Why Invest in Bonds? - S2 | E23
Summary
TLDRJoe Anderson and Alan Klopine from Pure Financial Advisors discuss the importance of diversification in retirement planning, emphasizing the risks associated with bonds. They explain that while bonds are often considered safer than stocks, they can still lead to significant losses. The conversation covers bond basics, the potential for a bond bubble, and strategies for managing risk in your portfolio, including the recommendation to consider short-term, high-quality bonds in the current economic climate.
Takeaways
- 📈 Diversification is crucial in investing, and it's not just about having stocks; including bonds can balance your portfolio against stock market volatility.
- 🔍 Be aware that bonds are not risk-free; they can lose value if interest rates rise, which affects their price in the secondary market.
- 🏦 Bonds function as loans to corporations or governments; you lend money and receive interest payments, but be prepared for volatility in interest rates and defaults.
- 📉 The longer the bond's term and the lower its credit quality, the higher the risk and potential loss, especially when interest rates are variable.
- 💡 Consider the role of bonds for controlling risk in your portfolio; they can provide stability and predictable income streams.
- 💼 Stability and income are key advantages of bonds; they are less likely to lose money compared to stocks and provide regular interest payments.
- 💵 Bonds can offer tax advantages and safety, especially with government-issued bonds like Treasury bonds or T-bills.
- 📊 Historically, stocks have higher returns than bonds, but bonds play a vital role in portfolio diversification and risk management.
- ⏳ The disadvantages of bonds include lower returns compared to stocks and lack of inflation protection, which can erode purchasing power over time.
- 🌐 International diversification is also important; it can reduce portfolio risk and potentially offer better returns than focusing solely on the U.S. market.
Q & A
What is the main theme of the discussion in the 'Your Money, Your Wealth' program?
-The main theme of the discussion is the risks associated with bonds in an investment portfolio, emphasizing that while stocks can lose value, bonds also carry risks that investors should be aware of.
What does the term 'Your Money, Your Wealth' suggest about the content of the program?
-The term suggests that the program is focused on financial advice and wealth management, aiming to educate viewers on how to manage and grow their investments.
What is the 'free lunch' in investing mentioned by Joe Anderson?
-The 'free lunch' in investing mentioned by Joe Anderson refers to diversification, which is a strategy that spreads investments across various assets to reduce risk without necessitating higher returns.
Why might someone lose money in bonds according to Alan Kropine?
-Someone might lose money in bonds due to volatility in interest rates or defaults, which can decrease the value of the bond if sold before maturity.
What is a bond as explained by Joe Anderson?
-A bond is like an IOU where the investor acts as a lender, providing capital to a corporation or government in exchange for an interest rate. It's essentially a loan with a contractual agreement for repayment and interest payments.
What are the potential risks of bonds that the hosts want to discuss?
-The potential risks of bonds include losses due to interest rate fluctuations, defaults by the bond issuer, and the fact that bond values can decrease if the investor needs to sell before the bond matures.
What is the significance of the bond bubble mentioned in the script?
-The bond bubble refers to the potential overvaluation in the bond market, which could lead to a significant drop in bond prices if interest rates rise, causing investors to lose money.
Why do Joe and Alan suggest that bonds are still a good investment despite the risks?
-Bonds are suggested as a good investment because they provide stability and income through regular interest payments, which can help balance the risk of a portfolio, especially in retirement.
What advice do the hosts give regarding the types of bonds to invest in?
-The hosts advise investing in short-term, high-quality bonds because they are less sensitive to interest rate changes and carry less risk compared to long-term or lower quality bonds.
How do Joe and Alan define the role of bonds in a total return portfolio?
-Bonds in a total return portfolio are defined as a way to control risk and provide a relatively predictable income stream, which can help stabilize the portfolio and protect against market volatility.
What is the 'pro rata' rule mentioned in the email segment of the show?
-The 'pro rata' rule refers to the IRS regulation that when converting traditional IRA funds to a Roth IRA, the tax liability is calculated based on the ratio of non-deductible contributions to the total IRA value across all accounts.
