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Investing in Safe Bonds: Invest Like You're Rich and Take Less Risk - YouTube
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what are the best bonds to buy in this
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episode we'll talk about what we look
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for when we're recommending bonds to
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clients and other people we'll talk
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about bonds and bond funds too and at
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the end of this episode we'll talk about
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why you hear so much about investing in
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stocks but are they anything about
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investing in bonds when it's actually
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more important about how you invest in
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your bonds hi i'm bridgette sullivan
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mermail and i own the fee only financial
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planning practice in chicago illinois
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and i'm john shearer i run a fee only
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financial planning practice in middleton
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wisconsin and before we get started on
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this conversation bridget i'm really
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looking forward to it but i want to
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remind our viewers to hit that subscribe
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button uh that helps us uh other people
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find us on youtube and so if you hit
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subscribe let's get on with talking
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about
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uh bonds and how to buy them last
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episode we talked about or recently
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anyway talked about how much we love
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bond funds or bond ladders right setting
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up a bond ladder to produce income for
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retirement or cash flow and retirement
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and then the next question like okay
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like how do you actually do this thing
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like what kind of bonds do you buy and
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i'm really interested to hear how you
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approach us with clients
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well you know it's going to be a
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different approach depending on their
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situation so
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first of all
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you know i love us treasury strips in
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iras
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okay especially if people are retired
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and we care uh create that cash flow we
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did a whole episode on how both of us
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love doing that so that's my number one
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is you is if it's an ira
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then i'm more
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attracted to treasury strips if the
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person's younger
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maybe or maybe not
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but uh
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when definitely when they're retired
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that safety of being backed by the
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government and having that cash flow
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even if it's more than what they need
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then i'll buy a separate individual bond
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i like it um because
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it's safe and also they're marketable so
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a treasury strip you buy them on schwab
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or i'm sure the other custodians have
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them too or you can buy them through
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treasury direct but if you buy them on
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schwab and you need to sell one you can
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sell it it's not and and it's not
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excessively expensive to sell or hard to
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sell you just uh you can either just do
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it on the website or you might have to
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make a phone call maybe but
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uh it's been and i've had both
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situations it seems like they've
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upgraded the website so i didn't have to
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do that the last time i had to sell a
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bond but you
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it's easy and it's not expensive and
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they're marketable and if somebody were
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to inherit them again they can sell them
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it's not hard to sell them some
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uh bond we can talk a little bit about
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corporate bonds or municipal bonds but
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they're not at all as easy to sell
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anything else except for the treasuries
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are not that easy to sell there's just
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not a ready market so that's another
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reason why i like treasuries
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you know i i love the idea i wanted to
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sort of pull out one of the things you
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said in there but and it's the idea and
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i think we both espouse this in our
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practices is that when we're talking
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about bonds
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safety trumps yield right not like we're
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not trying to get good returns like yup
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that's that's nice right but the
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important part is that safety aspect of
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things that at least that's how i look
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at that
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that
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especially when you're buying a us
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treasury bond a treasury strip like we
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do for our our bond ladders
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uh cds that are fcic insured certain
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agencies uh you know agency bonds from
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the government that are backed by the
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printing power of the government that
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you you know what you're going to get
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right you know that you're going to have
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this and that and that money will be
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there at the end of the bond term and
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that i think is a really significant
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difference at least that's how i look at
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it compared to corporate bonds sure
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maybe we can get better yields on
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corporates there's some drawbacks as you
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just mentioned
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but you know i when you go back to
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2007-89
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and suddenly the stock market's going
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like this
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and the dividends get cut and now you
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know hey if i'm wondering if my company
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that i've bought a bond from is going to
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pay me back that is not an awesome place
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to be right and we have the safety
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things we know that the money is going
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to be there because the government can
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you know can literally print money that
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that is such a big part
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of of the bond side of things for me i
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just wanted to make sure to draw that
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out a little bit yeah and when i have
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looked in the past with corporate bonds
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it looked to me like you get you're
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taking the risk like you said you're not
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sure if you're gonna get paid back if
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the company goes under you're not sure
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you're
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not an employee like you know you're
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pretty far down on the list of who we're
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gonna pay back uh you're not all the way
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at the bottom but you're pretty far down
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on the list a corporate bond is
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so you're taking
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more risk it's hard for them to gauge
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the risk they are not able to get this
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financing with a bank or somebody else
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so again it's higher risk
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and you have no upside reward so if the
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company does well you don't get any more
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money so investing in if you like that
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company invest in the stock and then go
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buy a treasury you know because you'd
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have more upside reward if you invest in
