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Are Bonds Still a Good Choice for Safe, Steady Growth?

Are Bonds Still a Good Choice for Safe, Steady Growth?

https://www.prosperitypeaks.com/wp-content/uploads/2018/04/bond-market-300x199.jpg If you’ve been paying attention, you’ll know that bonds aren’t what they used to be. Values are declining, risk is up, investors are selling, bond funds are underperforming, and municipal bonds are no longer the safe haven they once were.

With the demise of the bond insurance industry in the financial crisis, credit quality in the market has become a much bigger concern for investors,” reported financial journalist Andrew Osterland on February 28, 2018 for CNBC.comEarlier in the year, Financial Times noted sell-offs and declared that “the long bond rally could stall—and perhaps even unravel—in 2018.” This week, Bloomberg.com noted “concerns over volatility” in high-yield bonds. Even Kiplinger.com, which typically faithfully tows the line of “typical” financial advice, had harsh words for bonds in a December 2017 article:

The outlook for the bond market is bleak. With the benchmark 10-year Treasury yielding a paltry 2.36%, it’s simply not worth the risk to own it. Should market rates rise just one percentage point, the price of that 10-year bond would fall about 9%.”

While we tend to think of rising interest rates as a good thing for fixed income instruments, bond prices move in the opposite direction as interest rates. Additionally, a bond mutual fund can lose value when the bond manager sells bonds in a rising interest rate environment, while investors in the open market demand a discount on the older bonds that pay lower interest rates. And of course, when bond issuers default, bond values plummet.

Unfortunately, some investors mistakenly believe that bonds can’t or won’t lose money. But as Kent Thune explained in a December 2017 article on TheBalance.com, it is a “common misconception among beginning investors is that ‘bond mutual funds are safe.’”

https://www.prosperitypeaks.com/wp-content/uploads/2018/04/bonds-300x169.jpg During the 2008 stock crash, instead of protecting municipal bond investors, Bloomberg Barclays Municipal Index lost nearly 2.5% in 2008 during the stock crash. “That’s hardly catastrophic, but it might not have represented the resilience that the bond investors were expecting,” notes Morningstar analyst John Coumarianos, before making an ominous prediction that “results might be less benign during the stock market’s next wipeout.”

Municipal bonds have indeed become increasingly unpredictable in recent years. In January of 2018, the Wall Street Journal announced, “Muni Bonds May Not Be the Reliable Bet They Once Were,” advising investors to “understand the risks” and “adjust their strategy accordingly.” The asset class has fundamentally changed since the Financial Crisis, as an increasing number of cities, states, and now Puerto Rico have defaulted on obligations. Furthermore, when municipalities go bankrupt, bondholders must wait in line behind employee pension funds for payment.

“The Worst January Since 1981”

Even diversified muni-bond funds have suffered.January is usually a stellar month for the municipal bond market. Not this year.” Citing a 1.18% loss for the month in the Bloomberg Barclays Municipal Bond Index, Osterland notes it was “the worst January for municipal bonds since 1981.” Since January, the fund has continued its decline, posting a year-to-date loss of 1.65% on April 24.

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Add rising interest rates to the mix and lowered corporate taxes, which decrease incentives for muni-bonds, and we could be in for worsening woes.

“Interest rates have hurt the market,” Tom Hession, managing partner of Riverbend Capital Advisors told CNBC.com regarding municipal bonds. “People see rates going up and they sell.” Hession adds a backhanded recommendation: “Yields are more attractive than they’ve been in a long time, so if someone is comfortable with a more volatile environment, this could be a good time to consider municipal bonds.”

Meanwhile, Kiplinger columnist Steven Goldberg warns “income-hungry retirees” against reaching for higher yields from troubled companies. He argues that the purpose of bonds is not to earn income, rather, to decrease the volatility in your overall portfolio. But can we rely on bonds for steady gains? Perhaps not.

Goldberg goes on to halfheartedly recommend four bond funds which he sees as the best of a weak, unreliable asset class. Two receive this depressing warning: “Don’t expect either of the Vanguard funds to return more than 1% or 2% annually anytime soon.” One receives an additional warning that “you’d expect to lose roughly 2.6% if rates were to rise one percentage point.” The other two funds may return a bit more, Goldberg says, adding that they are “quite a bit riskier,” investing in things such as so-called “junk” bonds and emerging market debt.

So much for bonds as the “safe,” steadily-gaining part of your portfolio!

