Saturday, March 31, 2007

International Investing: Bond Funds

I have posted previously on this subject, but I was focused on equities. A recent thought has corssed my mind with my tax sheltered retirement accounts to open up a foreign moderate allocation fund or a foreign bond fund. I have little faith in the US Dollar rising in strength anytime in the near future due to our nation's obsession with spending (Consumerism and Materialism replaced Christianity and Patriotism a while back), which leads to current account deficits as well as our government's deficits.

A few reasons why I am looking to foreign bond funds as a place for my cash for retirement is that that sheltered money grows tax free and the non-dollar denominated investments will be worth more to me as an American as the dollar loses value. Bond funds generate a lot of income, which in taxable funds is craptacular. In IRAs, bond funds grow tax free, and in Roth IRAs, bond funds grow tax free and you will not be taxed on your withdrawals. Bond funds denominated in foreign currencies get a double bonus as the currencies appreciate versus the dollar. I am making a long term bet against the US dollar, which is not treason, but makes me feel a bit ill.

I would love for my country to change its attitudes towards saving, spending, and their culture, but I am afraid I alone cannot do enough. Because of my lack of faith in my fellow Americans, I am going to place my money in holdings that support that view. Now with these bond funds, the total yield should not just be the number you look for when evaluating where to put your money. That is a common problem with new bond fund investors, as I know several 20-somethings who have high yield (junk) bond fund investments because of that tantalizing 7% yield. I am all for high yield bonds being a portion of your portfolio; I just do not think they should make up 50% or more of your bond portfolio. You need to be aware of what it is you are parking your cash in for the long haul. A great website, www.morningstar.com, which has lame articles but awesome information available for normal Joe investors. I like to use their mutual fund screener to get a list of funds that fit my requirements, and then go into a fund's "Top 25 Holdings". In a world bond fund, you want to feel secure about the bonds that the fund holds. Any countries in that top 25 that I linked to that scared you?

Expense ratios for world bond funds are usually higher on world bond funds than with regular bond funds or some of those Vanguard international equity index funds. You do have to consider how those expenses will eat into your returns over time, especially if you will not touch this money for 25-40 years. I try to look for no load funds, and funds that have expense ratios under 1.0. It is tough with foreign bond funds, but it will be worth it in 20 years when a British pound will buy you 2 and a half dollars.

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