Tag: Bonds

What is a Municipal Bond?

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We built this city; we built this city on rock’ n’ roll, built this city on rock’ n’ roll.” You undoubtedly have heard this song by Jefferson Starship, and now you are singing it out loud and can’t get it out of your head—sorry!

However, with all due respect to Jefferson Starship, tax-free municipal bonds help fund the building of most cities. Local or state agencies issue bonds to help build roads, dams, bridges, schools, and other public works, and you probably voted on a bond referendum or two over the years.

When you vote on bond issues, you’re allowing the local government to issue bonds to finance a project in your city or county. The bonds are funded by your taxes or the services you use, like a toll road.

General obligation bonds can tax you and your neighbors to pay the interest and are some of the safest tax-free bonds to own.

Revenue bonds generate income from a project, and the project’s revenue will fund the bond payment. Typical revenue bond projects include airports, public works, hospitals, and toll roads, and a portion of the money collected from the projects will go to the bond debt service.

Because municipal bonds benefit the public good, the interest you receive is tax-free. The tax-free income incentivizes investors to buy bonds to help local authorities raise money for their projects—schools, roads, etc. The interest is free from local, state, and federal taxes, called triple tax-free.

Municipal bonds are an excellent choice for high-income earners, especially if you live in a state like California or New York. The higher your taxable income, the higher the after-tax return on your investment.

The taxable equivalent yield can help you find competitive rates relative to taxable bonds. For example, a San Diego general-obligation bond paying four percent tax-free interest equates to a six percent taxable bond. To find the taxable equivalent yield, multiply the coupon rate on the tax-free bond by 1.5. In this example, a four percent coupon times 1.5 equals six percent. I use 1.5 as a quick way to find the taxable equivalent rate. The actual formula is the coupon divided by one minus your tax bracket, which looks like this: coupon divided by (1 ˗ your tax bracket). If you’re in the 35 percent tax bracket, the formula is four percent/ (1 ˗ 0.35) = 6.15 percent. If you find a taxable bond paying six percent or more for the same time frame, purchasing the taxable bond makes sense.

If you live in a state with an income tax, buy bonds issued by that state where you live because you’ll pay an income tax if you buy one from another state. For example, if you live in California and buy a Florida bond, your income is taxable at the state level. If you live in a state with no state income tax, like Texas, you can buy bonds issued by any state.

Tax-free municipal bonds may increase your after-tax income, especially compared to CDs, corporate bonds, and US Treasuries.

The hardest thing in the world to understand is the income tax. ~ Albert Einstein

March 3, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.

What Is A Bond Ladder?

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An excellent strategy to protect your assets from rising or falling interest rates is to build a bond ladder—a portfolio of bonds with different maturities.

Bond maturities are similar to rungs on a ladder, and each one you climb gets you closer to your goal. Your ladder can consist of bonds maturing in thirty days or thirty years, and yours should fit your situation and time frame. You can also build multiple ladders designed to achieve several goals.

How can you create a bond ladder? Let’s look at an example. Start with five bonds with maturities ranging from one to five years with corresponding rates of 1, 2, 3, 4, and 5 percent. The average yield for this hypothetical ladder is three percent, with an average maturity of three years. At the end of year one, your first bond matures, and you’ll receive a portion of your principal. With the proceeds, you purchase a five-year bond paying five percent. The remaining bonds have now moved up by one year, and your bond ladder currently consists of bonds with original maturities of two, three, four, five, and five years, paying 2, 3, 4, 5, and 5 percent. Your average yield is now 3.8 percent, and the average maturity stays the same because you still own a portfolio of bonds maturing each year for five years.

At the end of the second year, bond two matures. With the proceeds from bond two, you buy a five-year bond paying five percent. The remaining bonds are one year closer to maturing, and your ladder consists of bonds with original maturities of three, four, five, five, and five years and paying 3, 4, 5, 5, and 5 percent, with an average rate of 4.4 percent. You can repeat this process indefinitely.

A bond ladder always has bonds maturing to provide liquidity, while longer-term bonds generate above-average income. The income from the original ladder was 3 percent; by the last example, it jumped to 4.4 percent—an increase of 46 percent. At the same time, your average maturity remained constant at three years. If interest rates rise, your maturing bonds allow you to buy new ones at higher rates. If rates fall, you generate higher income with your longer-dated bonds. Also, if rates fall, the value of your bond portfolio can rise in value to produce capital gains.