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the stock because it can keep going up
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and with a
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if you buy the company bond all you can
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do is get whatever they're paying in
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interest or lose it all
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you know so there's no there's no
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potential to make any more than that and
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yeah so all you can do is get paid back
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or lose it whereas with i
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and
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if there is a recession coming up we'll
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be seeing some people not getting
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payback and that doesn't feel good
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right right you know you know one thing
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is we're having this discussion it's
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super interesting to hear how you think
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about it how where we're similar and
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maybe different in some things and we'll
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talk about bond funds in a little bit
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but one of the things you know most of
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our clients are at or near retirement so
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we're looking at this bond ladder idea
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right now producing cash flow in
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retirement
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and one of the things that we're getting
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some questions about today is you know
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interest rates are rising and so the
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value of bonds is dropping those those
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of us that have bond funds are seeing
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those you know we're having negative
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returns you know this year
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and i think it's really important to
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remember for
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for viewers that when you buy an
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individual bond like we're talking about
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here it's kind of like buying a cd right
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the people are familiar with that list
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and
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in five years the company the government
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in this case will give me my hundred
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thousand dollars back and in the
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meantime i'm gonna have this interest
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return right that sort of concept
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and so even though with rates rising my
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my bond might be worthless when i look
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at my schwab statement it says a lower
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number
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in five years it's worth that number
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just like in five years your cd is worth
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that number it might be worth less now
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we don't even look at the returns on
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that because from that perspective it's
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about the cash flow it's that cash is
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going to show up in three years five
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years seven years right and it's and it
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can be confusing it can be sort of
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disheartening when the stock market is
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dropping i go geez my bonds are worth
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less and it's like yeah if you sell them
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today and like you said they're
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marketable but if you don't sell them
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they're still worth exactly what you
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thought they were going to be worth two
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or three or four or five years ago and
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it's not that easy to think about that
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right it doesn't feel like that when you
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see your statements right exactly so i
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tried to get people to ignore what the
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ups and downs of an individual bond is
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and just say look this is what we're
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looking for we're looking for it's still
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you're going to pay back it's still
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going to pay you whatever how much we
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thought it was going to pay it wasn't
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that great that's what we're going to
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yeah yeah
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so let's um switch topics into
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uh bond funds so i mentioned that i
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really like treasuries in iras but
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there's a lot of other
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uh things out there so let's talk about
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when we use bond funds and what we look
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for in bond funds so
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um yeah so before we start in this brit
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let's just explain just to make sure
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everybody's clear so we don't get the
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jargon police coming in and busting us
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is that there's individual bonds just
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like individual stocks right that's what
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we've been talking about when we talk
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about a fund we're talking about a
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mutual fund or etf where a company buys
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all kinds of funds you know 500 a
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thousand five thousand and we're buying
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that sliver investing in the mutual fund
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right right absolutely
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so
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uh let's talk about what we do with bond
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funds and this is where we might diverge
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a little bit so with bond funds um you
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know i have a couple of favorites and i
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tend to
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like those
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and they might have some corporate
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stocks in them or corporate bonds pardon
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me in them
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uh but i feel like the things that i
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really look for when i'm looking at a
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bond fund to pick
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is
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what's the rate what are the expenses
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just like any other stock fund you know
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what are the expenses is the expense
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rate low
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and what's the average duration okay now
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there we got uh jargon police for sure
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on that so that's another thing i'm
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looking at is the duration on bond funds
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and what duration means is basically how
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long of bonds right think of it in cd
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terms right a one year cd versus five
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year the duration of the five years
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longer so it's just how long are the
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bonds that's that fancy pants were but
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it means how long are the bonds in the
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fund right it's like the yeah and i mean
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i think that the brand people it's like
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how long does what is
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like duration yeah how long does it go
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right right great exactly
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um uh so
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i like bond funds that have
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uh
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expense ratios less than say 0.5 for
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sure
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so half a percentage point and i like
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uh bond funds that have a duration of
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around
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um five years or less
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yeah that's that's and you know it's
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very similar we've been seeing even bond
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funds especially we do a lot of index
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funds right and so the expenses can be
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even a lot lower than that right but
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we're exactly the same on that duration
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the length of average length of bond
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that we want to see in the fund is five
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years unless you get above that and
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there's a lot more volatility meaning
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more ups and downs
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and remember we're talking about this
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being our pantry right being the safe
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place in the portfolio so having the
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shorter duration
