2nd Opinions on Bond Alternatives?

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kdcui
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2nd Opinions on Bond Alternatives?

Post by kdcui »

Hi all,

I recently had some financial advisers recommend some alternative investments for me.
Due to the nature of the bond market at the moment, they recommended that I re-allocate my current bond mutual fund investments (in my Roth IRA) into other alternatives.
About 20% of my Roth IRA is in VBMFX (Vanguard Total Bond Market Index Investor Shares). The other 80% is in Total Stock and Total international Admiral Shares.

The 2 things they are suggesting are:

A Voya Annuity, specifically the Voya Sercure Index Seven Annuity (Flexible Premium Deferred Fixed Index Annuity). It is a 7 year annuity.
http://voya.com/products/voya-secure-in ... en-annuity


The other alternative is a non-traded REIT: Northstar Healthcare Income. This would be a 4 year investment (after which I can cash out or still around if an IPO happens).
http://www.northstarreit.com/healthcare/

I've typically heard some iffy things about non-traded REITS and Annuities. I am a little skeptical because I've heard these can carry high fees, and offer low performance. However the reasoning behind these (as explained to me) makes a little bit sense: with interest rates as they are (and the fact they will likely rise again soon), these alternatives could likely outperform.

Does anyone have any thoughts on this? Any opinions would be appreciated. I do not have any experience investing in Annuities or non-traded REITS. If it matters, I am 30 and am willing to incur some risk in my investment strategy.

Thanks.
FRANK2009
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Re: 2nd Opinions on Bond Alternatives?

Post by FRANK2009 »

I can't offer much help regarding those two investments other than my intuition says they are probably good for the advisor's commission.
john94549
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Re: 2nd Opinions on Bond Alternatives?

Post by john94549 »

Stick with TBM. At your age, modest dips in any Total Bond Fund will be invisible as you approach retirement.

The purpose of TBM in your AA is to offer an "anchor-to-windward" and provide ballast for re-balancing, if necessary.

I wouldn't change a thing.
Last edited by john94549 on Sun Oct 19, 2014 8:13 pm, edited 1 time in total.
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nedsaid
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Re: 2nd Opinions on Bond Alternatives?

Post by nedsaid »

As Nancy Reagan might say, "Just say no to bond alternatives."

During the recent turmoil, bonds did what they were supposed to. As stocks went down, bonds went up while still throwing off interest income. They provided ballast to a portfolio, reducing volatility and dampening losses.

The Bond Alternatives were inspired by the success of David Swenson at Yale and others who ventured into alternative investments before they were cool. Now that these are being offered to retail investors, the party is over and has moved on to something else. Alternatives like Gold, Commodities, REITs, Hedge Funds, Currencies had their hey day years ago. The time to buy in was perhaps 10 years ago. For example, commodities peaked about 2008. The dollar is strengthening so a bet on foreign currencies doesn't look so good right now. Gold peaked and has come down. It appears that Warren Buffett is winning his bet that the stodgy old S&P 500 will beat hedge funds. The guarantees (living benefits) for variable annuities are less than they used to be, so buying these annuities to hedge against a falling stock market is not as good of a bet as they were years ago.

Don't fall for this pitch, both investments you are being offered are fee traps. The fees will eat up much of the returns that you are hoping for. Jim Bouton, former Yankee Pitcher and famed Knuckleballer had a great saying, "By the time I get to where it is at, it has moved somewhere else." This sums up my feelings about "bond alternatives."
A fool and his money are good for business.
topos
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Re: 2nd Opinions on Bond Alternatives?

Post by topos »

If you are 30 years old and the money if for retirement, I don't see how an annuity would make sense for you.
TBM daily price will drop when interest rate go higher, but it will start paying more interest. Overall, if you keep your money long enough, you will recover.
Your best bet: get rid of those advisers.
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EyeYield
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Re: 2nd Opinions on Bond Alternatives?