The bond ladder is flexible, allowing you to use any fixed-income investment to construct your portfolio: CDs, tax-free municipal bonds, corporate bonds, or US Treasuries. You can mix and match the fixed-income choices. For example, you can structure a ladder with US Treasuries, corporate bonds, and tax-free municipal bonds. The treasuries can be short-term—from one to two years—corporate bonds from two to ten, and municipal bonds from ten to thirty years.

Investors often have a high percentage of cash in their accounts, waiting for interest rates to rise or the stock market to crash. If you hold a significant cash position, you can use short-term US Treasuries to create your money-market fund with better results. In addition to higher rates, your investments are guaranteed, regardless of how much money you invest.

Several years ago, I helped a client construct a short-term bond ladder with US T-Bills. He inherited several million dollars and wanted to buy CDs from local banks for safety and liquidity. I informed him he’d have to contact fifteen banks to qualify for the full FDIC insurance coverage, and as a result, we built a short-term US T-Bill ladder guaranteed by the US government. It was one-stop shopping for his inherited assets with superior income, liquidity, and guarantees.

In summary, a bond ladder built for you and your family can help you achieve your financial goals without worrying about the direction of interest rates.

The ladder of success is best climbed by stepping on the rungs of opportunity. ~ Ayn Rand

March 2, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.

Bond Math

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As rates rise, investors struggle to understand why bond prices are falling, especially after last year’s rout in the bond market. Bonds are supposed to be stable and boring, not a volatile asset class, yet, they are complicated instruments, providing something for all investors.

The Federal Reserve raised interest rates from 0% to 4.5% last year, a significant increase and the steepest rise in history. As a result, the rate increase destroyed bonds, causing damage to numerous portfolios.

Bonds are fixed-income investments, meaning the coupon does not move, but the other yields can gyrate significantly. A bond is a contract with terms outlined in the prospectus, a legal document. Let’s explore some bond pricing to help you make better investment decisions.

Terms and Data

Coupon: The coupon is the fixed rate on your bond.

Current Yield: The current yield is a function of your coupon rate and today’s price.

Yield To Maturity: The yield to maturity rate is what you’ll earn on your bond at maturity, based on the coupon rate and the price of your bond.

Stable Rates

If interest rates are stable, flat, or not moving, then the coupon, current yield, and yield-to-maturity are equal. For example, if a bond trades at $100 with a 4% coupon, the current yield and yield to maturity are also 4%. You will earn $4,000 annually if you own a $100,000 bond.

Falling Rates

If interest rates are falling, your bond’s price rises like a see-saw in the park. For example, if the coupon is 4% and the price of your bond increases to $110, then the current yield is 3.64%, and the yield to maturity is 2.84%. When rates fall, the coupon is higher than the current yield, which is higher than the maturity yield. You will earn $4,000 annually if you own a $100,000 bond, regardless of the current yield or price.

Rising Rates

If interest rates are rising, then the price of your bond is falling. For example, if your bond has a 4% coupon and the price drops to $90, the current yield is 4.44%, and the yield to maturity is 5.3%. When rates rise, the coupon is lower than the current yield, which is lower than the yield to maturity. You will earn $4,000 annually if you own a $100,000 bond, regardless of the current yield or price.

One Percent Decrease

If you own a ten-year bond, then a one percent decrease in interest rates will increase the price of your bond by 8.5 percent, rising from $100 to $108.50.

One Percent Increase

If you own a ten-year bond, then a one percent increase in interest rates will decrease the price of your bond by 7.7 percent, falling from $100 to $92.30.

Bond Funds

What about bond funds since they don’t have a fixed interest rate or maturity? Vanguard’s Intermediate-Term Bond fund owns 2,144 individual bonds with an average duration of 6.29 years. The yield to maturity is a function of the portfolio’s average coupon, duration, and the prices of their bonds.

Bonds can be simple and complicated. A US T-Bill is simple, but a junk bond issued by a cryptocurrency company is complex. Pay attention to the rating and yield to maturity if you buy individual bonds. If you don’t want to sift through thousands of bonds, purchase a bond fund.

Bye, bye, and buy bonds.

When I was a kid I got no respect. I had no friends. I remember the see-saw. I had to keep running from one end to the other. ~ Rodney Dangerfield.