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uh on bond funds means lower returns
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over time but also when you have times
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like these less downside i think the
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other only other thing that i'd throw in
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their bridget as i look at bond funds
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for people
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is um
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the quality of the bonds inside there
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right you know and people are maybe
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familiar with treasuries or triple a
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right you know backed by the government
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and then you've got junk bonds on the
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other end of the spectrum here
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and uh the farther down the spectrum you
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go the more returns you get but there's
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a reason for that that's you know the
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lower the grade of the company or the
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bond that means that maybe they're not
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going to pay you back or it's not as as
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reliable right so we'd like high grade
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again return of principle not
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necessarily return on principle so high
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grade you know
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aaa double a those sorts of things and
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low duration and you can find that
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information out there and if you do
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those two things and have a low expense
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ratio i think you're setting yourself up
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for success in bonds yeah and i think
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people might recall back uh in the 80s
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probably there was a lot of junk bonds
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and that's what you're talking about
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with
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low
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uh
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the low ratings okay yeah and so loaning
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a company
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you know somebody wanting a junk bond or
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a low it's just like
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loaning a friend who is unreliable money
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you know and well you got a friend like
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that too
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i don't know all my friends are very
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reliable actually but uh you know that
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that that comes up a lot you know so
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anyway uh you you don't expect to get
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paid back and what we really want with
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our bond investments is to get paid back
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that's what we're really looking for we
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want to get paid back
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uh another type of bond that we've
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talked about a lot a lot are i bonds and
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we just don't want to
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talk about bonds without talking about
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how great eye bonds are right now and so
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we'll mention them although we've got
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several of the videos on the topic and
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again
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uh so do you want to give a little quick
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pitch for ibonds
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i you know it's one of those things
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exactly what you said look at some of
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the previous episodes right now they're
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paying an annualized rate of over nine
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percent
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backed by the government tax deferred if
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you're not at least thinking about those
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there's some drawbacks but if you're not
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thinking about those you're missing the
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boat so that's a really great place to
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look uh and again check out our previous
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episodes on ibonds yeah okay so but this
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brings up a great question because you
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said you just went to some continuing
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education it was talking to a lot of
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advisors that were not an acp or the
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alliance of comprehensive planners and
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uh were talking about like how you're
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investing what's hot for you guys and
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that
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only one person mentioned either one
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one out of you know a few dozen that i
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you know personally spoke to and
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yeah go yeah go ahead talk about that
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that's great the rest of bonds like
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actually it why are bonds not talked
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about first of all the expense ratios
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are low and like you can go buy
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treasuries for free or
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unless
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the custodian might charge you a little
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bit but
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it's very inexpensive so
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advisors don't make money as much money
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on bonds although uh last time i checked
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there was a lot more money in the total
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stock market for funds than there was in
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stocks and so we are talking about it
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and when i talk to people about bonds i
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tell them this is what rich people do
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they buy bonds they don't need to take
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this risk of the stock market they don't
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want to take the risk of the stock
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market but they want to keep up with
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inflation
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you know make a little bit
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you know so
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anyway so that's what they're
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we we hope for with bonds right just
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get it back and we want it to be safe
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it's like our safe space
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that's right i i was going to say i love
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that idea you know there's there's more
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money or at least as much in the bond
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market as the stock market right but
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somebody will say boy the market's
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really down and i say oh yeah the bond
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market well no no not that not that
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market right and we forget this thing
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that's that's a great point
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yeah well and
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it's
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not sexy i mean you gotta admit like
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treasury strips i mean i guess the words
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the word strip is the biggest thing
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that's going for it yeah i should have
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thought about that now i'll never look
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at those the same again thank you but it
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doesn't compare with the text acts and
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you know how much fun that is you know
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like so
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uh i think that
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those two reasons it's doesn't engage
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people's imaginations and the people in
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the industry don't make much out of make
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much money off of them are the two
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reasons why advisors don't talk about
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them too much
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and when we do that's like something
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that in acp we like talking about like
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okay how are we doing this
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and that's that's maybe a great place to
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circle back and let remind everybody
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that both bridget and i are members of
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the alliance of comprehensive planners
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or acp
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and uh there's a nationwide group of
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fee-only tax-focused holistic planners
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uh that think similar the way we do and
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if you like what you hear on our show
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check out
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acplanters.org to find an advisor in
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your area and before we go don't forget
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to subscribe see you next time that's
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right all right bye
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