The Implementation: The Bond

640px-Sean_Connery_1971Looking back at my own risk appetite, I realize that a large portion of my portfolio should be in the boring world of bond funds. And even if you have a greater risk appetite than I do, I would argue that some portion of your portfolio should be in the world of bonds. You never want to chase capital flows between bonds and stocks, so it’s better to have a set amount allocated at the start.

The question is which bond fund. If you are a John Bogle (founder of The Vanguard Group) follower, you would advocate a total bond market index fund, something like the Vanguard Total Bond Market Fund (VBMFX). This fund would give you a broad exposure with 65-70% in US government bonds and the remainder in corporate bonds. However, if you are invested in a taxable account, regardless of your tax bracket, Uncle Sam will take a chunk of the income generated from the dividends.  And if you are re-investing your dividends back into the fund, this would mean paying taxes on income you aren’t touching.

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The Fed, the Noise and the Fury.

Federal_ReserveThe Federal Reserve has met and told the world that it is not raising rates this month but it intends to do so 2 more times this year. And if you really know what the Fed will do, you are ahead of the majority of the market. So what exactly does the Fed do and how does it impact the market? The Federal Reserve sets the overnight lending rate between banks. That rate has been set to zero percent from 2008 all the way though December of 2015 when it was raised by a quarter percent. Why does this matter? Some other rates are adjusted based on what the Federal Funds Rate is, such as prime. Prime rate is basically whatever the federal funds rate is plus three and a quarter percent. Currently it is at 3.5%, it is supposedly the rate which banks will give their best borrowers.

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You Down with OPP? err… OPM?

 

 

OPP err… Other people’s money, this is the Achilles heel of most hedge funds (with the notable exception of family wealth management funds). As a small investor, we have the freedom to determine if we are buyers, sellers or traders over a certain time horizon and this is certainly an advantage we have over funds with other people’s money. Most hedge funds are open ended funds giving their investors the freedom to exit or enter the fund every month. This results in capital inflows and outflows which results in the fund having to re-balance its position with whims of its investors.

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VW Buyback my Diesel

VW_LogoAbout 7 years ago during the tumults of the great recession, I was in the market for a new car for my wife. She is a better person than I am, and so she was looking for an environmentally conscious choice. We were living in Brooklyn, NY at that time and were sharing one vehicle as we both needed a car for work. We decided that it was the right time to purchase a car.

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The Experiment

 

Blood_donation_(test_tubes) (1)Hedge Funds are able to trace their roots back to the 1920’s stock market.  At that time, the most common Hedge Fund strategies were the equity long-short strategies of today. To over simplify it, the funds took long (bought) positions in equities that they felt would appreciate and short positions (borrowed other investors shares and sold them to buyback at a later time at a hopefully lower price) in equities they felt would decline. If the hedge funds were equally balanced in between their long and short positions, they were thought to be market-neutral.

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The Premise

LabyrintheSo, I decided to take the plunge into blogging. I have no agenda outside of forcing myself to follow through with an investment strategy and learning something about blogging in the process.

The Hedge Fund Wannabe does not profess to have any superior knowledge about personal finance or investment strategies than anyone else. In fact, as you probably guessed from the title, I am a Wannabe. I have no connections to the finance industry, banking or commerce, nor have I ever worked in any of these fields. So, you are reading the musings of wannabe (a person who wishes to be or do something, but lacks the qualifications, experience or talent).

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