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Rising From The Ashes

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The Phoenix, a Greek mythical character, is considered an immortal bird that rises from the ashes of its predecessor.[1]  Of course, it is a myth, but the image of one rising from the ashes to get a new lease on life is powerful. We all want a second shot or do-over, especially with investing.

It has been a challenging year as most asset classes have traded in negative territory, there have been few places to hide, and diversification has not worked. Stocks and bonds reacted negatively to rising interest rates as the Federal Reserve tried to control inflation, and the rate increase was too much to bear for investors.

Are you ready to rise from your investment ashes? Here are a few suggestions to help you soar to new heights.

  • Complete a financial plan. Your plan will help guide your future and quantify your goals, giving you a path to follow. More importantly, it validates your success and can bring you financial peace. Our clients with financial plans appeared more relaxed and better prepared to handle the market’s turbulence this year than those without one.
  • Rebalance your account. If you did not make any changes to your investment portfolio this year, it is probably out of whack from your original allocation. As a result, you may enter 2023 positioned incorrectly, either too conservative or aggressive. Rebalancing your portfolio realigns it to the proper risk level and tolerance. January is a good time to rebalance because all your 2022 dividends and capital gains will have been credited to your account.
  • Review your holdings. Do you have the correct investments for the new year? Will your current portfolio allow you to reach your goals? Use the final few weeks of the year to examine your holdings.
  • Adjust your goals. Is it time to review your goals like spending, retirement date, college funding, or major purchase? Use the coming year to set new goals or update old ones.
  • Buy stocks. The S&P 500 is down 16% for the year, and the last time it had two negative years in a row occurred more than twenty years ago, and since 1941, it only happened twice, and the average gain following a negative year was 25.3%.[2]
  • Buy bonds. Bonds are producing income again after a long hiatus. It’s now possible to buy bonds yielding 3%, 4%, 5%, or more. The one-month US Treasury Bill yield soared 7,720% this year, rising from 0.05% to 3.91%. Will it rise another 7,700% next year? Doubtful. If it did, the yield would increase to more than 300%!

I know it was a tough year, but markets always rebound. The carnage in stocks and bonds can create opportunities for next year, so use the market’s decline to strengthen your portfolio.

In order to rise from its own ashes, a phoenix first must burn. ~ Octavia Butler

December 5, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] https://www.greekmythology.com/Myths/Creatures/Phoenix/phoenix.html

[2] Dimensional 2022 Matrix Book – 1941 to 2021

Better Than Bonds?        

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Bonds are having a horrendous year, down double-digits as interest rates continue to climb. The onslaught could continue as the Federal Reserve battles inflation because one of the only tools they have left is to raise interest rates.

Rising interest rates are both good and bad. During COVID, interest rates were near zero, impacting investors searching for income. The higher rates benefit retirees and savers who can now generate more income from CDs, US Treasuries, and corporate bonds. However, rising interest rates hurt bond valuations because when rates rise, bond prices fall. It’s like a seesaw in a park; when one side rises, the other falls.

Bonds are supposed to be boring and safe, but not this year. The iShares 20+ Year Treasury Bond ETF is down 21%, whereas the Dow Jones has fallen 16%. A bond paying 3% offers little comfort to an investor losing 21%.

Another option for bond investors is to consider an immediate annuity. An annuity guarantees an income stream for life or a certain period and won’t fluctuate like a bond. When you purchase an annuity, you transfer the risk of owning the investment to the insurance company.

Some immediate annuities currently offer rates of 6% to 7%. For example, you determined you need an additional $50,000 per year to cover your living expenses for thirty years. To produce $50,000 for thirty years at 7%, you must contribute $620,452 today to an immediate annuity. To generate the same income level from a 30-year US Treasury Bond, you must purchase $1.6 million in bonds, almost $1 million more than the annuity.

In this example, a traditional 60% stock and 40% bond portfolio requires a balance of $4 million – $2.4 million for stocks and $1.6 million for bonds. Of course, you can use the dividend income from stocks to help offset the bond income, but more on that later.

If you replace your bond portfolio with an immediate annuity, you can reduce your fixed-income allocation and increase your equity exposure. For example, the annuity only requires an initial investment of $620,452, so you apply the extra $979,548 to your stock allocation. Your new allocation is now 85% stocks and 15% fixed income. The added equity exposure can give your portfolio a long-term boost and potentially provide more income.

Adding an annuity solves two problems. First, you generate an income stream for life; second, you add more growth to your portfolio.

