different bond index funds that allow investors to precisely target the average maturity and default level they wish for their portfolio.

9.       Municipal bonds are only appropriate for people in the very highest tax brackets. Remember, it’s not tax avoidance that should be your objective, it’s after tax total return.

10.   Municipal bonds have their own set of risks as many states and cities face real prospects of insolvency. This is not your father’s municipal bond market. And, if you trust the rating agencies after their recent performance with mortgage backed securities, there is no hope for you.

Frank weighs in at Miami’s Art Basel. To read his remarks about using Art as an Investment please click here.

“Are Index Funds on Track to Become Even Harder to Beat?” Our DFA funds have utilized most of these strategies for quite some time. To read more please click here.

The New York Times posted an interesting article. To read “A Dying Banker’s Last Instructions” please click here.

Frank was quoted in the Miami Herald’s “Value in the Eye of the Beholder” an article about investing in art. To read the article, please click here.

Here’s a great article on Fixed Income Risk in Your Portfolio. In today’s low interest rate environment, it’s not always smart to stretch for yield. To read the article, please click here.

Frank answers questions from callers during his live interview on WLRN’s – Topical Currents about avoiding invesment scams and preserving retirement funds. Listen to the archives show by clicking here.

If you are losing sleep over deflation, mellow out. You are more likely to be bitten by a black swan. To read Frank’s article “Should you be worried about deflation” please click here.

It’s an uphill battle to wean investors from their bad, bad habits. Read this NYT article for more: http://yhoo.it/9FvmCp

Frank Armstrong, III, CFP, AIFA

It’s been a slow news week. The gulf oil well spill is capped, we are all sick and tired of Bristol and Levi, and Lindsay Lohan is safely off in rehab. So, the financial press is cranking out stories about a possible Deflation.

Who knows what to believe? I generally hate making predictions, but, I’m not spending much time worrying about deflation.

We might all argue that the real estate bubble has further to go before we see equilibrium re-established. Otherwise, most of us are not feeling it. Check the price of gas, hospital bills or college education and tell me you see deflation at work.

But if, and it’s a big if, the government were to allow a general deflation it would lead to a global economic nuclear winter. We don’t want to go there.

Capitalism will not work in an atmosphere if expected across the board price declines. No one would buy anything today if prices will be lower tomorrow. The economy would come to a grinding halt. There are other problems as well. Debtors will find it harder to repay in appreciated dollars, and corporate profits will be squeezed.

The last time we experienced a true deflationary period was the Great Depression. The US Government did all the wrong things after the stock market crash of 1929 triggering a decade of misery. But, we have learned a lot about how economies work since then.

Helicopter Ben would emerge and sprinkle enough money around to prevent a widespread price decline. Ben gets it. Of course, any first year econ student could tell you: Dump enough dollars into the system and prices will react. It shouldn’t be difficult to provide enough fiscal stimulus and monetary expansion to prevent a deflation from happening.

So, if you are losing sleep because of deflation, mellow out. You are more likely to be bitten by a black swan.