In Bonds: The Unbeaten Path to Secure Investment Growth, Second Edition, the fully revised and updated edition of the classic guide to demystifying the bonds market, veteran investor husband and wife team Hildy and Stan Richelson expose the myth of stocks' superior investment returns and propose an all-bond portfolio as a sure-footed strategy that will ensure positive returns. Designed to educate novice and sophisticated investors alike, as well as to serve as a tool for financial advisers, the book explains why and when bonds can be the right choice. Case studies, detailed bond strategies, and a financial planning overview bring home the value of bonds in achieving financial goals.
Presenting a broad spectrum of bond-investment options, and describing how to purchase bonds at the best prices, the book shows how to make real money by investing in bonds. The strategies presented here are designed to help the reader determine how to use bonds to take control of their own financial destiny.
- New edition includes information on corporate bonds, emerging market bonds, municipal bonds, the new global ratings, and how to protect against municipal defaults
- Looks at how bond portfolios protected against market volatility in the 2007-2008 crash and how they can do the same in the future
- Includes information on how the bond market has changed
- The wealthiest investors and financial advisers use the bond strategies outlined in this book to maximize the return on their portfolios while providing security of principal
With more bond options available than ever before, Bonds continues to be a must-have for anyone looking to understand the investment opportunities available to them.
Table of Contents
Foreword xxiii
Preface xxvii
Acknowledgments xxxvii
Introduction xxxix
PART I Clearing the Cobwebs 1
Chapter 1 Bonds: The Better Investment 3
Examining the Myths 5
Historical Annual Return 5
Unhappy Returns: Uncovering the True Returns on Stock Investments 6
Taxes, Costs, and Risks of Investing in Bonds 9
Past Performance 10
Risk 14
Growth and Income 18
A Second Look at Risks and Returns 19
Stock Market Volatility: The Impact on Retirement Planning 21
Why Bonds Are a Better Investment than Stocks 23
Individual and Institutional Investors: How They Differ 24
Institutional Bond Investors 25
Key Questions to Ask about Whether You Should
Invest in Stocks rather than Bonds 27
Notes 27
Chapter 2 The All-Bond Portfolio 29
Advantages of the All-Bond Portfolio 30
Financial Planning 31
Designing the All-Bond Portfolio 33
Plain Vanilla Bonds 33
Plain Vanilla Exclusions 34
A Word about Other Bonds 36
High-Yield Debt 36
The All-Bond Antidote to Greed and Fear 37
Notes 38
Chapter 3 Adopting the All-Bond Portfolio: A Case Study 39
A Poor-Fitting Portfolio 39
Peter’s Financial Objectives 40
Peter’s Concerns about His Portfolio 41
A Consultation with Stan Richelson 43
A Financial Plan Aligned with Objectives 44
Step 1: Peter’s Objectives and Financial Needs 45
Step 2: Allocation between Safe Bonds and All Other Assets 45
Step 3: Tax Review 45
Step 4: A Goal-Directed Portfolio 46
Reaching a Comfort Level 48
Note 48
PART II Bond Basics 49
Chapter 4 The Evolution of a Bond: From Verbal IOU to Electronic Entry 51
Learning the Language 51
The Early Years 52
A Colonial Debut 55
After the American Revolution 56
Entering the Twentieth Century 59
Changes in the Twentieth Century 62
A Modern Metamorphosis 64
Great Recession of 2007–2009 67
Basel III - International Securities Standards 68
Derivative Regulation 70
The Internet’s Impact on Bond Buying 70
Notes 71
Chapter 5 The Life of a Bond: How it’s Created, Issued, Priced, and Traded 75
By Way of Background 76
Preparing a Bond Issue 78
Rating a Bond 81
Setting a Coupon Rate 84
Launching a Bond 85
Understanding Risk 86
A Bond’s Cost and Yield 88
Determining a Bond’s Yield 88