The annuity option sounds too good to be true; what’s the catch? If you buy an immediate annuity, your investment and income stream terminates when you pass away, and you can’t transfer this asset class to your heirs. You can add joint and survivor payout options to your contract, which means the annuity provides income for you and your spouse for life. Another option is to add a period certain payout, like five or ten years. Of course, your monthly payment will drop with the more features you add to your contract.

Inflation is another downside to the fixed annuity payout. Most immediate annuities don’t index to inflation, so a $1,000 payout today is worth $411 in thirty years with an inflation rate of 3%. You can add an inflation rider to your contract, which will lower your monthly income. However, your increased equity exposure can provide inflation protection over time. Since 1997, the S&P 500 has more than doubled the return of a sixty – forty portfolio. The extra equity exposure could offset inflation over time, allowing you to generate more income from dividends, eliminating the need to add an inflation rider to your annuity.

Should you consider an immediate annuity? This strategy could benefit you and your family if you want guaranteed income and are comfortable with increased equity exposure. Also, you must be willing to exclude a portion of your assets from your estate.

July 5, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so you can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

What A Brutal Year!

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Stocks and bonds are falling while commodity prices are soaring. The Federal Reserve is raising interest rates, investors are not happy, and they are losing patience! However, I’m referring to 1994, not 2022.

In 1994, the S&P 500 fell 1.54% and, at one point, was down 9%, and long-term government bonds plunged by 7.8%. While traditional investments dropped, commodity investments rocketed, generating a return of 16.6%.[1] Sound familiar?

The previous year made 1994 so frustrating because stocks and bonds produced stellar returns. The S&P 500 jumped 10.1% in 1993, and long-term government bonds climbed 13.2%. Investors expected the good times to continue; they didn’t. Last year, the S&P 500 soared 27%, so this year’s negative returns are upsetting.  

What happened in 1994? Alan Greenspan and the Federal Reserve surprised markets by raising interest rates, and Fortune Magazine called it the “Bond Market Massacre.”[2] The Fed Funds rate started the year at 3% and finished at 6% – a 100% increase. The Federal Reserve raised interest rates seven times from February 1994 to February 1995.

In 1994 the Federal Reserve was aggressively hiking interest rates, and a rising rate environment is not good for stocks or bonds. How did the markets fare since 1994? Investors poured money into the commodity sector because of its strong performance. With a strong economy and rising rates, investors chased this hot sector. However, those who bought commodity funds made 1.55% yearly from 1994 to 2022, barely outpacing inflation. A $10,000 investment grew to $15,450.[3] As a comparison, the S&P 500 returned 1,510% or 10.7% per year from 1995. A $10,000 investment grew to $160,540.[4]

Today, investors are frustrated by the lack of performance from stocks and bonds. The stock market is falling, bonds are dropping, and interest rates and inflation are rising. It feels like 1994 again, and investors are ready to jump ship and sell stocks and bonds.

Here are a few thoughts to protect yourself from doing something that may harm your long-term performance.

  • First, do nothing. Don’t chase returns, and don’t make dramatic portfolio changes. The best course of action, at times, is to let your portfolio find its footing. The S&P jumped 37.6% in 1995, 23% in 1996, 33.4% in 1997, 23.6% in 1998, and 21% in 1999. If you sold your stocks in 1994, you missed an incredible run in stocks where they climbed 138%!
  • Diversify your accounts. In 1994, international stocks – large and small, performed well, and real Estate Investment Trusts (REITs) generated positive returns.
  • Buy bonds for your account despite rising rates. Bonds are a vital part of a portfolio, and they provide safety and income. Adding bonds to your account while interest rates rise is an opportunity to lock in higher rates. If you purchased long-term government bonds in 1994, you made 31% in 1995.[5]
  • Rebalance your portfolio to keep your asset allocation and risk level intact. It’s also a great way to buy low and sell high. We screen our model portfolios weekly to look for accounts where the asset allocation has shifted from the original target, and when we find them, we rebalance the portfolio.
  • A financial plan is paramount if you want to be a successful investor. It will help you stay focused on your goals, despite volatile markets.

I don’t know when stocks and bonds will recover, but there will be better days ahead if history is my guide.

But if we hope for what we do not see, we wait for it with patience. ~ Romans 8:25

April 15, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] Dimensional Fund Advisors 202 Matrix Book.

[2] http://www.businessinsider.com/1994-federal-reserve-tightening-story-2013-1, Matthew Boesler, January 25, 2013

[3] YCHARTS

[4] YCHARTS

[5] DFA 2021 Matrix Boox

Buy Bonds?

