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:[2]
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."[3]
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