Current Yield 89
Simple and Compound Interest 90
Yield-to-Maturity 91
Yield-to-Call and Yield-to-Worst 92
Yield-to-Average Life 92
After-Tax Yield 93
The Call Option 93
Duration 94
Total Return 96
Cash Flow upon Death: The Estate Feature 97
Mind Mr. Market 98
Pricing a Secondary Market Bond 100
Key Questions to Ask When Purchasing a Bond 101
Notes 101
PART III Bond Categories 103
Chapter 6 U.S. Treasury Securities 105
The Big Picture 105
U.S. Treasury Notes and Bonds 108
Advantages 108
Risks 109
Tax Implications 109
Pricing Information 110
Special Features and Tips 110
U.S. Treasury Bills 111
Advantages 111
Risks 111
Tax Implications 112
Pricing Information 112
STRIPS 112
Advantages 113
Risks 114
Tax Implications 114
Pricing Information 114
TIPS 114
Advantages 117
Risks 117
Tax Implications 118
Special Features and Tips 118
Key Questions to Ask about All Treasury Securities 120
Notes 120
Chapter 7 U.S. Savings Bonds 121
Simple Investments with a Few Complexities 121
Purchasing a Savings Bond 122
Series EE Savings Bonds 123
EE Bond Purchases on or after May 1, 2005 123
Special Rules for Old EE Bonds 124
Advantages 125
Risks 125
Tax Implications 125
Special Features 127
Recommendations and Tips 129
Series HH Savings Bonds 130
Advantages 130
Risks 131
Tax Implications 131
Series I Savings Bonds 131
Advantages 133
Risks 134
Tax Implications 134
Recommendations and Tips 134
Key Questions to Ask about Savings Bonds 135
Chapter 8 U.S. Agency Debt 137
Major Debt-Issuing Agencies 138
Fannie Mae and Freddie Mac 139
Federal Agricultural Mortgage Corporation 142
Federal Farm Credit Bank System 142
Federal Home Loan Bank System 142
Financing Corporation 143
Resolution Funding Corporation 143
Student Loan Marketing Association 144
Tennessee Valley Authority 144
Advantages 145
Risks 145
Tax Implications 147
Special Features and Tips 147
Key Questions to Ask about Agency Bonds 148
Notes 149
Chapter 9 U.S. Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations 151
Mortgage Securities Guaranteed by the Agencies (Agency MBSs) 152
MBSs: A Complex Structure 153
The Agencies 155
Agency Mortgage-Backed Securities 157
Advantages 158
Risks 159
Tax Implications 160
Special Features and Tips 160
Key Questions to Ask about Mortgage-Backed Securities 161
Collateralized Mortgage Obligations 161
CMOs: A Closer Look 162
Advantages 164
Risks 165
Tax Implications 165
Pricing Information 166
Key Questions to Ask about CMOs 166
Chapter 10 Municipal Bonds: Overview 167
Why Buy Munis? 168
Munis: The Opaque Market 169
Default Risk Considered 172
Risks in Common Bring about Change 174
Ratings and Municipal Bond Insurance 177
Downfall of the Muni Bond Insurers 180
Phoenix Rising 182
Purchasing New Issue Municipal Bonds 182
Municipal Notes 183
Prerefunded and Escrowed Bonds 184
Advantages of Prerefunded Bonds 185
Advantages of Escrowed Bonds 185
Risks 185
Tax Implications 185
Protect Your Muni Bond Portfolio? 185
Taxes on Municipal Bonds 186
Key Questions to Ask about Muni Bonds 187
Notes 188
Chapter 11 Municipal Bonds: Types 191
Tax-Exempt or Taxable Bonds? How to Decide 191
Taxable Municipal Bonds 194
Advantages 195
Risks 195
Tax Implications 196
Special Features and Tips 196
Private Activity Bonds 196
Advantages 197
Risks 197
Tax Implications 198
Tax-Exempt Municipal Bonds 198
General Obligation Bonds 199
Revenue Bonds 202
Types of Revenue Bonds 205
Checking Prices on Municipal Bonds 220
Key Questions to Ask about Types of Municipal Bonds 222
Notes 223
Chapter 12 U.S. Corporate Bonds 225
The Big Picture 225
Ratings 225
Types of Corporate Bond Coupons 227
Taxation 228
Key Categories of Corporate Bonds 229
Advantages 230
Risks 230
Pricing Information 232
Special Features and Tips 232
Corporate Medium-Term Notes 234
Advantages 235
Risks 235
Pricing Information 236
Special Features and Tips 236
Corporate Retail Notes 236