Post by EyeYield »

From the information you provided, I would rather take advice from you than from your "financial advisors".
They want to sell you high commission products, because of the bond market "at the moment"?
At 30 your allocation looks good to me. If you want to take some risk, do it in a way that doesn't give a third party a sure thing.
"The stock market is a giant distraction from the business of investing." - Jack Bogle
dhodson
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Re: 2nd Opinions on Bond Alternatives?

Post by dhodson »

the funny thing is that with the index annuity the insurance company is investing most of the money in bonds and then a small slice of options. Add in the costs transferred from the insurance company for commission and such and you get the picture.
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Rob5TCP
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Re: 2nd Opinions on Bond Alternatives?

Post by Rob5TCP »

Non - traded REITS; there have been a fair number of stories about them - mostly negative
http://blogs.wsj.com/totalreturn/2014/0 ... ded-reits/
http://www.finra.org/investors/protecty ... ts/p124232
http://www.reuters.com/article/2014/01/ ... 5720140123

As for equity indexed annuities:
http://www.finra.org/web/groups/investo ... 125847.pdf
http://www.foxbusiness.com/personal-fin ... nvestment/
http://www.forbes.com/2009/06/05/equity ... nance.html
http://www.bloomberg.com/news/2011-01-2 ... isney.html

The non-traded REITS - I did look at them a few years ago - bought the Vanguard REIT index instead.
AS for equity indexed annuities; I have done ok on a couple of them. Did better than the 5 year rate at that
time. It was hell trying to figure out all the gotchas (and I missed a couple).
kenner
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Re: 2nd Opinions on Bond Alternatives?

Post by kenner »

kdcui wrote:Hi all,

I recently had some financial advisers recommend some alternative investments for me.
Due to the nature of the bond market at the moment, they recommended that I re-allocate my current bond mutual fund investments (in my Roth IRA) into other alternatives.
About 20% of my Roth IRA is in VBMFX (Vanguard Total Bond Market Index Investor Shares). The other 80% is in Total Stock and Total international Admiral Shares.

The 2 things they are suggesting are:

A Voya Annuity, specifically the Voya Sercure Index Seven Annuity (Flexible Premium Deferred Fixed Index Annuity). It is a 7 year annuity.
http://voya.com/products/voya-secure-in ... en-annuity

This should be illegal, but alas it's only immoral. They "advise" you to convert a great, low cost investment portfolio that you have already paid the taxes on and convert your investment into a high-cost vehicle that offers tax deferral that holds NO benefit for you.

Have you read the prospectus? Have you read the contract? Are you aware of the huge surrender charges?

They offer a marketing gimmick, not a worthwhile investment. You are the hoped-for victim.

Stay away from these people. They want your money. They do not want to help you.



The other alternative is a non-traded REIT: Northstar Healthcare Income. This would be a 4 year investment (after which I can cash out or still around if an IPO happens).
http://www.northstarreit.com/healthcare/

I have seen these decline in value all the way to ZERO. Good luck if you speculate on stuff like this.

I've typically heard some iffy things about non-traded REITS and Annuities. I am a little skeptical because I've heard these can carry high fees, and offer low performance. However the reasoning behind these (as explained to me) makes a little bit sense: with interest rates as they are (and the fact they will likely rise again soon), these alternatives could likely outperform.

Does anyone have any thoughts on this? Any opinions would be appreciated. I do not have any experience investing in Annuities or non-traded REITS. If it matters, I am 30 and am willing to incur some risk in my investment strategy.

Thanks.
You are, of course, free to transfer a large portion of your wealth to these people for no good reason. I hope you do not do that. At the very least, post links to the respective prospectuses and/or contracts so they can be fully evaluated.

I bet these so-called alternatives to bonds are a lot more expensive than you think they are.

Look before you leap.
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galeno
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Re: 2nd Opinions on Bond Alternatives?

Post by galeno »

Fire the FAs. Their advice will benefit them more than you. Stick with the TBM, a short bond fund, or just cash for your 20% not in equities.
KISS & STC.
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grabiner
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Re: 2nd Opinions on Bond Alternatives?

