Friday, October 20, 2006

Investment Eggs: Houses or Bonds?

If you're house-rich but other-asset-poor tilt investments more toward bonds than you otherwise might.

Bonds will act as a bit of a hedge: If the economy slows down, taking down the value of your house even further, bond prices will rise. They'll also produce more consistent returns and income for your mortgage payments than stocks will.

Avoid long-term bond funds and stick with ones that focus on shorter maturities. They're actually paying higher rates these days, and they're less volatile.

Because of rising short-term interest rates favors money-market funds. Given the relatively pricey stock market and real estate markets, those investments look less attractive. People today should not think of money-market funds as temporary parking places. Now they can serve as real investments for your portfolio.

You can get more aggressive about hedging by investing in options. You can buy a "put" option for your area, which could make you money if home prices fall.

It's akin to homeowners insurance. To hedge effectively, you'll need to put up 4 % to 5 % of your home's value. And since the futures market is already expecting prices to drop by next fall, the put will pay off for you only if the declines are precipitous. Otherwise, you will lose what you spent on the option.

Bond top choices:
FPA New Income (FPNIX) and Harbor Bond (HABDX).


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