"John A. Weeks III" <john@[EMAIL PROTECTED]
> writes:
> In article
> <ceb2e8f5-c7a9-46c8-a354-7d8740cd7d62@[EMAIL PROTECTED]
>,
> raylopez99 <raylopez99@[EMAIL PROTECTED]
> wrote:
>
> > An investor I know wants to have income, capital preservation (very
> > im****tant) and some small capital gains for $500k to be invested with
> > a term of 3 years from today. Capital preservation is im****tant, much
> > more so than capital gains. In fact, the investor has the entire $500k
> If capital preservation is the first goal, then market exposure
[I believe that John means *Stock* market exposure there][A]
> is out of the question for a 3 year time frame. You need to
> be looking at something that is guaranteed. I'd be looking at
> brokered CDs and maybe a few of the highest rated cor****ate bonds
[And, I'd amend that with "highest rated *short-term* cor****ate
bonds][B]
A) The stock market can (and has) lost bunches of money in the
past which has taken several years to recover. It's easy to
find a sizeable handful of 3-year periods over the last couple
of decades where there were substantial losses. You have to
go to *very* long periods to lower the historical chances of
a loss. If capital preservation is im****tant over a three
year period, stocks are out.
B) while cor****ate bonds don't move precisely with treasuries,
(the divergence is often discussed in terms of "spread" and
changes in spread), they do respond to changes in interest
rates. Just like treasury bonds, when interest rates go
down, cor****ate bonds go up and vice-versa. The longer the
term of the bond, the bigger the effect of those interest
rate moves. One way to protect against potential capital
losses in the face of interest rate moves is by having a
shorter term (or even having the bond mature right when
you're going to need the money and simply holding to term).
Note, of course, that unlike investing in treasuries (or
FDIC guaranteed CDs) if you're going to invest in cor****ates,
you need to take into account default risk and (or credit
risk in the event of, say, a downgrade on a company you
hold). One normally protects against issuer-specific risk
like that via diversification - which can be a huge pain
if you're trying to do this by holding individual bonds
instead of a fund. The flip side is that a fund doesn't
normally have a maturity date - so you can't buy a basket
of bonds which mature just when you need the cash.
Nevertheless, a short-term investment grade cor****ate
bond fund is very very unlikely to lose money over a
three year period. A quick glance at one just now shows
positive returns every single year over the last 7 and
only two negative quarters (which were separated by over
a year). Over the last 7 years (16 overlapping 3-year
periods), the average 3-year return was about 4%/yr,
the lowest was about 3%/yr and the highest was about 6%/yr.
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