Bonds E-Book

Hildy Richelson

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg
• Sprache: Englisch
• Veröffentlichungsjahr: 2010

Seitenzahl: 617

Beschreibung

In Bonds: The Unbeaten Path to Secure Investment Growth, Hildy and Stan Richelson expose the myth of stocks' superior investment returns and propose an all-bond portfolio as a sure-footed strategy that can ensure results. The book is designed to educate novice and sophisticated investors alike and serve as a tool for financial advisers as well. It explains why Bonds can be the right choice and how to use them to achieve financial goals. It presents a broad spectrum of bond-investment options, describes how to purchase Bonds at the best prices, and most important, shows how to make money with Bonds. The bond strategies presented in this book are used by the wealthiest investors and financial advisers to maximize the return on their portfolios while providing security of principal. These strategies can help you determine how to use Bonds in your portfolio and take control of your financial destiny. You'll be playing it smart while playing it safe. Silver Medal Winner, Axiom Business Book Awards (2008) Silver Medal Winner, Independent Publishers Book Award (IPPYs) (2008) Silver Medal Winner, Advertising/Marketing/PR/Event Planning Category, Axiom Business Book Awards (2008)

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Dedication

Foreword

PREFACE

Acknowledgements

Introduction

PART ONE - CLEARING THE COBWEBS

CHAPTER 1 - BONDS The Better Investment

Individual and Institutional Investors: How They Differ

Examining the Myths

A Second Look at Risks and Returns

Stock Market Volatility: The Impact on Retirement Planning

Why Bonds Are a Better Investment Than Stocks

CHAPTER 2 - THE ALL-BOND PORTFOLIO

Advantages of the All-Bond Portfolio

Designing the All-Bond Portfolio

A Word About Other Bonds

The All-Bond Antidote to Greed and Fear

CHAPTER 3 - ADOPTING THE ALL-BOND PORTFOLIO

A Poor-Fitting Portfolio

A Consultation With Stan Richelson

A Financial Plan Aligned With Objectives

PART TWO - BOND BASICS

CHAPTER 4 - THE EVOLUTION OF A BOND

Learning the Language

Bonds: The Early Years

A Colonial Debut

After the American Revolution

Entering the Twentieth Century

Changes in the Twentieth Century

A Modern Metamorphosis

CHAPTER 5 - THE LIFE OF A BOND

By Way of Background

Preparing a Bond Issue

Understanding Risk

A Bond’s Cost and Yield

Total Return

Cash Flow Upon Death: The Estate Feature

PART THREE - BOND CATEGORIES

CHAPTER 6 - U.S. TREASURY SECURITIES

The Big Picture

U.S. Treasury Notes and Bonds

U.S. Treasury Bills

STRIPS

TIPS

Key Questions to Ask About All Treasury Securities

CHAPTER 7 - U.S. SAVINGS BONDS

Simple Investments, With a Few Complexities

Series EE Savings Bonds

Series HH Savings Bonds

Series I Savings Bonds

Key Questions to Ask About Savings Bonds

CHAPTER 8 - U.S. AGENCY DEBT

Major Debt-Issuing Agencies

Key Questions to Ask About Agency Bonds

CHAPTER 9 - U.S. AGENCY and Other MORTGAGE- BACKED SECURITIES

A Complex Structure

The Agencies

Mortgage-Backed Securities

Key Questions to Ask About Mortgage-Backed Securities

Collateralized Mortgage Obligations

Key Questions to Ask About CMOs

CHAPTER 10 - MUNICIPAL BONDS

Munis: The Opaque Market

Ratings and Other Security Enhancements

Purchasing Municipal Bonds

Taxes on Municipal Bonds

Tax-Exempt or Taxable Bonds: How to Decide

Taxable Municipal Bonds

Private Activity Bonds

Tax-Exempt Bonds

Checking Prices on Municipal Bonds

Key Questions to Ask About Municipal Bonds

CHAPTER 11 - CORPORATE BONDS

The Big Picture

Key Categories of Corporate Bonds

Corporate Medium-Term Notes

Corporate Retail Notes

Corporate High-Yield Junk Bonds

Price-Checking Corporate Bonds

Key Questions to Ask When You’re Buying Corporate Bonds

CHAPTER 12 - BOND LOOK-ALIKES

Certificates of Deposit

Key Questions You Should Ask When Buying a Certificate of Deposit