Outlines
💼 Introduction to Bond Investing
Joe Anderson and Alan Klopine from Pure Financial Advisors discuss the importance of diversification in investment, particularly the role of bonds in a retirement plan. They emphasize that while stocks are known for their risk, bonds also carry risks that are often overlooked. The conversation aims to educate viewers on the nature of bonds, the potential for loss similar to stocks, and the impact of interest rate volatility and defaults on bond investments. Joe, a certified financial planner, and Alan delve into the basics of bonds, comparing them to IOUs where investors lend money to corporations or governments in exchange for interest. They highlight the need to understand bond risks, especially in a market with potential bond bubbles, and the importance of a balanced portfolio that includes bonds for stability.
📉 Risks and Considerations in Bond Investing
The discussion continues with a focus on the advantages and disadvantages of bond investing. Stability and regular income are highlighted as benefits, with bonds generally considered less risky than stocks. However, the speakers warn of the potential for loss of purchasing power due to inflation, especially with fixed-interest bonds. They also touch on the historical performance of bonds versus stocks, emphasizing that while bonds offer less return, they are not inflation-protected. The conversation points out the importance of aligning bond investment strategies with overall financial goals and portfolio diversification. The segment also addresses the risks associated with bond alternatives that promise higher yields, cautioning that these can come with significant risks, especially for retirees seeking income.
📈 Navigating the Bond Market with Market Conditions
In this segment, the focus is on how to navigate the bond market, especially with current low-interest rates and the potential for a bond bubble. Mike Fenison, CEO of Pure Financial Advisors, joins the conversation to discuss the role of bonds in a total return portfolio. He explains that bonds provide a predictable way to control risk and protect against market volatility. The discussion covers the importance of liquidity, especially for retirees who may need to access funds during market downturns. Mike suggests that in the current economic climate, investors should consider short-term, high-quality bonds to minimize credit risk and interest rate sensitivity. The conversation also addresses the relationship between bond prices and interest rate changes, advising investors to match bond maturity dates with their cash flow requirements.
💸 Understanding Bond Pricing and Interest Rates
This part of the script simplifies the concept of bond pricing and the effect of interest rates on bonds. It uses an example to illustrate how bond prices decrease when interest rates rise, and vice versa. The discussion clarifies that if an investor needs to sell a bond before its maturity date and interest rates have increased, they may have to sell at a discount to attract buyers. Conversely, if interest rates fall, bond prices go up, and investors can sell at a premium. The segment emphasizes the importance of understanding the type of bonds one owns and being aware of the risks associated with long-term bonds. It advises consulting with financial and tax professionals to determine the right bond strategy for one's portfolio.
🌐 Diversification and International Markets
The script concludes with a discussion on the benefits of international diversification in investment portfolios. It counters the common bias towards U.S. stocks by arguing that international markets can offer similar or better returns and can help reduce portfolio risk. The conversation points out that country returns can behave differently at different times, which can reduce overall portfolio volatility. The segment also addresses the question of whether individual bonds or bond funds are better, suggesting that it depends on the investor's financial situation and goals. For those with limited funds, bond funds may offer better diversification at a lower cost, while individual bonds might be more suitable for larger investors who understand the specific risks and maturities involved.
📚 Summary and Q&A on Bond Investing
The final segment summarizes key points from the discussion on bonds, emphasizing that bonds are loans to governments or companies, and that stocks do not always outperform bonds. It reiterates the importance of diversification, especially including bonds in a portfolio for protection during market downturns. The conversation also touches on the inverse relationship between bond prices and interest rates, advising investors to consider short-term, high-quality bonds in the current market environment. The segment ends with a Q&A, addressing specific questions about IRA conversions and pension options, highlighting the importance of planning and understanding the tax implications and long-term financial goals before making investment decisions.
Mindmap
Keywords
💡Diversification
💡Bonds
💡Stocks
💡Risk
💡Interest Rates
💡Portfolio
💡Certified Financial Planner
💡Inflation
💡Coupon Payment
💡Maturity
💡Yield
Highlights
Diversification is the only free lunch in investing.
You can lose as much in bonds as in stocks.
Bonds are like IOUs; you're acting as a lender.
Volatility in interest rates or defaults can hurt your investment strategy.
Bonds provide stability and regular income.
There's a potential bond bubble in the market.
Bonds should be in your portfolio for diversification.
Bonds are not inflation protected.
Stocks historically have higher returns than bonds.
Bonds are a safe investment but offer lower returns.
Tax advantages can come with certain types of bonds.
Bonds play a key role in building a strong portfolio foundation.
Different bonds have different risk levels.