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Buying bonds is the ultimate contrarian play because everyone knows interest rates are rising, and when rates rise, bond prices fall. The yield on the 1-Year US Treasury increased 1,528% over the past year, while the yield on the 10-Year US Treasury “only” jumped 64%. All rates along the yield curve have increased substantially, and they will probably continue to rise.  

In 1990, long-term interest rates reached 9%, and I could not give bonds away since investors were convinced rates were going higher because, in the 1980s, they touched 15%. However, rates declined from 1990 to 2020, falling to a low of  .62% – a drop of 93%. The ultimate bull market in bonds occurred from 1982 to 2020.

A 30-year bond will fall 19% if interest rates rise from 2% to 3% – not a compelling argument to buy bonds. And the higher rates go, the lower prices will fall. We sold most of our long-term bond holdings in March 2020 as yields pushed below 1%, and we shortened our maturities to about two to three years and realized gains while transitioning to a defensive position. As interest rates rise, we will extend the maturities of our bond holdings to capture higher yields.

If rates rise, is there a bond strategy that makes sense? I believe there is, and it’s called a bond ladder. A bond ladder works in a rising or falling interest rate environment, and as rates rise, a bond ladder allows you to generate more income.

Here is how it works. You purchase a three-year bond ladder with bonds maturing in one, two, and three years and they pay 1%, 2%, and 3%, respectively.

  • Bond 2023 pays 1%
  • Bond 2024 pays 2%
  • Bond 2025 pays 3%
  • Average yield = 2%

When the 2023 bond matures, the remaining bonds are now one-year closer to maturity. You now purchase a new three-year bond maturing in 2026, paying 3% with the proceeds from the 2023 bond. Your new ladder now looks like this:

  • Bond 2024 pays 2%
  • Bond 2025 pays 3%
  • Bond 2026 pays 3%
  • Average yield = 2.6%

Your income increased from 2% to 2.6% or 30%.

When the 2024 bond matures, the remaining bonds are now one-year closer to maturity. With the proceeds from the 2024 bond, you buy a 2027 bond, paying 3%. Your new ladder now looks like this:

  • Bond 2025 = 3%
  • Bond 2026 = 3%
  • Bond 2027 = 3%
  • Average yield = 3%

Your income increased by 15%.

Your bond ladder can consist of any maturity from one to thirty years, depending on your appetite for risk. Eventually, your ladder will contain higher-yielding long-term bonds with monthly, quarterly, or annual liquidity.

A physical ladder will take you higher with each rung you climb, and a bond ladder can produce higher income as you purchase new bonds. In addition to higher yields, buying bonds can protect your principal if stocks fall, especially if you own short-term bonds. For example, the NASDAQ is down 9.3% this year, while short-term Treasuries are only down 1.57%.

If interest rates continue to rise, you will have the opportunity to buy bonds at a discount, increasing your total return. For example, if you buy a 10-year bond with a 2% coupon at $100, your current income and yield-to-maturity will be 2%. If rates rise by 2%, the price could fall to $84. If you purchase the bond at $84, your current yield jumps to 2.4%, and the yield-to-maturity increases to 3.9%. It pays to buy bonds at a discount. One person’s trash is another person’s treasure.

What is the top for inflation and interest rates? I don’t have a clue, nor does the Federal Reserve. No one can predict where inflation or interest rates are going. If interest rates continue to rise, consider adding bonds to your portfolio so you can generate more income.

As I mentioned, buying bonds is the ultimate contrarian play because everyone knows interest rates are going higher, but what if everyone is wrong? What if rates don’t rise? What if inflation falls? If you buy when others are selling, you could make money with your shrewd investing skills. Who knows?

Bye, bye and buy bonds.

Bond selection is primarily a negative art. It is a process of exclusion and rejection, rather than of search and acceptance. ~ Benjamin Graham

February 11, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Bye bonds or buy bonds?

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I started my investment career in 1989 when the 30-Year US Treasury Bond yielded more than 8%. Investors were reluctant to buy bonds because they worried interest rates were going higher. They remembered the double-digit yields from 1979 to 1985; convinced interest rates would climb again, they kept their money in cash. Thirty-two years later, they are still waiting for rates to rise. 