Single-Premium Immediate Fixed Annuities

Key Questions You Should Ask About an Immediate Fixed Annuity

Deferred Fixed Annuities

Key Questions to Ask About a Deferred Annuity

Nonconvertible Fixed-Rate Preferred Stock

Key Questions to Ask About Preferred Stock

Dividend-Paying Common Stock

PART FOUR - OPTIONS FOR PURCHASING BONDS

CHAPTER 13 - HOW TO BUY INDIVIDUAL BONDS

Buying Online

Pricing Information

Key Questions to Ask About Buying Bonds Online

Choosing a Broker

Evaluating Bond Prices

Key Information at the Point of Purchase

CHAPTER 14 - BOND FUNDS

Common Ground

Checking the Costs: Hidden and Unhidden

Buying for Total Return

Fund Categories

CHAPTER 15 - BONDS FUNDS

Tax-Exempt Funds

Taxable Funds

CHAPTER 16 - CHOOSING A BOND FUND

The Search Begins

PART FIVE - BOND INVESTMENT STRATEGIES

CHAPTER 17 - INVESTMENT PLANNING WITH BONDS

Designing a Bond Portfolio

Evaluating Risk

Reevaluating Your Portfolio

CHAPTER 18 - FINANCIAL PLANNING WITH BONDS

Critical Choices: Easing Life’s Transitions

CHAPTER 19 - MAXIMIZING PROFITS

Knowing When to Buy and Sell

Strategies for Deciding When to Sell

Strategies for Finding Bargain Bonds

Strategies for Staying Away From Overvalued Bonds

Strategies for When Interest Rates Are High or Rising

Strategies for When Interest Rates Are Low or Falling

Investing for Tax Advantages

Investing and Risk Tolerance

Strategies for Safe Investing

Investing for Income Needs and Financial Goals

If You’re Starting Out With Less Than $25,000 to Invest

APPENDIX - USEFUL WEB SITES

INDEX

About Bloomberg

About the Authors

PRAISE FOR Bonds: The Unbeaten Path to Secure Investment Growthby Hildy Richelson and Stan Richelson

“Too many investors suffer from biting off more than they can chew. They would be better off financially if they would follow the keep-it-simple principle that the Richelsons meticulously describe in their new book.”

ROBERT L. FREEDMAN Partner, Dechert LLP

“Standard advice says investors need to strike a comfortable balance between risk tolerance and return expectations. In Bonds, Stan and Hildy Richelson convincingly challenge conventional wisdom. Using a straightforward, repeatable approach, the authors outline how to find safety without sacrifice by harnessing the unique risk-adjusted characteristics of bonds.”

BILL D’ALONZO Chief Executive and Chief Investment Officer, Friess Associates Manager of the Brandywine Funds

“The unconventional wisdom in ‘the unbeaten path’ will soon become the conventional wisdom for anyone nearing retirement and frightened by the stock market’s volatility of the past decade. Hildy and Stan Richelson do all of us a big favor by outlining, step-by-step, how we can use bonds for growth and income in retirement.”

KEVIN ADLER, MBA Editor, NAPFA Advisor: The Journal of the National Association of PersonalFinancial Advisors

“Hildy and Stan Richelson demystify bond investing with this clearly written, comprehensive review of the fixed-income markets. In place of conventional, equity-based strategies, they convincingly propose bonds as the preferred alternative for individuals seeking attractive returns with low risk.”

ANDREW B. WILLIAMS, CFA Chief Investment Officer, Philadelphia International Advisers

“All investment advisers and investors, particularly those who can’t afford to see savings disappear, should read this book. It explains how the 100 percent bond portfolio strategy eliminates risk, can be superior to equity strategies, and can be implemented by anyone. The book’s summaries of bond basics, bond categories, and options for purchasing are important tools for everyone who invests. Don’t miss them.”

PAUL H. FRANKEL Partner, Morrison & Foerster LLP

“This is a highly provocative, entertaining, and thoroughly informative book. The first chapter sets the tone: Everything you thought you knew about portfolio management is probably wrong—especially about the alleged superiority of equities over bonds. A must-read!”