High yield bonds come with higher risk.
Bonds can be a safer alternative to stocks for risk-averse investors.
Investors should consider the role of bonds in a total return portfolio.
Bonds help control risk in a portfolio.
Short-term, high-quality bonds are recommended in the current economic climate.
Bonds and stocks can have different reactions to economic changes.
Risk and return are directly correlated in bond investments.
Bonds are a complex topic requiring professional advice.
Transcripts
joe anderson and al quote
of pure financial advisors have the
answers to your retirement plan
this is your money your wealth the only
free lunch
in investing is diversification and
you've heard this before you want to
have some money in stocks
and some money in bonds most of you are
aware that you can lose money
a lot of money in stocks but are you
aware that you can lose just as much
in bonds that's what we're going to get
into today welcome to the program
everyone joe anderson here i'm a
certified financial planner i'm with mr
alan klopine
from peer financial advisors what we
want to dive into today
is talking about the risks a lot of risk
that you're taking in your overall
portfolio because here's what
potentially could happen to you
you're taking on risk in stocks right we
all know stocks can go down
but you also money in bonds but if bonds
go downs and stocks go down your whole
portfolio is going to potentially
blow up that's what's on my mind today
so let's get into it let's get into the
basics first of all
what is a bond in
no not this bond let's talk a little bit
more about
investing in bonds right when you look
at investing in bonds
it's like all right well it's just an
iou you're acting as the lender you're
giving
a corporation the government a piece of
your capital
they're utilizing that capital and
they're giving you an interest rate in
return it's just an iou it's a loan
however if you're not prepared for the
volatility in interest rates
or defaults that's where you can get
hurt in your overall investment strategy
when it comes to bonds
let's break it down a little bit more
let's bring on the big man big al
clopine
alan we're talking all about bonds today
and trying to get our viewers a little
bit more perspective that hey
you should own bonds in your portfolio
there's a lot of talk in the overall
media that hey there could be a bond
bubble
let's kind of break it down to figure
out exactly what a bond is how it works
and what risks are associated with bonds
well joe i think it's important
especially in this market where we've
had stock market at all-time highs
and bonds a lot of people are saying
there's a bond bubble so now what now
what do you do
and so we want to spend some time today
going over bonds
how they work and most importantly
should you have bonds in your portfolio
so for today we'll talk about advantages
and disadvantages
of holding bonds we'll get into some of
the risk factors and a lot of you don't
realize that you actually can lose money
in bonds so we'll discuss that
and we'll discuss more importantly ways
to protect yourself
and then finally the key question is
should you be holding bonds in your
portfolio
i'll give you a quick snapshot the
answer is yes
but you want to be careful as to what
type of bonds that you buy
and joe this is one of those things it's
like what do you do right now markets
are at
highs bonds seem to be at highs where do
you put your money
it's confusing yeah and most def if you
look at your investment strategy as
building a home
right you want a strong foundation if
you're building a house well that's just
like your portfolio you want a strong
foundation in the overall portfolio
and bonds will play a key component with
that but you want to be aware of
different types of bonds because
different bonds have different
variations of risk
and so you want to be prepared to say
all right well if i want to get a high
coupon or a high interest or high yield
just know that you're taking on a little
bit more risk than if you would if
you're not getting a lot of interest on
a shorter term bond so we'll break it
all down for you
because most people just search for
returns out if you look at
what's more important in an investment
is it return or is it risk a lot of
times people say well show me the return
they don't understand the risks that
they're taking in the overall investment
well that's right joe so why don't we
start with advantages of the bonds and
so right off the bat
i would say stability so you're less
likely to lose money in bonds than
stocks you still can lose money
you're just less likely to and number
two is the income
interest is paid regularly and it's
often paid quarterly sometimes twice a
year
in some cases even once a year but you
know when it's coming
when you own a stock it may pay a
dividend and it
often times pays quarterly but you never
know the amount
some many stocks don't pay any dividends
at all so at least with bonds you know
you have a certain amount of income yeah
it's a contractual agreement with the
overall company you're loaning your
money out to that organization or the
government for a certain period of time
here's my capital for 20 30 years i'm
going to receive five percent interest
rate two percent three percent whatever
the interest rates are
you receive that coupon payment or that
income payment at the end of the term of
the loan
or the bond you get all of your money
back so there's some
stability there but then you have to
take a look at all right well there's