Post by grabiner »

kdcui wrote:I've typically heard some iffy things about non-traded REITS and Annuities. I am a little skeptical because I've heard these can carry high fees, and offer low performance. However the reasoning behind these (as explained to me) makes a little bit sense: with interest rates as they are (and the fact they will likely rise again soon), these alternatives could likely outperform.
And so will many other investments. You have 80% of your portfolio in things which are likely to outperform the bond market (probably more likely than the alternatives suggested by your advisors), and if you wanted to do that, you could move the other 20% there as well. Presumably, you don't want to do that because 80% risky assets and 20% safe assets is consistent with your risk tolerance; the 80% of your portfolio which is likely to outperform the bond market won't always do so.

To see the risk involved with REITs, look at the 2007-2009 performance of Vanguard's REIT Index. The average REIT lost 2/3 of its value, so individual REITs can do much worse.

The annuity is a bit different; there are complicated formulas for determining how much is credited, which will likely result in your getting your money back in seven years but not much more. If you want your money back in seven years and somewhat more, you could buy bonds which mature in seven years, which is essentially what you already have (Total Bond Market Index has an average maturity of 7.7 years); unlike the annuity, you can also sell these freely if another investment is better.
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kdcui
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Re: 2nd Opinions on Bond Alternatives?

Post by kdcui »

Thanks everyone for the advice. Sounds like I will stay away and stick with my bonds.
The whole reason I even considered is because I am maxing my Roth IRA out and already and contributing to my employer match (6% pre tax) on my 401k.

That said, are there any redeeming qualities or appropriate places for these types of investments?
I will soon (next year or two) be entering the phase out range for the Roth IRA. Should I be maxing out my 401k before looking at other options?

Thanks again.
dhodson
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Re: 2nd Opinions on Bond Alternatives?

Post by dhodson »

Don't get overly focused on tax advantaged accounts. That will drive you towards things you don't want like annuities and permanent insurance. Unless you highly value the insurance features then you will likely have less money using those items even if you save more on taxes with them. I'd max out my 401k, do a Roth Ira and then go taxable. I'd use my stocks in taxable to tax loss harvest, pay capital gains instead of income rates, better liquidity, and get the step up basis at death. With an annuity, no step up, gains are taxed as income, less liquidity, lower return. I'd put tax inefficient in my tax advantaged accounts.

With insurance, you must highly value the insurance features otherwise there is no magic in this world. You can invest in the same stuff without their additional costs/fees. If one for some reason wanted to buy very tax inefficient products such as REITs and didn't have any tax advantaged space to hold them and was willing to hold them for a very long time like 30 years then I can see purchasing a variable annuity to do so.
LongerPrimer
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Re: 2nd Opinions on Bond Alternatives?

Post by LongerPrimer »

Not for someone less than 52.5yo because the chance than you may need the money is too high VS the perceived returns.

Disclaimer. We have deferred fixed index annuities. 67 yo. Told FA that we are not happy with their absolute returns VS deferred dVA or bonds, But we are not looking at the current Returns but looking at the Guarantee Income Withdrawal option, Downside Market protection, the backend withdrawal rate for life (planning for 6.5% at RMD age, and the option to do a SPIA or close the account for cash. :annoyed
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ruralavalon
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Re: 2nd Opinions on Bond Alternatives?

Post by ruralavalon »

kdcui wrote:Hi all,

I recently had some financial advisers recommend some alternative investments for me.
Due to the nature of the bond market at the moment, they recommended that I re-allocate my current bond mutual fund investments (in my Roth IRA) into other alternatives.
About 20% of my Roth IRA is in VBMFX (Vanguard Total Bond Market Index Investor Shares). The other 80% is in Total Stock and Total international Admiral Shares.

The 2 things they are suggesting are:

A Voya Annuity, specifically the Voya Sercure Index Seven Annuity (Flexible Premium Deferred Fixed Index Annuity). It is a 7 year annuity.
http://voya.com/products/voya-secure-in ... en-annuity


The other alternative is a non-traded REIT: Northstar Healthcare Income. This would be a 4 year investment (after which I can cash out or still around if an IPO happens).
http://www.northstarreit.com/healthcare/

I've typically heard some iffy things about non-traded REITS and Annuities. I am a little skeptical because I've heard these can carry high fees, and offer low performance. However the reasoning behind these (as explained to me) makes a little bit sense: with interest rates as they are (and the fact they will likely rise again soon), these alternatives could likely outperform.

