Quote:
Originally Posted by UCFKnight85
Investing for a house. The timeframe is a little "ways away" on this, so I'd rather seek a moderately agressive investment vehicle to earn money towards buying a house. I think a historically well performing mutual fund may be appropriate?
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Determining an appropriate investment to satisfy this goal will be dependent on what you mean by a "ways away." Generally, the further away the goal, the more risk you could/should take.
But, whether 5 years or 15 years, your question on bonds is pertinent here.
During the crash of 2008, bonds, that is corporate bonds, correlated with stocks and crashed in almost perfect unison. Solvency was questioned across the board, from large companies to small. And rightly so.
Historically, it may be true that when investors sell stocks and buy debt there is an inverse relationship between the asset prices of the two. Supply and demand. However, when the ongoing concern of the business is in doubt, both their equity prices (stock) and their debt values (bonds) began to fall at the same time. And this makes sense. If I believe a company is not going to be around this time next year, would I want to own either? Not me.
So, yes corporate bonds
generally offer some diversification. However, when it's really needed, it's nowhere to be found. And honestly, what is diversification for if it's not for events like the tech crash of 2001 and 2002, or the crash of 2008 and the spring of last year?
To attempt to mitigate this problem, look outside of corporate bonds. Instead look to government bonds. No, they don't have the returns of corporate bonds historically. But what they have offered is much more valuable. Diversification, not dilution. This has been born out over the most recent decade.
As an illustration, let's say you had bought only two funds on January 1, 2000. First, with 50% of your cash you bought a Vanguard Long-Term Treasury Bond Fund. With the other half, you bought a Vanguard Mid-Cap Index Fund.
From 2000-2009, as the most brutal decade in the history of America (not 10-year stretch, but decade e.g. 30's, 40's etc.) you would have returned an annual compound growth rate of 8.06% with the only down year being 2008 at -9.65%.
Not too shabby for a couple of old index funds, bought in their proper amounts.
Jeff