Why Invest in Bonds? - S2 | E23

Summary

Joe 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

00:00

💼 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.

05:02

📉 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.

10:03

📈 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.

15:03

💸 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.

20:04

🌐 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.

25:04

📚 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.

Keywords

💡Diversification

Diversification is a risk management strategy that mixes a variety of investments within a portfolio to reduce risk and increase the potential for returns. In the context of the video, diversification is crucial as it involves not only having investments in stocks but also in bonds. The video emphasizes that while stocks can be volatile, bonds can also lose value, hence the need for a balanced portfolio that includes both to mitigate risks effectively.

💡Bonds

Bonds are debt securities in which the issuer owes the bondholder a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and to repay the principal at maturity. The video script explains that bonds act as a form of loan where investors lend money to corporations or governments in exchange for fixed interest payments. They are considered a safer investment compared to stocks but come with their own set of risks, particularly related to interest rate fluctuations.

💡Stocks

Stocks, also known as shares or equities, represent ownership interests in corporations and entail the right to a share in the company's profits. The video script mentions that while stocks have the potential for higher returns, they also carry the risk of significant losses, which is why they should be balanced with bond investments to create a diversified portfolio.

💡Risk

Risk in the financial context refers to the possibility of losing some or all of the original investment. The video script discusses the risks associated with both stocks and bonds, highlighting that while stocks are known for their volatility, bonds also pose risks, especially from interest rate changes and defaults, which can lead to capital losses if bonds are sold before maturity.

💡Interest Rates

Interest rates are the cost of borrowing money and the return on investment for lenders. In the script, interest rates are discussed in relation to bonds, where changes in interest rates inversely affect bond prices. When interest rates rise, the value of existing bonds falls, as new bonds offer higher returns, which is a key risk factor that investors need to consider.

💡Portfolio

A portfolio refers to a collection of financial investments held by an investor. The video emphasizes the importance of a well-balanced portfolio that includes both stocks and bonds to manage risk and maximize returns. The composition of one's portfolio should align with their financial goals, risk tolerance, and investment horizon.

💡Certified Financial Planner

A Certified Financial Planner (CFP) is a professional who has met high educational, examination, experience, and ethical requirements in personal financial planning. Joe Anderson, one of the hosts in the video script, is a CFP, indicating his expertise in financial planning and investment advice, which lends credibility to the discussion on managing investments like bonds and stocks.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video script touches on the fact that most bonds are not inflation-protected, meaning their fixed interest payments do not increase with inflation, which can erode the real value of the returns over time.

💡Coupon Payment

A coupon payment is the periodic interest payment made by a bond issuer to the bondholder. The video script explains that bonds provide a contractual agreement for regular interest payments, often quarterly, which provides a stable income stream for investors, unlike stocks whose dividend payments can vary and may even be non-existent.

💡Maturity

Maturity in the context of bonds refers to the date when the bond's term ends and the bond issuer repays the principal to the bondholder. The video script discusses how the maturity of a bond affects its sensitivity to interest rate changes, with shorter-term bonds being less sensitive and thus less risky compared to longer-term bonds.

💡Yield

Yield refers to the return on an investment, often expressed as a percentage. The video script mentions yield in relation to bonds, where a higher yield indicates a higher return but also a higher risk. It contrasts the yields on bonds with those on stocks, suggesting that for higher returns, investors should consider taking on more risk with stocks rather than bonds.

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