Does anyone have any thoughts on this? Any opinions would be appreciated. I do not have any experience investing in Annuities or non-traded REITS. If it matters, I am 30 and am willing to incur some risk in my investment strategy.

Thanks.
A "fixed index annuity"? How is that even conceivable? An index moves up and down, it's never fixed. At least their linked site is honest in twice plainly stating that you only participate in the index gains "in part". Be a long-term investor. Just buy a good inexpensive index fund and get the full index gains plus the dividends. I would not buy this product.

Horror stories about non-tradeable REITs are often true. Go with your gut reaction, don't buy this alternative.

At age 30 invest for the long-term, don't be too concerned about changes in bond prices that most expect to be relatively small and brief.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
dhodson
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Re: 2nd Opinions on Bond Alternatives?

Post by dhodson »

Bc most of the money is in bonds

It is characterized as a fixed product
technovelist
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Re: 2nd Opinions on Bond Alternatives?

Post by technovelist »

As they say about poker, if you can't figure out who the fish is, it's you.
Their recommendations aren't in your interest.
In theory, theory and practice are identical. In practice, they often differ.
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Toons
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Re: 2nd Opinions on Bond Alternatives?

Post by Toons »

FRANK2009 wrote:I can't offer much help regarding those two investments other than my intuition says they are probably good for the advisor's commission.
+5 :happy
Stick with TBM :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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retiredjg
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Re: 2nd Opinions on Bond Alternatives?

Post by retiredjg »

Just say no.

It is not in your best interest. It is in their best interests. They make money convincing people to buy this stuff.
LongerPrimer
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Re: 2nd Opinions on Bond Alternatives?

Post by LongerPrimer »

kdcui wrote:Thanks everyone for the advice. Sounds like I will stay away and stick with my bonds.
The whole reason I even considered is because I am maxing my Roth IRA out and already and contributing to my employer match (6% pre tax) on my 401k.

That said, are there any redeeming qualities or appropriate places for these types of investments?
I will soon (next year or two) be entering the phase out range for the Roth IRA. Should I be maxing out my 401k before looking at other options?

Thanks again.
IMO , your FAs gave appropriate recommendations to the your question for "alternatives to bonds". As in my original reply, we have fixed index annuities, I add, we have dFI annuities instead of bonds/bond fund. Other appropriate recs could be, CDs, REITs, convertibles, and high yielding stocks or MLPs.

Is there a place for these "alternative" investments - Yes, you will recognise them when you are ready for them. :annoyed
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retiredjg
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Re: 2nd Opinions on Bond Alternatives?

Post by retiredjg »

kdcui wrote:Thanks everyone for the advice. Sounds like I will stay away and stick with my bonds.
The whole reason I even considered is because I am maxing my Roth IRA out and already and contributing to my employer match (6% pre tax) on my 401k.

That said, are there any redeeming qualities or appropriate places for these types of investments?
I will soon (next year or two) be entering the phase out range for the Roth IRA. Should I be maxing out my 401k before looking at other options?

Thanks again.
You should be maxing out your 401k regardless. In most situations, you should not use a taxable account for retirement money until you have filled both a 401k and an IRA. There are exceptions.

When you get out of range for Roth IRA, you can use the back door method to contribute to Roth IRA if you don't have other IRAs in the way. Check out the Wiki.
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Re: 2nd Opinions on Bond Alternatives?

Post by z3r0c00l »

Just to emphasize the point, they are way wrong and not acting in your best interests here at all. Not only would I ignore the advice, I would personally (just personally) stop seeking their advice at all as I did with the kind but totally uninformed adviser at Chase bank. Just as a test, see if they know what an iBond is. If they don't, that should be the end of it.
70% Global Stocks / 30% Bonds
LongerPrimer
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Re: 2nd Opinions on Bond Alternatives?