Advantages 237
Risks 238
Pricing Information 238
Information Sources 238
Special Features and Tips 239
Step-Up Bonds, Notes, and Debentures 239
Advantages 240
Risks 240
Tax Implications 241
Special Features and Tips 241
Corporate High-Yield Junk Bonds 241
A Rose by Any Other Name 241
The Track Record 242
Brave Buyers 244
Advantages 245
Risks 246
Pricing Information 246
Special Features and Tips 247
Corporate Convertible Bonds 247
Advantages 248
Risks 248
Pricing Information 249
Special Features and Tips 249
Price-Checking Corporate Bonds 250
Key Questions to Ask about Corporate Bonds 251
Notes 252
Chapter 13 International Bond Markets: Foreign and Offshore 255
Definition of Terms 256
Types of International Bonds 257
Trading Blocs 260
European Bloc in the European Union 260
Emerging Market Bloc 261
Dollar-Denominated Foreign Debt 263
Foreign Bonds 265
Currency Considerations 265
Tax Implications 266
Advantages 266
Risks 267
Special Features and Tips 268
Key Questions to Ask about International Bonds 269
Notes 270
Chapter 14 Bond Look-Alikes 273
Certificates of Deposit 274
Ratings 274
Yields 274
Bank Certificates of Deposit 275
Broker-Sold Bank Certificates of Deposit 277
Key Questions to Ask about Certificates of Deposit 281
Single-Premium Immediate Fixed Annuities 281
Advantages 283
Risks 284
Tax Implications 284
Pricing Information 285
Information Sources 285
Special Features and Tips 285
Key Questions to Ask about an Immediate Fixed Annuity 287
Deferred Fixed Annuities 287
Investment Phase 287
Accumulation Phase 287
Nonfixed Distribution Phase 288
Fixed Distribution Phase 289
Advantages 289
Risks 289
Tax Implications 290
Pricing Information 291
Special Features and Tips 291
Key Questions to Ask about a Fixed Deferred Annuity 292
Nonconvertible Fixed Rate Preferred Stock 292
Advantages 295
Risks 295
Pricing 296
Tax Implications 296
Information Sources 297
Special Features and Tips 297
Key Questions to Ask about Preferred Stock 298
Dividend-Paying Common Stock 298
Advantages 299
Risks 299
Special Features and Tips 299
Key Questions to Ask about Common Stock 300
Notes 300
PART IV Options for Purchasing Bonds 301
Chapter 15 How to Buy Individual Bonds: A Tool Kit 303
Buying Online 304
Pricing Information 305
Pricing a New Issue 308
Real-Time Prices 308
Key Questions to Ask about Buying Bonds Online 310
Choosing a Broker 310
What’s wrong with This Ad? 310
Choosing the Right Brokerage Firm 314
Criteria to Consider 315
Establishing a Relationship 316
Using a Stockbroker 316
The Managed Account 317
Evaluating Bond Prices 319
Nature of the Marketplace 320
Wholesale versus Retail 320
New-Issue Order and Confirmation Details 321
Key Questions at the Point of Purchase 322
Notes 324
Chapter 16 Bond Funds: The Good, the Bad, and the Worst 325
Common Ground 326
Maturity 327
Yield 327
Duration 328
Derivatives 329
Advantages 330
Disadvantages 330
Checking the Costs: Hidden and Unhidden 331
Load 331
Other Changes 332
More about Fees 335
Buying for Total Return 336
Fund Categories 337
Unit Investment Trusts (UITs) 337
Closed-End Funds 338
Exchange-Traded Bond Funds 340
Open-End Mutual Funds 342
Key Questions to Ask about Types of Bond Funds 346
Notes 347
Chapter 17 Bond Funds: A Taxing Matter 349
Money Market Mutual Funds: Taxable and Tax-Exempt 349
Breaking the Buck 350
Municipal Bond Funds: Tax-Exempt 352
Municipal Bond Funds: High Yield (Junk Bonds) 352
Municipal Bond Funds: National 353
Municipal Bond Funds: State Specific 354
Taxable Funds 354
Municipal Bond Funds: Taxable 355
Build America Bond (BAB) Funds 355
Corporate Bond Funds 355
Convertible Bond Funds 356
Corporate Bond Funds: High Yield (Junk) 356
Corporate Bond Funds: Investment Grade 357
Floating Rate Loan Participation Funds (Bank Loan) 358
International Bond Funds 360
Index Funds 360
Inverse Bond Funds 361
Long-Short Bond Fund 361