SAM KIRSCHNER, PHD Managing Director, MayerCap, LLC

ALSO AVAILABLE FROM BLOOMBERG PRESS

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Investing 101by Kathy Kristof

Investing in Hedge Funds:Revised and Updated Editionby Joseph G. Nicholas

Guide to Investment Strategy:How to Understand Markets, Risk, Rewards, and Behaviourby Peter Stanyer

The Trader’s Guide to Key Economic Indicatorsby Richard Yamarone

A complete list of our titles is available at www.bloomberg.com/books

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This book is available for bulk purchase at special discount. Special editions or chapter reprints can also be customized to specifications. For information, please e-mail Bloomberg Press, [email protected], Attention: Director of Special Markets, or phone [phone].

© 2002, 2007 by Hildy Richelson and Stan Richelson. All rights reserved. Protected under the Berne Convention. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022 or send an e-mail to [email protected].

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Library of Congress Cataloging-in-Publication Data

Richelson, Hildy.

Bonds: the unbeaten path to secure investment growth/Hildy Richelson and

Stan Richelson; foreword by John Brynjolfsson.

p. cm.

Includes index.

ISBN 978-1-57660-243-0 (alk. paper)

1. Bonds. I. Richelson, Stan. II. Title.

HG4651.R528 2007

332.63’23- -dc22

2007021635

Acquired by Jared Kieling

Edited by Mary Ann McGuigan

To Mary Ann McGuigan, Jared Kieling, and Andrew Feldman, the visionaries at Bloomberg Press who trusted that the strategy of the 100 percent bond portfolio would illuminate a clear path for the individual investor and made this book a reality.

FOREWORD

BY VIRTUE OF opening this book, you can count yourself among those who have chosen to explore the world of bonds and bond investing.

You won’t see many books about bonds on the New York Times bestseller list. Bonds are after all the most predictable, and boring, of investments—we hope! You see, for bonds, boring is good. The principal and interest promised are fixed.

Not many people start out intending to focus on bonds. Even my boss, the “Bond King” Bill Gross, chief investment officer and founder of the $600 billion bond giant PIMCO, admits that in his early twenties his goal was to find a job as a “stock jock.” Instead, his first job in the industry was as a bond analyst whose duties included literally clipping coupons in the basement vault of an insurance company. Who would have thought such a humble beginning would lead to a career as a media and investment giant? It is precisely because bonds are underestimated and underrated that they deliver the unexpected.

I crept my way into fixed income in a similar way, when I realized that my love for competition, math, and political economy intersected with the role of a fixed-income portfolio manager. The choice left my friends, parents, and professors perplexed. After all, the returns on safe bonds are modest and their upside capped. Still, PIMCO, the firm Bill Gross and I work for, has attracted $600 billion based on investors’ need for cash flow and security.

And now here you are, book in hand, contemplating a dramatic change in your investment portfolio or simply hoping to secure your retirement by seeking a deeper understanding of bond investing. In Bonds: The Unbeaten Path to Secure Investment Growth, Hildy and Stan Richelson provide a road map for you. For years, they have worked with individual investors, helping them to decipher the unwritten “code” words put out by investment industry insiders. For their service, I applaud them.

I too have been trying to get the same message out: don’t take needless investment risk.

I was first introduced to Hildy and Stan twelve years ago when they were doing research on bond funds. They wanted a better understanding of a small fund I was managing called the PIMCO Real Return Bond Fund. It invests primarily in U.S. Treasury inflation-protected securities (TIPS), and at the time, it had perhaps $200 million in assets under management.

The point of the fund, I explained to Stan and Hildy, was to provide a way for investors to protect their “grocery” money. TIPS, as you will learn in this book, have principal that is indexed to the Consumer Price Index (CPI). As such, TIPS, and funds owning them, allow investors to preserve the real purchasing power of their principal and earn interest on the principal. The grocery money people put aside for retirement will keep up with the generally rising cost of living—and grocery prices—regardless of the inflation rate. That small fund has since become a bit of a hit with investors and has grown to more than $12 billion.

Sure, I believe in some risk taking, sometimes even dramatic risk taking. Young athletes with skill, stamina, and steel nerves should single-mindedly devote themselves to training and competition. The scientist or entrepreneur should plunge into a career with both feet. But such virtues rarely serve professional or individual investors well. Plunging into risky investments may have disastrous outcomes. Unfortunately, professional advisers, and even some financial journalists, too often project virtues like boldness and risk taking onto the individual investor. Even Warren Buffet and Peter Lynch have been tempted to sing the siren’s song of speculation, albeit couched in the robe of “prudent long-term” investing.

