Like many others, monitoring an IRA or 401k can be certainly nerve-wracking (so to speak?). Last August’s market turbulence got me thinking thoughts of “just how much will I have at retirement?” “Did I pick my funds correctly?” “Should I re-adjust my portfolio”? “How often should I re-adjust?” “What risks are my monies actually taking?” “How can I increase financial certainty?”
This motivated me to seek out alternatives. For some time, I have been interested in giving bonds and bond funds a closer look. To this end, I chose Bonds: The Unbeaten Path to Secure Investment Growth by Hildy and Stan Richelson (2007 Bloomberg Press) to help me dive deeper into this area.
Hildy and Stan Richelson readily deliver on their stated “main purpose” of Bonds: “to debunk the many myths surrounding investing in stocks and bonds and to provide new thinking for you to consider when developing and carrying out your financial plan.”
Stock investing provides for an unknown future value. In short, investing in stocks is highly speculative. Investing in bonds is predictable. At a future date one knows the value of his investment and one is certain that the bond will pay a certain rate, although the bond itself may rise or fall in value in its lifetime. This is mostly a concern if one wants to sell the bond early.
The Richelsons, through Bonds, certainly provide contrarian — and quite refreshing — thinking about investing. (I like “contrarian”!) They advocate an all-bond (plain vanilla, high-grade, no junk) portfolio to all classes of investors and provide case studies of how to carry these plans out in concrete terms. I found Bonds extremely helpful in understanding the fundamentals of bonds, the variety of bonds available and concrete ways to invest in bonds.
Except for U.S. Treasuries, individual bonds, like corporate and municipal varieties, must be bought through a broker. They can not (currently) be bought individually on-line through the internet, like stocks. The Richelsons focus on the purchase and investing of individual bonds, not bond funds, although they cover bond funds as well.
Here are the fundamental “myths” that the Richelsons take-on:
1. Old Assumption
The historical annual return of stocks is around 10 percent.
The actual annual historical return on stocks is much less than 10 percent when taxes, transaction costs, and bad timing of the stock market are taken into account.
2. Old Assumption
Stocks will outperform bonds in the future.
It is uncertain that stocks will outperform bonds in the future.
3. Old Assumption
Stocks are not risky if you hold them for ten years.
The risk of a severe stock market decline increases as the investment period increases. Stocks are riskier and less predictable than bonds.
4. Old Assumption
Bonds are for income and stocks are for growth.
Bonds can provide both growth and income.
Bonds confirms that bonds are a nice alternative to bank money markets and CDs because of the comparable or better interest rates and because of their similar liquidity. They are surely more liquid than stocks especially if one has monies tied-up in either an IRA or 401k.
Bonds also has me re-thinking the flat tax. Municipal bonds are attractive to those in higher income tax brackets because these types of bonds are generally free from federal and state taxes. These tax advantages encourage people in these higher income brackets to invest their monies in these municipal bonds even if these bonds pay less than corporate or other type of bonds. Makes sense to me.
However, a flat tax would eliminate these tax advantages. The municipal bond market would certainly suffer greatly if a flat tax were enacted because people would divert their funds to higher-paying corporate bonds and the like. For cities and towns to compete with the corporate they would have to raise taxes. Yet tax rate increases are limited by law in many places. (Massachusetts residents … Prop. 2 1/2 anyone) Cities and towns would be pressed for funding of public works and communities would suffer.
Perhaps I should modify my thinking from a flat tax to a flatter-but-not-exactly-flat so-called flat tax? In any event, Bonds was an enjoyable read. I’ll be returning to it to shore-up my understanding of bonds. In a stock market decline I may just be sitting pretty!
Bonds is extremely well written. (Their text is very precise in wording so careful reading is required.) For a novice with little or no experience in bond investing this book is a great primer. Bonds is well organized that it can readily serve as a reference manual with great ease.
Finally, the internet web-sites that Bonds presents are worth the price of the book itself. The fruit of the 1999 Bond Price Competition Improvement Act (H.R. 1400), investinginbonds.com , is a great place to compare prices of individual bonds. A broker will certainly take his cut for corporate and municipal bonds and the like. However, U.S. Treasuries (I bonds, for example) can be managed through individual accounts for free.