Post by LongerPrimer »

One other comment.
If at your age and income, where you will hit the ROTH phase out, you may want to take another job elsewhere with a lower COL that doesn't demand a high level of income. :annoyed
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ruralavalon
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Re: 2nd Opinions on Bond Alternatives?

Post by ruralavalon »

kdcui wrote:Thanks everyone for the advice. Sounds like I will stay away and stick with my bonds.
The whole reason I even considered is because I am maxing my Roth IRA out and already and contributing to my employer match (6% pre tax) on my 401k.

That said, are there any redeeming qualities or appropriate places for these types of investments?
I will soon (next year or two) be entering the phase out range for the Roth IRA. Should I be maxing out my 401k before looking at other options?

Thanks again.
If the 401k funds offered are decent with expenses ratios that are low, moderate or not very high, then its usually going to be best to max out the 401k before even considering taxable investing of any kind.

No redeeming qualities that I can see to the annuity or a non-tradeable REIT, or at least none that outweigh the high expenses of the annuity and the high risk of the REIT.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
kenner
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Re: 2nd Opinions on Bond Alternatives?

Post by kenner »

LongerPrimer wrote:
kdcui wrote:Thanks everyone for the advice. Sounds like I will stay away and stick with my bonds.
The whole reason I even considered is because I am maxing my Roth IRA out and already and contributing to my employer match (6% pre tax) on my 401k.

That said, are there any redeeming qualities or appropriate places for these types of investments?
I will soon (next year or two) be entering the phase out range for the Roth IRA. Should I be maxing out my 401k before looking at other options?

Thanks again.
IMO , your FAs gave appropriate recommendations to the your question for "alternatives to bonds". As in my original reply, we have fixed index annuities, I add, we have dFI annuities instead of bonds/bond fund. Other appropriate recs could be, CDs, REITs, convertibles, and high yielding stocks or MLPs.

Is there a place for these "alternative" investments - Yes, you will recognise them when you are ready for them. :annoyed
Interesting. Longer Primer, what is your understanding of the TOTAL COSTS of the investments that these financial advisors recommended for OP?
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retiredjg
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Re: 2nd Opinions on Bond Alternatives?

Post by retiredjg »

LongerPrimer wrote:Other appropriate recs could be, CDs, REITs, convertibles, and high yielding stocks or MLPs.
I suppose "appropriate" depends your purpose for holding bonds.
  • -If you are using bonds to provide income, perhaps those would work.

    -If you are using bonds to provide safety and stability to your portfolio, those choices (other than CDs) may not work very well.
CDs of course would provide the safety and stability, but I don't think the others would be much help in a market crash. In fact, I think they may make things a lot worse. However, I know little about "convertibles" and "MLPs", so some of that is a guess.
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Re: 2nd Opinions on Bond Alternatives?

Post by dhodson »

Maybe I'm mistaken but I don't believe the OP asked for a bond alternative. Sounded more like a scare tactic about bonds was presented and a "solution". I'd say the FAs did a very poor job.
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kdcui
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Re: 2nd Opinions on Bond Alternatives?

Post by kdcui »

Thanks again for all the responses.
dhodson wrote:Maybe I'm mistaken but I don't believe the OP asked for a bond alternative. Sounded more like a scare tactic about bonds was presented and a "solution". I'd say the FAs did a very poor job.
That is correct. The "FA" saw my 20% bond allocation and said he did not like that as interest rates will be rising in the foreseeable future. Sounds like the typical sales pitch.

What I did ask is what to do with my excess cash reserves that I have been hoarding (in excess of my 6 to 8 month emergency funds). Parking it in my 0.1% APY checking account seemed wasteful. I wanted some thing relatively safe yet provided a decent yield. I probably can't have it both ways.

I should probably use that excess wages earned and start contributing more into my 401k.
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kdcui
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Re: 2nd Opinions on Bond Alternatives?