It is certainly easy to make straw men out of academic arguments: “The Chicago professor didn’t bother to pick up the $20 bill lying on the sidewalk because markets are efficient; if it was a real $20 bill, someone would have already picked it up.” Other “pros” might point to the failure of the academics at Long-Term Capital Management in 1998 and thereby relegate the logic of modern financial theory to the dustbin.

Yet, in this book the Richelsons outline the wisdom and logic of a 100 percent bond portfolio. I buy their analysis. The zero-risk portfolio is on the efficient frontier as presented in academic research and is a starting point for any portfolio-construction effort. The prescriptions in this book are persuasive and compelling. They are consistent with what I have learned in my years of study at the Massachusetts Institute of Technology and here at PIMCO. Reading this book should serve you well if you choose to hire a bond manager like PIMCO or advisers like the Richelsons or if you decide to try your hand at picking some bonds yourself. Enjoy!

—JOHN BRYNJOLFSSON Managing Director, PIMCO

PREFACE

In Bonds: The Unbeaten Path to Secure Investment Growth, we take the complex world of financial investing and simplify it for you. The ancient Greek poet Archilochus said, “The fox knows many things, but the hedgehog knows one big thing.” Jim Collins, author of the best-selling Good to Great, believes that hedgehogs, such as Freud, Darwin, Einstein, and Adam Smith, made a powerful impact because “they took a complex world and simplified it.”

Like the hedgehog, we know one big thing that seems to remain undiscovered by the financial establishment: bonds are a better investment than stocks for individual investors. Viewed through objective eyes, stocks historically didn’t outperform bonds when an individual investor’s taxes, transaction fees, and bad timing are taken into consideration. Moreover, when stocks and bonds are viewed on a risk-adjusted basis (meaning how much of your principal is at risk), the case is clear that for individual investors, bonds were historically a better investment than stocks.

If stocks haven’t outperformed bonds in the past, what is the basis for the argument that they are likely to outperform bonds in the future? Should you bet your financial future on the hope that stocks will rack up superior returns and that you will be able to realize those returns? We take the contrarian view and believe it’s past time to trash the myth of stocks’ superior investment returns. We propose instead an all-bond portfolio as a sure-footed strategy that will ensure real results.

Many investors want consistent success, but they pursue investments with the potential for spectacular and uncertain results. These investors believe they’re capable of achieving such success, until they don’t. And then they’re greatly disappointed. Investing in stocks was all the rage in the late 1990s. However, when stocks tanked from 2000 to 2002, investors got reacquainted with the old Wall Street adage: trees do not grow to the sky. As stocks became scary, investors rediscovered the world of bonds and their benefits. Yet the reality is that bonds have always provided a secure place in the world of investments because of their enduring role in solving financial problems.

A wealth of data is available about investing, but most of what comes to the general public are story lines, dramatic events, and other fuel for enticement. What investors need to study instead is the investment process. Long-term investment success results from the strength of the investment strategy, rather than the individual wins and losses. Investing, like baseball, is a war of attrition, and what is being worn away—by fees, transaction costs, taxes, and poor timing—is your investment capital.1

A bond investor who is willing to take a measured approach to investing, scoring consistent and predictable returns without big losses, has the best possibility of winning. In the war against attrition, the bond investor hits no spectacular home runs. Instead, day in and day out he consistently gets on base, securing a predictable return while protecting his investment capital.

Warren Buffet is a great baseball fan and says investing is like being up at bat in baseball—only easier. When a player is up at bat in baseball, he has to swing, whereas the investor can stand at the plate indefinitely, until he gets the pitch he wants. But finding a good investment, like a good pitch, is difficult.

One reason we prefer purchasing individual bonds rather than bond funds is that you can decide when you want to swing. When you purchase most closed-end funds or open-end mutual funds, the fund managers must stay fully invested in a particular market sector as defined by the fund prospectus. That means a fund manager must swing whether the pitch is in the strike zone or not.