Stable-Value Funds 361
Ultrashort Bond Funds 363
Government Bond Funds 363
GNMA Funds 364
Inflation-Protected Securities Funds 364
Treasury Bond Funds 365
Strategic or MultiSector Bond Funds 365
Target-Date Funds: Zero-Coupon 365
Target Date Funds: Life Cycle/Asset-Allocation Funds 366
Key Questions to Ask about Choosing a Bond Mutual Fund or ETF 367
Notes 367
Chapter 18 Choosing a Bond Mutual Fund or ETF 369
Bond Fund Fees 370
Understanding Yield 370
The Search Begins 372
Morningstar 375
Long-Term Thinking 377
Strategies for Bond Fund Buyers 377
Key Questions to Ask When Exploring Bond Fund and ETF Search Engines 380
Notes 381
PART V Bond Investment Strategies and Richelson Investment Rules 383
Chapter 19 Financial Planning Framework for Bond Investing 387
Create Cash Flow with Bonds 388
Focus on Cash Flow Not Performance 388
Buy Cash Flow, Not Diversification 389
Get Cash Flow, Not Hoped for Returns 390
Inflation and Cash Flow 390
Cash Flow in Retirement 391
The Basics of Creating Your Financial Plan:
The Four-Step Financial Planning Process 393
Step 1. Determine Your Life Objectives and Financial Needs 394
Step 2. Divide Your Investment Portfolio into Two Categories 396
Step 3. Plan for Taxes 398
Step 4. Select Bonds to Support Your Life Objectives and Financial Needs 401
Should You Add Risk to Your Portfolio? 406
Reevaluating Your Portfolio 409
Key Questions to Ask about Financial Planning with Bonds 410
Chapter 20 Financial Planning with Bonds: Case Studies 411
Baby Boomers Design a New Financial Plan 411
Every Family Has a Different View of What Lifestyle is Appropriate for Them 412
Summary of Key Takeaway Points 415
You Are Rich! Why Are You Worried? 415
Summary of Key Takeaway Points 418
Changing Course 418
Summary of Key Takeaway Points 419
Meeting a Need for Safety 420
Summary of Key Takeaway Points 420
An Unanticipated Transition 421
Summary of Key Takeaway Points 422
Ownership of Stock in a Private Company 423
Postscript 424
Summary of Key Takeaway Points 424
Stock Options Pay Off Big 424
Postscript 426
Summary of Key Takeaway Points 426
Planning for College Expenses 427
Summary of Key Takeaway Points 428
Invest a Large Amount of Cash at One Time 428
Summary of Key Takeaway Points 431
Socially Responsible Investing 432
Ill-Advised Advisers 433
Mikala’s Bond Portfolio 435
Charitable Lending and Personal Growth 437
Church Bonds 438
Mikala’s Life Plan 439
Summary of Key Takeaway Points 439
Notes 440
Chapter 21 How to Make the Most Money from Bonds 441
Knowing When to Buy and Sell 441
The Yield Curve 443
Strategies for Deciding When to Sell 447
Strategies for Finding Bargain Bonds 448
Strategies for Avoiding Overvalued Bonds 450
Strategies for When Interest Rates Are High or Rising 451
When Interest Rates Are Rising 451
Strategies for When Interest Rates Are Low or Falling 453
Investing for the Highest After-Tax Yield 455
A Reminder about Taxes on Investments 456
Strategy for Placing Bonds in Tax-Effective Accounts 457
Strategies for Individuals in High Tax Brackets 458
Strategies for Tax-Deferred Retirement Accounts and Individuals in Low Tax Brackets 458
Investing and Risk Tolerance 460
Practical Considerations for Assessing Risk Tolerance: Know Yourself 460
Strategies for Reducing the Risk of Default 462
Strategies for Safe Investing 463
Strategies for Reducing Market Risk 464
Strategies for Reducing Liquidity Risk 469
Strategies for Reducing Call Risk 469
Investing for Income Needs and Financial Goals 470
Strategies for Short-Term Goals 470
Strategies for Long-Term Goals 471
Strategies for Life Events 473
Strategies for Increasing Income 473
Strategies for the Socially Responsible Investor 475
If You Are Starting Out With Less Than $25,000 to Invest 475
Obstacles to Committing to an All-Bond Portfolio 475
Notes 477
Appendix: Useful Web Sites 479
About the Authors 483
Index 485