While bond funds are generally less risky than stock market funds, with more moderated losses as well as profits, investors relying on bonds to provide gains if (or when) stocks fall could be in for disappointment.

Seeking bond alternatives

https://www.prosperitypeaks.com/wp-content/uploads/2018/04/bond-alternatives-300x271.jpgSo if not bonds, then what? It depends on what you were trying to get out of bonds.

If you were invested in muni-bonds primarily for income, we think there are other options worth considering. Private lending—the oldest form of investment around—is alive and well. Private equity funds, bridge loans, land leases, fractional real estate investments and other opportunities can generate regular monthly income. Depending on your situation, immediate annuities might be a good choice.

If you were looking to bonds for long-term safety and stability and reliable tax-advantaged growth, you should give serious consideration to high cash value whole life insurance. Dividend earnings rates vary according to age, health, and insurer, but net policy gains for cash value after costs are currently in the 2-4% range for many policy owners, when held long-term. (This does not include an additional death benefit paid to beneficiaries.) When adjusting for the preferential tax treatment (tax-deferred, often tax-free gains as long as the policy remains in force), you’d have to earn upwards of 4 or 5% to match the gains of whole life insurance.

While a rate of 5% is certainly doable in many investments, consider the quality of the asset when it comes to life insurance. It is not an equity that will roller coaster ride, but a time-tested vehicle with guaranteed minimums. Dividends have been faithfully paid for well over 100 years through every economy, and gains are locked in. Furthermore, industry requirements for reserves make life insurance one of the safest places to store cash… certainly safer than muni-bonds in today’s market!

And if you simply want short-term place to store cash you’ll need a year or two from now, you’re likely better off with an internet bank savings account. Banks such as Discover, Ally, and Marcus are all paying around 1.5% at this writing, with no monthly fees. CDs can pay a smidge more if it’s worth it to you to sacrifice liquidity.

What we DON’T recommend you do is simply give up on “safe money” and rely on a portfolio of nothing but mutual funds and ETFs. That’s setting yourself up for failure without a safety net.

Is it time to explore alternative ways of saving and investing?

Prosperity Economics shows you how to create wealth outside of Wall Street and the big banks! To find out more about stock, bond, and cash alternatives, contact us today!

©ProsperityEconomicsMovement

7 Strategies for More Income in Retirement

7 Strategies for More Income in Retirement

“Old age is always fifteen years older than I am.”

—Bernard Baruch, American financier, investor, statesman and philanthropist

retirement-piggy-bank.jpgOne of the biggest fears people have is running out of money in retirement. And for many Americans, this is a very real risk, not an irrational phobia.

If you are a reasonably healthy 65-year-old non-smoker, actuarial tables estimate you’re likely to live to age 86, as a man, and 89, as a woman. And the longer you live, the longer you can expect to live. A 90-year old non-smoker has a good chance of living to age 95, as a man, and a 97, as a woman.

However, there’s no need to worry your way through retirement in a state of self-enforced poverty and extreme frugality. Follow these strategies to have more spendable income in retirement, and never run out of money!

#1: Stay healthy and active.

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Although it’s no guarantee, good health habits can help slash medical costs:

Move more. Inactivity costs individuals, employers and the governments as much as $28 billion annually in medical costs and lost productivity, according to a study cited by The New York Times. Exercising for 30 minutes 3-5 times per week can make a measurable difference in health and vitality.

Eat from the bottom of the food pyramid. To reduce your risk of cancer and heart disease, eat more fruits and vegetables. Avoid the “SAD” Standard American Diet, which fuels disease, and learn what “Blue Zone” researchers are discovering about the world’s healthiest and longest-living people.

Quit or moderate negative habits. Eliminate bad habits such as cigarettes or over-indulging in sugar, junk food or alcohol.

Think positively. A recent Harvard study found that “optimistic women” had nearly a 40% lower chance of dying of heart disease or stroke and a 16% lower risk of dying from cancer. Multiple other studies show that optimistic people of both sexes live longer and have less heart-related illnesses.

Exercising regularly, eating well and maintaining a positive attitude will save you money and—even more importantly—help you enjoy your life!

#2: Save more.

retirement-saving.jpg The average American saves less than 5% of their income. Some Americans have no savings at all, or they have debt instead. Some people invest but neglect to save and have to raid their retirement accounts—paying penalties and taxes—for every emergency.

We recommended saving 20% of your income. That might sound intimidating or even impossible, but it’s not. It starts with a decision and it requires a mindset committed to living below your means.