other advantages too you might have some
tax advantages in certain types of bonds
or if you want to stay very very safe
you might want to go with the treasury
bond or a t-bill because that's the
safest investment on the planet
but if you look at the the 10-year
treasury it's what two percent
so you're giving your money to the
federal government for ten years for two
percent you're not a piece of inflation
so you're basically losing money on that
transaction
so you have to compare all of your
options to make sure how does this all
fit in your overall portfolio it
basically starts with your goals dreams
aspirations and so on
right absolutely now there are
disadvantages to bonds and
and right off the bat i would say that
there's there's lower returns compared
to stocks
i mean bonds historically over the last
80 90 years have returned about five
percent
stocks closer to 10 percent and the
another problem with bonds is they're
not inflation protected at least most of
them there's one type that is that we'll
get into but most bonds are not
inflation protected
meaning that during periods of high
inflation you're really losing
purchasing power in other words a bond
is just a loan it's an iou
and with interest rates they stay
generally fixed and when they're fixed
then you get that interest payment
regardless to what inflation is so
maybe you're getting a five percent
interest rate and now interest rates ten
percent maybe inflation goes way up
that payment that you're receiving will
feel like a lot less
yeah i mean then you can get into all
right well looking at the long-term
averages um everyone stocks will pay you
more than bonds because you're
are receiving right more compensation
for taking on that type of risk
if you hold that stock for the long term
if i buy a bond well then i have some
stability here i have a little
uh some some safety so if you look at
the compound returns just as l
said stocks over the last what from 1926
to 2012
have averaged close to ten percent while
bonds are around five percent
but then if you take a look at inflation
and taxes well your stock returns are
now down to four and a half percent and
your bonds are almost
negative so then it's the mix it's like
all right well what do you do
how much money should you have in stocks
versus bonds and that's what we're going
to get into it a little bit later
when we get back from the break we have
our good friend the ceo
of pure financial advisor is going to be
joining us and
al is going to talk to mr mike fenison
and we're going to ask him some
questions all right first of all should
you own bonds what type of bond should
you own
what are some risks associated with that
so you do not want to miss
this next segment yeah handsome devil
isn't he
look it up all right don't go anywhere
we got a lot more to discuss show's
called your money or wealth we'll be
back in just a second
hey welcome back to the show joe
anderson alan klopline hanging out today
show us called your money and wealth and
speaking of wealth we're talking about
bonds in your portfolio stick around
this segment we got mike venison ceo
and founder of pure financial head of
the investment committee
the firm manages over a billion dollars
so we're going to dig in and figure out
exactly what you should do with your
bonds but before we do that let's go to
the true false
question investors who need income
must own bond alternatives so bond
alternatives here's the thing now right
now because
interest rates are very very low people
are looking for alternatives to find
that income
so maybe it could be a master limited
partnership maybe it's a dividend paying
stock
maybe it's a high dividend yielding
mutual fund or exchange traded fund
multiple different strategies that are
very very popular because a lot of
individuals are retiring and looking for
those high yields
be careful we don't agree with that
strategy at all because there's a lot of
risk
with those investments we look at a
total return
approach when it comes to creating the
income that you need that's a totally
different topic and a totally different
show
al what's your comments yeah i agree
with you joe i mean so that's what
people want to do right now is
is there are such low yields in bonds
and the stock market seems to be at
all-time highs and it's so
so you want to look to other things but
people don't realize that some of these
other things
master limited partnerships and some of
these other investments
come with a lot of risk and in some
cases you can lose all your principle if
the investment goes bad
so watch out for these kind of
strategies but with that in mind i want
to introduce our special guest for today
and that's mike fenison he's a certified
financial planner
ceo and founder of pure financial
advisors mike welcome aboard today
glad to be here al so i want to ask you
the key question
on everybody's mind right now given the
market conditions given the stock market
is
at or near all-time highs everyone's
saying there's a bond bubble
so should people still invest in bonds
well for most people the answer is yes
it's understanding what the role of
bonds is in a total return portfolio
and the main advantage of bonds is that
it gives you a a relatively predictable
way of controlling the risk in the
portfolio
okay so so we we need because if we
don't have any bonds
like let's say we go 100 stocks for
example then we're at the mercy of the
market market goes up 20
that's great but market could go down 50
as it did say in 2008
right and we can't really predict the
the direction or
