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Considering bonds? Keep an eye on interest rates
December 29, 2009

A low appetite for risk and lingering uncertainty about the health of the stock market has many consumers weighing the pros and cons of bonds and other fixed income investments. If you’re looking to invest in these steady return options, here are a few things you should keep in mind.

Bonds vs. Stocks

Under normal economic conditions, stocks tend to outperform bonds over long periods of time. This makes them an attractive option for risk-tolerant investors who can handle seeing their assets fluctuate with the ups and downs of the stock market. Contrarily, bonds are fixed; barring a default or other unusual event, bond investors receive their principal plus the assigned interest at the time of maturation.

Exceptions to the rule exist. In periods of severe economic volatility, bond interest rates can yield higher returns than stocks. Until the stock market began to rally in the second half of 2009, the decade prior generally proved more favorable to bonds than stocks. This fact, coupled with a sense of uncertainty about the market, has driven some investors to recalibrate their portfolios’ bonds to stocks ratio.

But, now that it appears we are on the road to economic recovery, will bonds continue to generate higher returns going forward? Nobody can say for certain, but the low interest rate environment may be an obstacle that stands in the way of superior bond market performance in the years to come.

Interest rates and prices – an inverse relationship

An important fact to keep in mind is that bond prices are affected by the direction of interest rates. When interest rates decline, bonds increase in price. When interest rates rise, bond prices fall. Returns for bondholders typically rise in an environment where interest rates are declining, a trend that has worked to the benefit of bond investors in the past decade.

Why do interest rates affect bond prices? Consider this simplified example: Suppose you invest in a bond from an issuer for $1,000 and it pays 4% interest. That amounts to $40 in annual income from the bond. If, one month later, the same issuer offers a $1,000 bond with a 5% interest rate, you could buy the same bond and receive an annual income of $50. In that case, the original bond you purchased that pays only $40 in income is no longer worth $1,000. To match the current market yield of 5%, a buyer would only offer $800 for your older bond to achieve a comparable yield based on the $40 annual income payout. That represents a 20% loss of investment principal.

Of course, if you hold the bond until it matures, the issuer is obligated to repay the entire face value of the bond, in this example, $1,000. Then again, if you wish to sell it in the secondary market prior to maturity, the bond has lost value (unless the interest rate environment has changed enough in your favor to compensate.)

Today’s low interest rate environment

Keeping in mind how interest rate movements affect bonds, consider the state of interest rates in today’s market. They are at relatively low levels on an historic basis.

For example, one of the benchmark measures of the bond market, the 10-year U.S. Treasury note, had a yield of 3.4% (as of October 30, 2009). At the end of 1999, the same maturity government issue yielded 6.3%.

The yield on the 10-year Treasury note has rarely dipped under 3%, and typically is much higher. In fact, in the fall of 1981, 10-year Treasury note yields soared above 15%. The note of caution for investors is that long-term interest rates may not have much room to decline from current levels, limiting the potential upside for bond values.

The greater risk in the current environment is that interest rates will rise, depressing values of existing bonds. If that occurs, it could have a detrimental impact on your bond portfolio. One way to measure interest rate risk in a bond mutual fund is to look at the fund’s duration. The longer the duration, the more it is affected by changes in interest rates. That can work to your advantage in a declining interest rate environment, but will have a negative impact on your returns if rates move higher.

Historically, interest rates have tended to move higher in periods of an economic recovery. This is important to bear in mind as you consider putting your money in bonds. If the economy continues to build steam, you may need to temper your expectations about future returns on your fixed-income portfolio.

Holiday Fun Can Be Affordable
December 17, 2009

Traditionally, the holiday season is a time of indulgences. Any combination of gifts, travel and entertaining can result in big end-of-year expenditures. But this year—in light of declining investment portfolios, sinking house values and a shaky job market—many American consumers will be looking for ways to toast the season without breaking the bank. If you, too, want to avoid over-spending, here are some tips to celebrate more frugally:

Set proper expectations

It helps to make sure everybody in your family is onboard with the cost-conscious approach. If you are married, have a frank discussion with your spouse about spending limits. If you have children, make sure they understand that your plans for the holidays will focus on fun that can be had without spending a lot of money. If your children are old enough, you may even use this as an opportunity to explain the fundamentals of household economics and involve them in setting holiday spending priorities for the family.

Plan ahead

Take time to write down a list of possible gifts you hope to purchase for family and friends. Knowing what you want ahead of time may help you avoid making poor decisions and impulse purchases once you hit the stores.

Invest time to save money

The best deals can be found by shopping around. Check out stores in your area and investigate what’s available online. The emergence of online shopping has made it much easier to do your homework before you buy. Web retailers will help you determine best prices for the products you are looking to purchase.

Track your spending

One of the best ways to keep spending under control is to set a limit. Within your family, this can be on a per-person basis, or you can set a budget that dictates your maximum holiday spending. Once this number is chosen, see if you can come in under budget. Track all of your purchases and be certain to hold onto receipts. You might also request gift receipts where available and tuck them inside cards or gift boxes.

Be smart about gift cards

Gift cards have become increasingly popular and more widely available. Make sure you understand the terms of a gift card (such as expiration dates) before making a purchase.

Get a jump on the season

Given the forecast for below-average consumer spending, many retailers are cautious to avoid stockpiling large inventories this holiday season. If you shop early, you will be more likely to find what you’re looking for at a reasonable price. Conversely, last minute shopping could result in spending more than you planned, particularly if you are determined to buy specific items.

And finally…

These tips are about gift buying. But rather than making gifts and packages the center of your holiday celebration, try putting more emphasis on spending quality time with family and friends. Encourage games and conversation; you may be surprised to find how little you miss the excesses of years past.

