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Why Buying a Bond Fund Is a Stupid Idea

By Jeff Clark
Tuesday, August 26, 2008

Yesterday, I did something I swore I would never do... I talked "finances" with my father-in-law.
 
You see, I married my lovely wife nearly 17 years ago. And after vowing to love and honor her in sickness and in health – till death do us part – I also promised to never talk about money with my in-laws.
 
No one was worried I would steer them in the wrong direction. After all, I was running a pretty successful stock brokerage business and I already had a fairly impressive list of clients. But no one wants to run the risk of sitting down at Christmas dinner and having to answer questions about the loss we took on Webvan or Pets.com.
 
So, I've been quiet for 17 years. Whenever my in-laws sought my opinion, I deflected the question with all the skill of a Chicago politician. "That's interesting," I would say. "It may work out. But then again, it may not. Let me give it some thought and we can talk about it later."
 
Later never came. And the idea would drift off like a whisper in the wind.
 
Of course, if the idea was particularly bad, I would do my best to dissuade them without really offering an opinion. "Yes, Hillary did make $100,000 trading cattle futures. But that's not something I would do with my own money unless I, too, was married to the governor of Arkansas. But, who knows? It may work for you."
 
For 17 years, Christmas dinner has come and gone without incident. Yesterday, though, I had to speak up.
 
My father-in-law called me from his bank. "They're only offering me 2.5% on a CD," he said. "I can't live on that. So I'm going to put my money in a U.S. government bond fund this guy recommends. It pays almost 5%, and the guy says it's safe. What do you think?"
 
I wanted to tell him buying a long-term bond fund when interest rates are at historic low levels is a stupid idea. I wanted to tell him "safe" U.S. government bond funds lost 33% of their value in 1994. They dropped 15% in two months in 2003. And from mid-March until mid-June of this year, the average U.S. government bond fund was down over 8%.
 
I wanted to tell him the fund this "guy" was recommending charges a 4% up-front sales feed so his 5% return wasn't going to look too good for the first year.
 
Instead, I told him to drop the bond fund brochure, grab his wallet, and plan on coming over to my house for dinner. "When you get here," I said, "I'll show you what I do to generate income with my own money."
 
On Thursday, I'll tell you how the dinner went.
 
Best regards and good trading,
 
Jeff Clark




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