Unless you have the instincts of a Buffet or the skills of a quant searching under every rock to find an opportunity, there is considerable wisdom in settling on bonds with the aim of getting on base and scoring consistent runs. The fans may not cheer as much, but you will have the satisfaction of knowing you’re financially secure. Bad pitches in the form of market hype will keep coming, but armed with the information we provide in this book, you’ll have the discipline not to swing at a bad pitch.

Chapter Note

1 If you like baseball and want to understand our pitch, read Michael Lewis’ book Moneyball: The Art of Winning an Unfair Game (New York: W. W. Norton & Company, 2003) about the success of the Oakland Athletics.

ACKNOWLEDGMENTS

Bonds: The Unbeaten Path to Secure Investment Growth is a major mile-stone in our careers because it has enabled us to clearly articulate our philosophy and deeply held beliefs about the importance of safe bonds—for both income and growth—in the portfolios of individual investors.

Our editor, Mary Ann McGuigan, made the most significant contribution to this book, and we are deeply grateful for her help. With a fine scalpel, she quickly and deftly sculpted our thoughts. Her insights into the book’s structure, organization, and style shaped its form and content. We also want to express our appreciation to the staff at Bloomberg Press for their expert and very professional help in producing this book.

We particularly wish to thank and acknowledge the help of three special people: John B. Brynjolfsson, CFA, Managing Director, Pacific Investment Management Company (PIMCO), who took time from his incredibly busy schedule to write the foreword to the book; Victor F. Keen, Chair of the Tax Department, Duane Morris LLP, who reviewed some of the tax aspects of bonds; and our son-in-law, Evan B. Carpenter, who provided invaluable help in multiple reviews of Part 1 of the book, which focuses on the relationship of stocks and bonds. As you shall see, we were fortunate that he likes baseball as well as golf.

We would like to express our deep appreciation to the investment planners and investment professionals who generously stepped up to help us by reviewing chapters of the book and by sharing their wisdom with us. We take responsibility for any errors. We thank Jeffrey B. Broadhurst, George Connerat, Rick Dunphy, Joe Gaskey, Richard W. Kidd, Jeff Metz, and Arthur Sinkler. And we’re grateful to our son Scott Richelson, an innovative young lawyer, who gave us many thoughtful comments on the chapter he reviewed.

We wish to acknowledge our friends in the investment community who teach us daily about bonds: Patrick Coyne, Jenny Ellis, Tim Hlavacek, Charles Ripley, Pete Rossi, and Debra Weiner.

Special thanks go to our dear friends and family, who have advised us and supported us throughout this project: Carole and Emilio Gravagno, Drs. Sam and Diana Kirschner, George Robinson and Dr. Abby Van Voorhees. Thanks also to Judy and Milton Moskowitz, who protected our time to write. We are grateful to our daughter, Jolie Carpenter, and our granddaughters, Maya and Emily, who bring the whys of saving into focus.

We learn about investments and the real world every day from our friends and fellow investors who provide the real-life context to our study and work. By asking questions and sharing aspects of their lives with us, they have enhanced and sharpened our skills. For this, we wish to acknowledge and thank Katharine Ayers, Dean Bress, Esq., John Clements, Jerry and Lois Cooper, Christopher Doyle, Esq., Mark Dresnick, Esq., Colleen Gordon, Ellen Greif, David Lihn, Esq., Drs. Gary and Elaine Liversidge, Ron and Holly Flaherty, Michael C. and Neeru Phillips, Dr. Linda Ripstein, Juliet Spitzer, Phil Wachs, Kevin West, and Dr. Stanley Wulf.

We were inspired by the love and encouragement offered us by our association with the Souls Network: Don Arnoudse, Peter Blake, Rich Constantine, Vince DiBianca, Jeffrey DiFrancesco, Tom D’Aquanni, Tony Freedley, Dr. Sam Kirschner, Anton T. Lahnston, Dave Laveman, and Jim Selman.

INTRODUCTION

BONDS ARE A misunderstood investment. In Bonds: The Unbeaten Path to Secure Investment Growth, we intend to rectify that by clearing up long-held misconceptions about bonds. We also explain an overlooked investment strategy for individual investors, the 100 percent bond portfolio, which enables investors to attain financial security while achieving a good return on their investment.

The bond market may at first seem complicated. However, its principles are straightforward, and anyone can master them. This book provides you with the tools to understand and successfully invest in the bond market so that you can build and protect your capital and effectively realize your financial and life goals.