Budgeting Between Semesters
December 10, 2009

It may seem like every college student returning home for the holidays has something they’d like to downplay in front of their parents: a shaggy haircut, a bad grade, or a less than stellar class attendance record. And, for students whose summer earnings slipped away faster than expected, mid-school year finances might be a particularly sore subject.

It’s certainly easy to understand how students—especially those in their first year away from home—are prone to financial missteps. College campuses are more commercialized than ever before. Bookstores sell not only books, but electronics, apparel and furniture. Nearby streets are lined with restaurants and other social gathering places. And for students that like to shop, if something they want isn’t within walking distance, it almost certainly is for sale online.

Parents who want to help their kids avoid a Funds Depleted message at the ATM—or, worse, slide into unmanageable credit card debt—should set aside time over holiday break to crunch the numbers and make a plan for second semester. Here are a few tips:

Teach financial literacy. Universities offer a variety of higher education courses, but what’s usually lacking in most curricula is Personal Finance 101. If your child doesn’t know how to balance a checkbook, or know the difference between compound and simple interest, take some time to walk them through the basics. Particularly in navigating credit card and student loan agreements, a little parental guidance can go a long way in making sure your kid doesn’t get in over his or her head.

Create a (realistic) budget. Your son or daughter may groan at the sight of a spreadsheet, but don’t be deterred. Even non accounting majors can understand the meaning of a bottom line. Having them fill in the numbers on a page may make them assess the wisdom of their $4 latte habit or $80 concert tickets purchase. That said, be realistic. College students will most likely spend money on non-necessities. A budget completely devoid of a “fun fund” is probably impractical and likely to be tossed aside. Make sure to build in a cushion for the occasional splurge.

Look for extra sources of income. While their primary pursuit is education, many students should have enough free time to reasonably hold down a part-time job, and earning a little extra money can go a long way in balancing second semester finances. Most universities have online listings of jobs that are flexible enough to fit students’ sometimes erratic schedules. Encourage your son or daughter to take a look.

Check in once in a while. If you financially support your son or daughter, you might have access to online banking statements. It may not be necessary (or wise) to check balances everyday—after all, your kid won’t learn to be fiscally responsible and independent if you weigh in on every small purchase they make. But merely informing him or her that you’ll be keeping an eye on things may persuade them to spend and save wisely.

Finally, if you are uncomfortable having a financial conversation with your child, or if your advice isn’t getting through, consider seeking outside help. Most financial advisors are used to being in the position of talking kids through finances and can support the lessons you are trying to teach in the home.

Neither Ameriprise Financial nor its affiliates or representatives may provide tax or legal advice. Consult your tax or legal advisors concerning your situation.

Financial planning services and investments offered through Ameriprise Financial Services, Inc. Member FINRA & SIPC.

©2009 Ameriprise Financial, Inc. All rights reserved.

Holiday Fun Can Be Affordable
December 3, 2009

Traditionally, the holiday season is a time of indulgences. Any combination of gifts, travel and entertaining can result in big end-of-year expenditures. But this year—in light of declining investment portfolios, sinking house values and a shaky job market—many American consumers will be looking for ways to toast the season without breaking the bank. If you, too, want to avoid over-spending, here are some tips to celebrate more frugally:

Set proper expectations
It helps to make sure everybody in your family is onboard with the cost-conscious approach. If you are married, have a frank discussion with your spouse about spending limits. If you have children, make sure they understand that your plans for the holidays will focus on fun that can be had without spending a lot of money. If your children are old enough, you may even use this as an opportunity to explain the fundamentals of household economics and involve them in setting holiday spending priorities for the family.

Plan ahead
Take time to write down a list of possible gifts you hope to purchase for family and friends. Knowing what you want ahead of time may help you avoid making poor decisions and impulse purchases once you hit the stores.


Invest time to save money
The best deals can be found by shopping around. Check out stores in your area and investigate what’s available online. The emergence of online shopping has made it much easier to do your homework before you buy. Web retailers will help you determine best prices for the products you are looking to purchase.

Track your spending
One of the best ways to keep spending under control is to set a limit. Within your family, this can be on a per-person basis, or you can set a budget that dictates your maximum holiday spending. Once this number is chosen, see if you can come in under budget. Track all of your purchases and be certain to hold onto receipts. You might also request gift receipts where available and tuck them inside cards or gift boxes. 

Be smart about gift cards
Gift cards have become increasingly popular and more widely available. Make sure you understand the terms of a gift card (such as expiration dates) before making a purchase.

Get a jump on the season
Given the forecast for below-average consumer spending, many retailers are cautious to avoid stockpiling large inventories this holiday season. If you shop early, you will be more likely to find what you’re looking for at a reasonable price. Conversely, last minute shopping could result in spending more than you planned, particularly if you are determined to buy specific items.


And finally…
These tips are about gift buying. But rather than making gifts and packages the center of your holiday celebration, try putting more emphasis on spending quality time with family and friends. Encourage games and conversation; you may be surprised to find how little you miss the excesses of years past.

--------------------------------------

This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.

Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC.

©2009 Ameriprise Financial, Inc. All rights reserved.


Robert A. Powell, CFP®, CMFC®
Financial Advisor | Registered Principal
CERTIFIED FINANCIAL PLANNER™ practitioner

Ameriprise Financial, Inc.
2 Pittsburgh Circle
Ellwood City PA 16117

Phone 724-758-7112
Phone 724-752-5252

http://www.ameripriseadvisors.com/robert.a.powell/

Fax 724-758-2669

This communication is published in the United States for residents of
Pennsylvania, Ohio, West Virginia, Maryland, Florida, Indiana, Nevada,
Georgia and California; and this advisor is licensed in the states of
Pennsylvania, Ohio, West Virginia, Maryland, Florida, Indiana, Nevada,
Georgia and California.

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