magnitude of stock market changes but if
you add a
bond component to that you can mitigate
that volatility
and you can control it so that it
matches with the cash flow requirements
of a client or
matches up with their financial planning
so that they know that they can weather
a storm either in interest rates
or in stock market movement well that's
a good point because
liquidity i mean that's when you're in
retirement for example and you need
assets to live off of if you have all
your assets in the stock market and the
stock market has taken a dive
it's and and you're pulling money from
the accounts at the same time
it's hard to recover if you've got some
bonds that are more stable you can pull
assets out of your bonds at those times
right and you have to look at the
overall portfolio so for example if you
needed cash in 10 years
and you had a 10-year bond even if
interest rates were to spike
and the current value of that bond were
to drop
that value would be restored by the
maturity date of the bond so you really
wouldn't
get any less of an expected return than
when you originally purchased the bond
all right so given this economic climate
with interest rates pretty low and at
some point we don't know when but at
some point they'll likely go
up what kind of bonds should people be
looking at well it depends on their tax
bracket
so if they're in a very high income tax
bracket they might be looking at
municipal bonds
but in general you want to be looking at
shorter term higher quality bonds
you you'll avoid some of the credit risk
with high quality bonds
and the shorter the duration or maturity
of the bond the less interest rate
sensitive it's going to be
yeah because bond prices actually go up
and go down based upon
interest rate changes and there's an
inverse relationship right as interest
rates go up bond prices actually go down
and there's there will be a sea change
for the last 30 years interest rates
have been
in a relative downtrend which means when
you look at the total return of a bond
that's mature that's liquidated before
maturity
you're not only getting the coupon rate
but you're also getting a capital gain
because
you may be selling it at a premium when
interest rates start going back up
then if you sell a bond midstream you're
going to get the coupon rate
probably taking a discount if you want
to liquidate it so it's really important
to tie those maturity dates
and duration of the bond to what your
cash flow requirements are so that
you're not forced to
liquidate those bonds before you need
the money now
and i agree with you short-term bonds
high quality are probably the way to go
but there's not much
yield in them so should that concern us
well certainly everybody wants higher
yield
everybody wants more and they don't want
to take any risk but risk and return
are related and it doesn't matter what
type of an investment that you're
looking at
there's a direct correlation between
risk and return so if the bond rates are
not high enough
for the appropriate bonds to your
portfolio and you start searching for
high
higher yield somewhere else there's
going to be a corresponding risk
associated with that investment
that may not show up you may not be
aware of it until it's too late
yeah i would say what's interesting
about bonds is when you take more risk
when you go longer term
or when you have lesser credit quality
yeah you get a little bit higher yield
but that yield is not that great not
that much greater compared to much safer
bonds
and it's you do get compensated more in
the stock market so if you're going to
take risk you might as well take it in
the stock market
if you want more risk you take it in
stocks not in bonds
and when you're looking at how long you
want to go out on the bond
you're looking at the at what rate of
return you're going to get and is it
tied to your financial planning but the
yield curve is what you're looking at
and the yield curve doesn't necessarily
change
the same for all bonds when there's
interest rate spikes so there might be
something to happen
in the interest rates and short-term
bonds may be affected longer-term bonds
may not or the opposite may happen
so not all bonds are going to react the
same
to the same stimulus in the economy so
now we're getting complicated yield
curve and so forth but the key is
yes most investors probably still want
bonds
probably you want to stay short term and
high quality in this bonds in this
environment
so where can people go for more
information mike well for more
information i mean bonds are a complex
topic
and if somebody's concerned that
interest rates may adversely affect
their portfolio
we offer a free portfolio review and
assessment
at pure and we'll take a look at their
entire portfolio and the
the role that bonds are playing within
that portfolio so that they can
understand the risks and the potential
right well thanks mike for joining us
let me do this let me try to break it
down
maybe a little bit more simple right i'm
a simple guy
so if you look at all right companies
issue
bonds and a bond is just a loan right so
you go to a company you give them a
hundred thousand dollars they pay an
interest rate let's say it's five
percent
five thousand dollars that's your income
let's say you have that bond for 30
years they're taking your capital
utilizing your money
for 30 years in exchange for 5 coupon or
interest or
income payment the end of the 30 years
you get your money back
but where people fall into problems is
if they try to sell that bond prior to
the maturity date