Post by kdcui »

LongerPrimer wrote:One other comment.
If at your age and income, where you will hit the ROTH phase out, you may want to take another job elsewhere with a lower COL that doesn't demand a high level of income. :annoyed
Primer, not sure if you are joking or serious (sorry I am bad about picking up sarcasm).
It's not so much that my COL demands a high income so much as it is my job as an engineer.

That said, I drive a Honda Fit and rent.

:happy
LongerPrimer
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Re: 2nd Opinions on Bond Alternatives?

Post by LongerPrimer »

^
Entirely serious.
DS is also a techno. UX with engineering degree. Some of his classmates went to Bay area and some went to the Big Apple. He decided Seattle was good and where there is a big contingent from his school. He was raised in the dark clouds of PNW. He saw that SV and NY has very high COL which necessitates a high pay scale which puts people into higher tax brackets sooner and out of ROTHs.

Although Seattle is a fairly high COL scale, it's still less expensive than other major tech centers and WA has no income tax.

The FA advisors offered what they sell and appear to appropriate, although there other options. Which why you asked. Good for you. :happy
Me, I have dVAs and some dFIAs. Insurance purposes first, Income second, and Investment third. I treat them as long bonds.
I also buy/sell high quality, high yield utility companies that I treat as short/intermediate bonds.
We are 64/67 yo.

So to make this picture more complete, your age? Marriage Status or expectations? Risk tolerance? Looking for home purchase and how soon?
LongerPrimer
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Re: 2nd Opinions on Bond Alternatives?

Post by LongerPrimer »

^^
DS also had a big passbook savings account, on my recommendation. :D
He is now 29, wasn't 100% sure if would stay in the PNW. But he became convinced this Spring that this is home. He used his savings and taxable to buy a very attractive home.
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Phineas J. Whoopee
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Re: 2nd Opinions on Bond Alternatives?

Post by Phineas J. Whoopee »

At 80% equities, your portfolio's value and volatility is affected very little by the fixed income component, whatever it's invested in. Twenty percent is somewhere around the minimum good level for bonds, for a risk-seeking investor. There's an argument that it's really 10%, but that difference won't make very much difference.

Whatever else they're advising you to buy will be good for them. What could you expect? Old joke: I put three daughters through college. Unfortunately, they were my stockbroker's daughters.

If they've aroused your curiosity regarding the best, highest-yielding, most-lucrative, lowest-risk fixed income, there are a couple of things you could do, perhaps, which might, but probably won't, make much difference; but letting those pickpockets take your money and run will never be a good move.

In this life, one thing counts: In the bank, large amounts. I'm afraid these don't grow on trees. You've got to pick a pocket or two, boys, you've got to pick a pocket or two. Lionel Bart, adapting Dickens.

PJW
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kdcui
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Re: 2nd Opinions on Bond Alternatives?

Post by kdcui »

LongerPrimer wrote:^
So to make this picture more complete, your age? Marriage Status or expectations? Risk tolerance? Looking for home purchase and how soon?
Just turned 30. Unmarried but live with girlfriend, could become married in a 2-3yr timespan. Living in Southern NH but work in MA. I'm willing to tolerate moderate to high risk in my retirement accounts right now but would prefer lower risk investments for my current excess cash. I foresee looking for a home in 3-5 yrs.
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kdcui
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Re: 2nd Opinions on Bond Alternatives?

Post by kdcui »

Phineas J. Whoopee wrote: In this life, one thing counts: In the bank, large amounts. I'm afraid these don't grow on trees. You've got to pick a pocket or two, boys, you've got to pick a pocket or two. Lionel Bart, adapting Dickens.
Nice touch with the Oliver reference!
I do believe there was a line in that song about not paying taxes.... :D
dbr
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Re: 2nd Opinions on Bond Alternatives?

Post by dbr »

You are talking to people who are trying to sell you a bill of goods in order to enrich themselves.

Why are you talking to these guys?
feh
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Re: 2nd Opinions on Bond Alternatives?

Post by feh »

galeno wrote:Fire the FAs.
+1
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