Wednesday, November 7, 2012

Short Answers to Unanswered Questions: Reinvesting Earnings, Money Market Funds, and Bond Bubbles


Once again, it's time to catch up with some of your questions...

Dear Investor Juan,

Do you think it is a good strategy to sell units equivalent to the earnings of your original investment after a certain period of time lets say every 4 months? And re-invest on let say stocks?


Dear Anthony,

The best way to reinvest earnings is to not redeem any of your units. "Cashing in" a portion of your investment and reinvesting the proceeds in stocks, as you suggested, would make better sense if you're originally invested in a non-equity fund such as a bond/fixed income or money market UITF and you want to diversify your portfolio. Reinvesting redemption proceeds into (more or less) the same kind of security may not make much difference in terms or risk and return to justify the additional transaction costs that you would incur, so maybe it would be better if you just keep your original investment intact.


Dear Investor Juan,

Good day!

Let me start by telling you how informative your blog is. I have a number of questions i want to ask you. I have recently invested a good amount of money in BDO's equity, Bond, Fixed-income and money market. The percentage of investments are as follows: 30%, 20% and 50 %. However i still have some money in the savings account. Should i put the remaining amount in a money market which would produce a better return than a Saving account?

I also invested money in foreign denominated funds. These being Dollar money market, Dollar bond fund, dollar medium term bond all at BDO. Moreoever, I have invested in the ALFM euro bond fund of BPI. My concern with this is the recent interest cuts by the Feds and ECB on interest rates have seen interest rates reach new lows. While this would mean that bond prices rise, at what point can the US and Europe sustain these borrowings until the burden becomes to heavy and a government defaults? Wouldnt this produce a bond bubble?

I also would like to ask how these Foreign denominated bond funds would fare in the long run considering that interest rates are set until 2014 in the US and in the foreseeable future for europe? lastly given that these Bond funds are mainly invested in ROP bonds would they be affected by the changing bond prices of the US and euro?

Hoping for your positive response.

Respectfully yours,


Dear student,

Wow, that's a lot of questions. Unfortunately, I don't have answers for some of them.

The returns that you get from money market funds is essentially the price of liquidity, of having ready access to cash that you get from a savings account. So sure, invest whatever amount you think you can afford to not be readily available in a money market fund, but remember that we all need to have some amount of cash at hand for various reasons.

If you were already investment in those fixed income funds that your mentioned before the rate cuts, then you should be happy because your portfolio value will already have risen, right?

Decreases in interest rates are a result of the injection of funds into the system by an economy's central bank (such as the Fed), and the central bank does this by buying securities such as bonds, not by selling them or borrowing money. So why would interest rate cuts result in a heavier debt burden for governments? Unless I'm missing something here...

Bubbles are created by unrealizeable/unjustifiable expectations, and bond price bubbles occur when investors bid up the price of bonds to a point where it can't be justified by interest rate cuts. Whether the current rise in bond prices represent a bubble or not is a matter of opinion, though. By the way, the cuts already happened, and prices have already risen, so you should be more concerned if what we have now is a bubble rather than if a bubble will be created.

Finally, I'm afraid I can't answer your last set of questions because I have no idea how foreign exchange rates will move in the future.

I hope that my responses are positive enough, as you hoped.

Related Posts Plugin for WordPress, Blogger...