and if interest rates go up this is the
problem is that the company's not going
to take that money back because they
don't have it anymore they hired a new
ceo or infrastructure
or they had new inventory they needed
that capital to grow the bottom line
you need your money so what do you need
to do you go to the secondary market and
try
to find someone else to purchase the
bond real simple example
let's say bond prices go to seven
percent okay
you have a hundred thousand dollar bond
paying you five percent
someone else says all right well i can
buy your bond and get five thousand
dollars of income or i could go
somewhere else and get seven thousand
dollars of income
no one is going to buy that bond why you
have to entice them
i would rather have seven thousand
dollars of income versus five it makes
sense
correct so here's what they have to do
they have to entice you instead of
saying
all right well maybe not a hundred
thousand but maybe eighty thousand
does that pencil out so here you get
your liquidity but at a deep discount
because interest rates go up that
individual then gives you eighty
thousand dollars
okay you have your liquidity they have
your bond now
they get the 5 000 of income for the
rest of the term and at the end of the
term of the loan or the bond
they get the full 100 grand back
so the company issues it at par
now if interest rates go up so from 6.25
to 7 and a half well the value of that
bond is going to decrease
they have to entice you right you have
to entice that individual to purchase it
now if interest rates go down bond
prices go up
think about this i think most of you
could remember
you could go to a cd and get five
percent money markets were paying five
percent
right so bonds were paying a lot higher
10 15 20 years ago interest rates have
gone down
bond prices have gone up extremely high
so we're in a bull
market if you will in bonds just be
careful
identify what type of bonds that you own
knowing that if interest rates go up
that bond price will fall the longer the
term
the more risk that you're taking the
shorter the term the less risk
but less risk means lower returns so
there's a
yin yang here if you will that's why
planning is so important
talk to your financial advisor talk to
your tax professional to figure out
exactly
what is the right bond for your overall
portfolio
and build that to make sure you don't
lose your money
all right we got to take another break
when we get back we're going to dive
into
your email questions and break down the
show real quickly
don't go anywhere got a lot more to go
show us how your money or wealth
this week's question is why invest in
international markets
we often see investors with a
significant bias towards u.s stock
the thinking being the u.s is either the
safest or best returning market
and investors should just buy what they
know on the contrary here are a few
reasons to consider why international
diversification makes sense
number one diversification is an
investor's best friend
one of the most effective ways to reduce
overall portfolio risk is by being
broadly diversified across sectors asset
classes and global markets
number two there can be correlation
benefits from international
diversification
country returns can behave differently
at different times
this correlation benefit works to reduce
overall portfolio volatility which can
increase compound returns
the final reason being international
markets often have similar and sometimes
better returns than the us
by excluding international markets
investors can leave returns on the table
hey welcome back to the program show's
called your money or wealth my name is
joe anderson certified financial planner
talking bonds today fixed income making
sure that you are aware of all the risks
with your bonds we're going to switch
the show over to you and get your email
questions here in just a second
uh but before we do that let's go to the
true false
question individual individual bonds
are better than bond funds and joe this
is one of those questions that could be
true or false
it depends it depends upon you so i
think if you have a lot of money to
invest
individual bonds are probably a little
bit better way to go because you know
what the maturity is you know what the
interest rate is you have control over
it
right but for a lot of people they don't
have enough money to
diversify maybe they got 10 000 bucks
and you don't necessarily want to just
buy one
bond if something happens with that bond
uh you could lose a bunch of money so
for that kind of person a bond fund
might be better yeah i would say in most
cases al bond fund might be better
suited if they understand the mechanics
or or the makeup of that bond fund
because you can get hundreds or
thousands of different bonds inside a
portfolio
at a very low cost with the transparency
on
wall street if you try to buy individual
bonds at even levels of a hundred
thousand dollars the pricing on that is
pretty high
so if you want a little bit more
diversification we would suggest you
know hey have a hundred pounds maybe
versus
one um so yeah there's pros and cons to
each but if you understand the makeup of
the bond fund and saying all right well
here i have a long-term bond fund or a
short-term bond fund you understand or
identify the risks associated with that
so yeah that's a toss-up pal it really
depends on the individual investor
there's pros and cons to each
well it is and joe so let's summarize
our show on bonds so we want to go over
some of the key points
and i would say number one is that bonds