Start saving—even if it’s 5 or 10% to start, and work your way up as you can. The key is to increase your saving—not your spending—as your income and financial capability increases.

Save more money, and you’ll have liquidity for opportunities as well as emergencies. You’ll end up with more money to invest, without compromising your savings. Saving more also makes people less compelled to subject their dollars to unreasonable risks in pursuit of unrealistic rates of return.

#3: Keep working, contributing, and earning.

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The impact of longevity and low savings rates combined with too-early retirement can be devastating. Many people are retiring without the financial capability to remain independent—one reason why we don’t recommend a traditional retirement. Work can also provide people with purpose and with their primary social interaction.

Another tremendous benefit of working longer is that you can maximize your Social Security income! Too many people take Social Security too soon and regret having a lower income.

If you don’t enjoy your work, the thought of delaying retirement may lead to despair. But when we say “don’t retire,” we mean, “Find work you LOVE and do it for as long as long as you want.” If you love what you do, it won’t feel like “work.”

It doesn’t have to be full-time work. Perhaps you’ll work part-time or seasonally. Maybe you’ll freelance and volunteer on the side. Perhaps you’ll consult, become a travel blogger, or work virtually. Just keep your mind active, keep contributing your wisdom and skills, and keep earning!

81-year old Earnestine Shepherd is the world’s oldest female bodybuilder. She no longer competes in bodybuilding, but she has found her calling in inspiring and training others to be healthy and strong at any age. In this BBC video profile, she declares she’ll do the work she loves “until her last breath”:

Want to envision a future you’ll love? You’ll find inspiring stories and “case studies” in Busting the Retirement Lies, along with some serious number-crunching that may have you re-thinking your 401(k).

#4: Reduce risk with asset allocation

asset-allocation-portfolio.jpg You may know the joke about how 401(k)s “became 201(k)s” in the Financial Crisis. People who planned on retiring saw their investments plummet as much as 50%.

“Easy come, easy go” should not be a phrase that applies to your investments! But the problem is this: most people’s portfolios are comprised of nearly all stocks, and stocks are subject to systemic risk.

For investors with truly diversified portfolios, “Great Recession” was more of a speed bump than a roadblock to retirement. Reduce your risk by following Prosperity Economics strategies and investing in diverse asset classes and financial instruments, such as:

  • private lending instruments such as bridge loans
  • cash-flowing real estate
  • business investments
  • alternative investments such as oil and gas
  • life settlement funds
  • and high cash value life insurance.

#5: Raise financially independent children.

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Unfortunately, some parents keep spending resources on adult children who remain dependent. Increasingly, kids are moving back in with parents after college, where some overstay their welcome.

The trend of many young adults to become self-supporting has become so widespread it now has a name: the “Failure to Launch” syndrome. Unfortunately, parents can contribute to the problem when they keep subsidizing kids and shielding them from the natural consequences of their actions. To avoid this, help kids learn responsibility and independence from a young age. Encourage them to earn (even if it’s through chores or babysitting), save (even if it’s from gifts and allowance), and make wise choices with money.

#6: Focus on cash flow, not net worth.

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Typical financial advice helps you accumulate assets in a brokerage account, but too often, financial plans neglect how to turn this into cash flow later. Such strategies may be a better retirement plan for advisors with “assets under management” than for YOU!

When interest rates dropped recently to historic lows, retirees faced hard choices. Should they scrimp and save to live off of “interest only”? Consume equity and risk outliving their savings? Keep the bulk of their investments in equities and pray that stocks will somehow keep going up?

It’s best to “practice” creating cash flow with assets before you must rely on the income from investments. It’s good to accumulate assets, but you must also have reliable strategies to turn assets into income.

#7: Consume assets strategically.

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The amount of money accumulated in assets isn’t as important as the amount of spendable income produced by those assets! By accumulating the right assets and spending them in the right order, you might end up with hundreds of thousands of dollars extra in your pocket!

By strategically consuming assets in the most efficient way, you can:

 

  • dramatically reduce taxes
  • increase your cash flow and
  • protect yourself from market swings and low interest rates
  • while increasing your net worth and (likely) leaving more to heirs.

For instance, replacing bonds in your portfolio with high cash whole value life insurance can make a multiple six-figure difference in future spendable income! (This is why we don’t recommend bonds. And we’ll show you a case study in a future post that demonstrates how this move can give you more income—while raising the value of your estate!)

Want a Strategy for More Income in Retirement?

Let’s talk… we’d love to show you how you CAN “live long and prosper!”