For individual investors, that understanding is vital. The world has changed drastically in the past twenty years. The economic safety net is now frayed. Job security has sharply declined. Company-sponsored pension plans are becoming extinct, and many people worry about the health of the Social Security and Medicare systems. Given these concerns, we all must take responsibility for our own financial well-being.

If you want to take responsibility for your financial life, this book can be an indispensable guide to your decision making. Bonds is designed to educate novice and sophisticated investors alike and serve as a tool for financial advisers as well. We explain why bonds can be the right choice for you and how to use bonds to achieve your financial goals. We also present a broad spectrum of bond investment options, describe how to purchase bonds at the best prices, and most important, explain how to make money with bonds.

This book offers straightforward bond strategies that are used by the wealthiest investors and financial advisers to maximize the return on their bond portfolios while providing security of principal. These strategies can help you determine how to use bonds in your portfolio and investment program and take control of your own financial destiny. You’ll be playing it smart while playing it safe.

Investments in bonds have grown significantly since the beginning of the twenty-first century. Investors now understand that they can make money with bonds and that bonds are an essential part of every investment program. For the investor who is risk averse or who cannot afford to lose money, bonds are hugely important because basing a financial plan on stock appreciation is a very risky strategy.

A 2006 poll by the National Association of Variable Annuities found that many baby boomers were very concerned about retirement and the risks of stock investing:1

• A majority of Americans between fifty and fifty-nine years old were concerned about having enough money to retire.

• 64 percent said that they would not put more than 30 percent of their money into stocks.

• 32 percent would not put any money in stocks at all.

• Among younger boomers, those forty to forty-nine years old, 53 percent would not put more than 30 percent of their money in stocks, and 23 percent would put no money at all in stocks.

These numbers are probably a surprise to many investors because investors are told that investing the bulk of their money in stocks is the key to financial success. However, many stock investors may share the same feelings expressed by this middle-aged woman named Ruth: “I am frightened and panicked to the point of paralysis about making decisions about my money and about whether to stay in the stock market or get out because of the current volatility. My future depends on being right.”2

Bonds can free investors from any fear of investing. Safe bonds will protect your principal and generate substantial after-tax income without subjecting you to the substantial risk inherent in stocks. We believe that bonds will provide as good or better returns than stocks in the future and without substantial volatility. Bonds will also provide growth through the magic of compound interest if you reinvest the income that bonds provide. Bonds offers you a way to realize your financial goals and secure your financial future without taking a market risk.

Bonds is divided into five parts, namely, the rationale for the 100 percent bond portfolio, bond basics, descriptions of the major categories of bonds, how to buy bonds, and using bond strategies to structure your portfolio. Part One, “Clearing the Cobwebs,” provides the rationale for our belief in the value of bonds. By focusing on the impact of taxes, fees, transaction costs, and bad timing, chapter 1 explains why the 100 percent bond portfolio is superior to diversifying into stocks and alternative investments. It explains why plain-vanilla bonds are the best investment for individual investors to use to achieve their life and financial goals. Chapter 2 explains how to structure and implement the all-bond portfolio. Chapter 3 presents a case study of how one stock investor turned to the all-bond portfolio to solve his financial problems and the implications for his personal and financial life.

Part Two, “Bond Basics,” provides key information you need to know about bonds. Bond language, which is often arcane, is easier to understand when placed in its historical context. Chapter 4 provides that context and explains how bond structures are rooted in history. In chapter 5, we trace how a bond is created, issued, priced, and traded.

Part Three, “Bond Categories,” introduces all the major types of bonds and compares them in detail in a uniform and useful format. There are descriptions of Treasuries, Treasury inflation-protected securities (TIPS), U.S. savings bonds, agency bonds, mortgage securities, municipal bonds, and corporate bonds (including junk bonds). Chapter 12 describes certain bond look-alikes, namely, CDs, immediate fixed annuities, deferred fixed annuities, and common and preferred stock. In Part Three, the advantages, disadvantages, tax implications, pricing, and special features become clear, allowing for easy comparison of one type of bond or bond look-alike to another.

