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Question
Hi Paul,
I'm getting ready to retire and I would like to invest some of my money in bond funds. My risk tolerance is very low and I'm pretty conserative. I'm been looking at the Vanguard GNMA but saw that it's going down recently. Are there any bond funds or mutual funds that you would recommend? I'm just looking to beat inflation. Thanks! - David

Answer
David,
  Thank you for your question!  You are right that bond funds are attractive (usually). It is much safer to purchase bond funds than it is to buy individual bonds.

But, assuming I am looking at the right fund, GNMA is a bond fund that invests in government mortgage backed securities, so it is a very specialized fund.  If your risk tolerance is low, I would think that you definitely do not want to invest in something so specific.  With low interest rates, it is NOT a good time for this fund. Here is a link to read more about this bond fund:

https://personal.vanguard.com/us/funds/snapshot?FundId=0036&FundIntExt=INT

However, your idea to invest in bonds is a good one, just not that one.  Bond funds typically are more stable than investing in stocks.  It is important to diversify across several bond funds, this further reduces your risk. For example, here are some general categories that you can search for bond funds that specialize in these:  General international, emerging markets, US aggregate bond fund, small cap, large cap bond funds.  There are bond funds that specialize in specific economies, for example I like the Brazilian economy and markets. There are bond funds that invest in Brazilian bonds.

One other thing: ETF's are exchange traded funds, and typically have lower costs than do mutual funds.  Something to look for.  Here is a link to a brief description of bond ETF's:
http://www.investopedia.com/articles/bonds/05/011105.asp#axzz2J8iKSr89

Here is a link to an article that discusses bond funds in general:
http://bonds.about.com/od/bondfunds/bb/BeforeBuyBonds.htm

I hope this helps, please do not hesitate to follow up with me if I can be of any additional service.

Sincerely,
Paul

Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com

Beginner Investing

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Paul Henneman

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I can answer any questions on investment strategies. Specifically, my expertise lies in long term investment strategies designed to beat market performance while reducing risk. Not get rich quick schemes, but solid investing strategies. DO NOT SEND ME YOUR HOME WORK QUESTIONS! Over one half of the questions I receive are clearly students in finance or economic classes asking for answers to their homework questions. Most of these come from India. I won't answer them, do your own work. However, I welcome all investors trying to negotiate how to invest in stocks, mutual funds, ETF's, and other investments.

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15 years in a leadership role at a financial research company. We sell research to institutions such as Wells Fargo, Fidelity, Thomson Reuters, Bloomberg, Bank of NY, Scotia Bank, and others.

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Florida International University, University of Florida

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Wells Fargo Advisors, Fidelity, Scotia Bank, Thomson Reuters, Capital IQ, Factset, Bloomberg, Bank of NY, CBSMarketWatch, Hoovers, Multex, Yahoo Finance, Zacks, Earthlink Finance, numerous large institutions and hedge funds, subscribers to www.ValuEngine.com

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