are ious
from governments and companies so it's
just a loan you're loaning the
government
or a company some money you're getting a
payment back
stocks do not always outperform bonds
there's some years where stocks go down
bonds don't go down as much or bonds
maybe even go up right i mean i think
that's what
the key component here is right it's
diversification you want to have
negatively correlated asset classes and
so if you look at 2008 of course the top
performing asset class wasn't stocks
there were bonds so they're there to
protect your overall portfolio so
yeah that's why you want a little bit of
each you know in your overall portfolio
yeah joe and and of course um as we
mentioned you can lose money in bonds
and interest rates and bonds have an
inverse relationship
so bond prices move in the opposite
direction of interest rates
and so we'll tell you don't invest all
your money in bonds
and right now and probably actually
generally this is best
consider short-term high-quality bonds
because they're not as impacted from
interest rate changes
inflation because they turn over quickly
yes you give up a little bit of return
but you make a lot higher return if you
take a little bit more risk in the stock
market
such as small companies and value
companies do better than larger
companies and growth companies
you just take a little bit more risk in
that stock market don't take so much
risk in the bond market
because you're not really compensated
that much more for that risk yeah
but i mean if people invested in
long-term bonds over the last couple of
years you know they've
enjoyed that nice high return because
for years and years right how many times
have we heard this how that interest
rates are going to go up they're going
to go up they have to go up
they haven't gone up they could stay low
for quite some time
so understanding your overall goals and
objectives in your portfolio to
determine what rate of return is
probably the best solution there
for the best portfolio for you uh let's
go to the email questions what do we got
today
all right we've got mike from san marcos
and he says can i avoid the pro rata
rule with my ira conversion by opening
separate accounts well that's that's a
loaded question first let's talk about
what the pro rata rule is which is when
you do a roth conversion when you take
money out of your ira
and convert it to a roth you pay taxes
on the conversion once it's in the roth
ira all future income growth in
principle is tax free
what you're what you're talking about is
if you have tax basis
inside your ira let's say you did a
non-deductible
ira for 5 500 this year and in a new
account and you want to convert it you
pay no tax because you didn't get a tax
deduction
well no the irs says that you have to
aggregate all accounts together
and you take that six thousand dollar
basis you divide it into all of your
accounts
let's say you got two hundred thousand
bucks of iras
six thousand to two hundred thousand is
only three percent so only three percent
of your roth conversion
is is tax free so when you have separate
accounts it doesn't matter you have to
aggregate them all together
yeah that's a big mistake because
there's something that's called the
backdoor roth ira contribution
so i can put basis in because i'm
already taxed on that and then if i
convert it i don't pay tax but it's the
pro
pro rata and aggregation rules uh yeah
we're getting a little complex here on
these emails let's go to the next one
see what yeah that was kind of
sophisticated here's bill
kearney mesa i plan to delay my
retirement until i'm
age 70 which will put me at the highest
tax bracket until i stop working i think
he
means to delay his pension payments
until he stops working
should i um take my pension as a lump
sum
when i retire or should i take it over
time wow that's a loaded question joe
i'm going to turn that one over to you
well i mean it depends i mean so there's
pros and cons to each of them right so
if i take the pension or the annuity
then i'm going to receive that income
for the rest of my life
if i take the lump sum well then i have
a little bit more control over the
assets i can invest them the way i
choose i can take the distributions what
i'd like
i have a 70 and a half though rule still
in those pensions where i have to take
the money out
regardless if it came from a pension or
if it came from a 401k
plan um in most cases the pension
probably makes the most sense because
that's going to be a guaranteed income
for the rest of your life
and so if you take a look at longevity
risk is one of the biggest risks that a
lot of retirees are facing right now
so you want to make sure that you have
that paycheck but you also take a look
at what is your social security benefits
how much money do you have in iras and
401ks what is your longevity
what is your social security benefit the
list goes on and on and on that's why
doing a little bit of planning before
you make that decision is so important
because it's irrevocable
and everything is taxed at 100 ordinary
income what we're going to get into next
week is talking about tax-free income
most people want a tax-free income but
you have a strategy to get you the
income that you need tax-free that's
what we're going to get into next week
that's it for us want to thank michael
fenison ceo founder of pure financial
advisors big al clopin i'm joe anderson
you just saw another episode of your
money
your wealth have a great weekend
everyone
you
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