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Tip # 13 George Divel on Fixed Income Investing

These are tough times for fixed income. Interest rates are low, which is good if you have the credit to borrow money. But its not so good if you are investing for income.

CD’s and money market rates are at historic lows. So where’s the best place to put your fixed-income holdings?

It depends, of course, on your time horizon, tax situation and stomach for risk. Generally, though, under today’s conditions it doesn’t pay very well to tie your money up for the long term.

Top-rated five-year municipal bonds, for example, pay the equivalent of nearly 4.7 percent for investors in the 28-percent tax bracket. At the same time, a five-year Treasury note yields just 3.4 percent.

To stimulate a growing economy, the Federal Reserve has cut short-term interest rates — the Fed funds rate — to 4.25 percent, down from 5.25 percent just a few months ago. While there is lots of speculation about whether the Fed will hold rates steady or cut further, not many analysts expect it to raise rates, which it does to head off inflation.

Botton line: be careful. If you invest in a long term bond to get a higher dividend, you could suffer large losses in the price of the bond when interest rates go up.

All the more reason to talk to your financial advisor on a regular basis.

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June 23, 2008 Posted by | Uncategorized | Leave a comment