Today, interest rates are a fraction of where they were many years ago, and investors are still focused on rising rates. Reluctant to buy bonds for fear of missing a rate rise or losing principal, they keep their money in cash or a money market with a near 0% yield waiting for the Fed to raise rates. Though rates are low, investors should not ignore the safety, and income bonds provide to a portfolio. 

In the October 1, 2015 issue of Fortune Magazine, Josh Brown of Ritholz Wealth Management outlines a compelling case for owning bonds. He suggests allocating a portion of your portfolio to bonds to help “cushion a portfolio for down years.” Adding that stocks and bonds have only had three times where their returns were both negative – 1931, 1941, and 1969. He suggests investors should ladder their bond portfolio, which will help investors with “a built-in-defense mechanism against a gradually rising interest rate.”

In fact, when stocks fell in 2002 and 2008, bonds performed well. In 2002 stocks dropped 22.1%, bonds rose 17.8%. In 2008 stocks were fell 37%, bonds climbed 26%.

So, I would recommend giving bonds another look.  

Bye, bye and buy bonds.

I would never be 100 percent in stocks or 100 percent in bonds or cash. ~ Harry Markowitz

November 10, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Rates are rising! Buy bonds?

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The Federal Reserve might raise interest rates next year. They last hiked interest rates in 2018, raising the fed funds rate four times from 1.50% to 2.50%. The relationship between bond prices and interest rates is like a see-saw in a park; when one side rises, the other side falls. If interest rates are rising, why would you buy bonds?  A rate rise will indeed disrupt prices. However, disruption is where bond buyers can find opportunities.

The 30-Year US Treasury Bond yields 2.09%. If interest rates rise one percent, the price will fall 19.4% from $100 to $80.62. If you purchase the bond at $80.62, you have an opportunity to earn 24% when it matures to $100. In addition, the current yield improves to 2.6%. Since 1926, long-term government bonds have produced an average annual return of 5.8%.[1]

Bond and bond funds are considered lousy investments when interest rates rise. However, investors assume, incorrectly, that fund managers do nothing while rates are rising. When rates rise, fund managers buy bonds at lower prices while locking in higher rates. Eventually, lower bond prices and higher coupons will benefit shareholders.

The Franklin U.S. Government Securities Fund (FKUSX) originated in May 1970, and since its inception, it has delivered an average annual total return of 5.85%. Its best year was 1982, returning 33.04%, and its worst year was 1980, losing 12.87%. A $100,000 investment in May 1970 is now worth $1,827,300.[2]

When rates rise, the first reaction for bondholders is to sell. When they sell, it creates buying opportunities for investors with a long-term time horizon. You can take advantage of panic sellers by purchasing bonds at favorable prices. Their pain will be your gain.

Why buy bonds when interest rates climb? 

  • Lower prices
  • Higher yields
  • Better total return
  • More bond investment choices

Don’t fear a rate rise. It will treat you well in the long run.

“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity.” ~ John F. Kennedy.

October 23, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] Dimensional Fund Matrix Book 2021.

[2] YCharts

Year 2051

Posted in Financial Planning, Investments, Retirement Planning, Wealth ManagementTagged , , , , Leave a comment

Thirty years is a long time. Thirty years ago, Operation Desert Storm liberated Kuwait, the New York Giants won Super Bowl XXV, and Dances with Wolves won the Academy Award for best picture.

Today, The 30-Year US Treasury yields 2.05%. It’s hard to imagine investing in a bond that matures in 2051, but some individuals will buy it for safety due to the recent stock market volatility. Safety is a relative term, of course. Bonds are safer than stocks in the short term, but it’s hard to beat a basket of great companies over time. 

According to YCharts, 1,660 companies yield more than 2.05%, including 138 that raised their dividend by 10% or more during the past year.    

I plucked five companies from this list, including Broadcom, Amgen, Texas Instruments, Best Buy, and T.Rowe Price.  If you invested $10,000 in each stock ten years ago, they would be worth $329,320 today – a gain of 558%! If you purchased a bond instead, your total return would have been about 20%.

If you invested $50,000 in these stocks today, your annual income would be $1,325, or $300 more than the 30-Year US Treasury. In addition, your potential gain from these stocks is substantially more than a bond.

I will always take my chances with a basket of great companies with a history of rising dividends. Companies with solid balance sheets and dependable cash flows are tough to defeat.

Do you know the only thing that gives me pleasure? It’s to see my dividends coming in. ~ John D. Rockefeller

October 18, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.