Part Four, “Options for Purchasing Bonds,” describes how an investor can buy bonds using a broker, online, or through mutual funds and similar vehicles. Included is thoroughly practical real-world advice on how to buy bonds without the use of an investment adviser, how to best use a broker, and how, through use of the Internet and other techniques, to evaluate the price of a bond. Drawing on our many years of experience representing clients in their purchase and sale of bonds, this chapter tells the secrets of the trade from the perspective of an experienced and expert bond investor.

If you prefer not to buy individual bonds on your own, you can rely on Part Four to learn how to buy bonds through mutual funds, unit investment trusts, closed-end funds, and exchange-traded funds. As an aid to our readers, we provide a comprehensive treatment of all the different types of bond funds and indicate the various categories available. We include income-producing funds containing no bonds for comparison.

Part Five, “Bond Investment Strategies,” discusses financial planning and investment planning with bonds and bond strategies. Rich in detail, this section will enable you to determine how bonds can best fit into your portfolio. Chapter 17 tackles the vital subject of your financial and life needs and describes how to use bonds in your financial planning to achieve financial well-being. Chapter 18 contains case studies describing how bonds might be used to meet a variety of financial-planning goals, including socially conscious investing. Chapter 19 not only discusses techniques tailored to the individual investor but also offers a complete checklist of strategies useful as well to investment advisers and other professionals. Specific strategies address topics such as determining when to buy and sell, constructing and implementing a bond ladder, finding bargain bonds, keeping away from overvalued bonds, what to do when interest rates are rising or are falling, investing for tax advantages, investing by risk tolerance, and investing for income needs.

Finally, an appendix of useful Web sites annotating those mentioned throughout the text serves as an invaluable reference for finding bond information on the Internet. You will discover sites for bond calculators, yield curves, and other practical tools.

Whether you’re a novice and want to read Bonds from cover to cover or a seasoned investor or adviser who wants to brush up on a long-neglected market, you’ll find what you need here: an abundance of practical information about bonds, bond funds, and how to make them part of your portfolio.

Chapter Notes

1 Warren S. Hersch, “Boomers Fear for Their Nest Eggs, but Are Wary of Stocks,” National Underwriter, December 18/25, 2006, 24.

2 Byron Katie, Loving What Is (New York: Three Rivers Press, 2002), 189.

PART ONE

CLEARING THE COBWEBS

THE MAIN PURPOSE of this book is to debunk the many myths surrounding investing in stocks and bonds and to provide new thinking for you to consider when developing and carrying out your financial plan. In Part One, we take you on an unusual journey and encourage you to look at the financial world through our eyes and examine the proposition that for individual investors, bonds are a better investment than stocks or any other asset class.

In chapter 1 we compare stocks and bonds and describe the powerful case for investing in bonds. This case has always existed, but we believe we have a new way to explain it. If you find that bonds make sense for you, we describe in chapter 2 how to carry out the strategy of the all-bond portfolio, including the specific kinds of bonds to buy (we call them plain-vanilla bonds) and why. Plain-vanilla bonds are safe individual bonds, easy to buy and sell at low or no cost, and easy to understand. In chapter 3 we provide a case study illustrating why and how a family used the all-bond portfolio to support their life objectives and their financial goals using our four-step financial plan.

Come with us as we look at the financial world in an unbiased way, challenge the traditional thinking found in articles and books on investing, and offer evidence to support our belief in bond investments. Financial plans based on the traditional thinking and stock investing have not worked out well for many individual investors. They have taken substantial risks with their nest eggs and endured severe and upsetting market declines and financial uncertainty. Indeed, many individuals lost their retirement savings. We believe that the all-bond portfolio is a better way to plan and secure your financial future. This book will show you how to build one.

CHAPTER 1

BONDS The Better Investment

Watching your stocks all day long is amusing up to a point, but income is the thing if you’re shopping for anything from pajamas to pastrami sandwiches.

—JOE MYSAK

Bloomberg columnist1

FOR GENERATIONS, STOCKS have gotten top billing over bonds. Stocks, many insist, have outperformed bonds in the past, will outperform bonds in the future, and are not risky if held for ten years or more. We believe these assertions are myths. This chapter makes the case that the stated historical return of 10 percent on stocks is merely theoretical because it does not take into account taxes, expenses, and investors’ bad timing. It is uncertain that stocks will outperform bonds in the future, and the risk of a severe stock market decline increases as the investment period increases. Stocks are riskier and less predictable than bonds. Ultimately, they are not as good an investment as bonds.