Journey into the World of Bonds: A Guide to Portfolio Diversification
Dec 02, 2023Season 3Episode 35
The Crotchety Old Men
Are you ready to secure your financial future? Then, buckle up as we navigate the journey of bond investments that could just be your golden ticket to a comfortable retirement. Forget your preconceived notions about bonds being complex or tedious; we break down the intricacies of bond rates, the differences between stocks and bonds, and various bond types like corporate, municipal, and government bonds. We even guide you through the maze of different bond maturity periods. So, gear up to get a grip on an investment strategy that could give your portfolio the much-desired diversification.
Imagine having a financial crystal ball that shows you a path to retirement bliss. Spoiler alert, that crystal ball might just be smart investing. We move beyond bond basics to the advanced realm of portfolio diversification, focusing on the tax benefits of municipal bonds, and the possibilities of making a profit by selling bonds at the right time. Our special guest, George, throws in a thought-provoking quote about the crucial role of understanding debt for financial success. So, for anyone yearning to master their finances, this episode is your essential guide. Remember, knowledge is power, and in this case, it might also be profit.
Are you ready to secure your financial future? Then, buckle up as we navigate the journey of bond investments that could just be your golden ticket to a comfortable retirement. Forget your preconceived notions about bonds being complex or tedious; we break down the intricacies of bond rates, the differences between stocks and bonds, and various bond types like corporate, municipal, and government bonds. We even guide you through the maze of different bond maturity periods. So, gear up to get a grip on an investment strategy that could give your portfolio the much-desired diversification.
Imagine having a financial crystal ball that shows you a path to retirement bliss. Spoiler alert, that crystal ball might just be smart investing. We move beyond bond basics to the advanced realm of portfolio diversification, focusing on the tax benefits of municipal bonds, and the possibilities of making a profit by selling bonds at the right time. Our special guest, George, throws in a thought-provoking quote about the crucial role of understanding debt for financial success. So, for anyone yearning to master their finances, this episode is your essential guide. Remember, knowledge is power, and in this case, it might also be profit.
Hi, this is George Cremling with the Crouchy the Old man podcast. Gary Smith, Paul Clements and I will be taking off the month of December. This will give us an opportunity to replenish and recharge and get ready for 2024. We hope you have enjoyed many of the 75 episodes we have produced over the last two years. Our goal for 2024 is to continue to bring you our audience wealth building as well as health building tips. We are wishing you a happy and safe holiday season and, as we always say on the Crouchy the Old man podcast, if you didn't know, now you know. Hi, this is George with the Crouchy the Old man podcast. Hopefully you have enjoyed listening to the Crouchy the Old man as much as we have enjoyed making each episode. If so, send us some feedback. We would love to hear from you at thecrouchytheoldmanpodcastcom. Let us know what you enjoy about the show, what you would like to hear more of. We would love to receive your feedback. Remember that's thecrouchytheoldmanpodcastatgmailcom. And, as we always say, if you didn't know, now you know Peace.
Speaker 2:
Hello, it's me again, gary Smith, one of the co-hosts of the Crouchy the Old man podcast. Well, you know how I like to say it Good day, good morning, good afternoon, good evening, maybe even good night, depending on what hemisphere you're in. Hey, it's such an exciting time today, and joining me in the studio, as always, is my main man, george Tom Lay. Top of the day to you, george.
Speaker 1:
Top of the day, smith, how we doing today.
Speaker 2:
Man, we're doing great, George. I am amazing. I'm amazing because I'm so dog-on excited. That's what I say.
Speaker 1:
Every time we get together, it's such a new, it's a new topic, it's a new day, and you can't help but be excited about that.
Speaker 2:
Absolutely, man, absolutely. Life has so many twists and turns and you never know where you're going to end up, so all you have to do when you get up is continue to put one's foot in front of the other.
Speaker 1:
That's right. Like I said, if I can see the dust on the ceiling fan, I know it's going to be another good day.
Speaker 2:
Well, all right. Well, what you got for us today, George?
Speaker 1:
Well, smith, you know we always talk about our four pillars, which are information, education, exposure and opportunity. I think we're going to talk a little bit about opportunities today. That opportunity is your normal investor might be missing, which is bond rates. I know we've seen a lot of news about what. The interest rate goes up. The interest rate goes up. The Fed are making the interest rate go up again. They're thinking it's going to control economics and the hiring and things like that. But the flip side for investors is how it affects bond rates. So right now, bond rates are pretty good investment.
Speaker 2:
All right, then, brother will hey bring it on. Let's dive into this thing. I'm sure curious about what's the benefit of bonds.
Speaker 1:
Yeah Well, first of all, you know, let's kind of talk about you know, remind our audience again. You know what bonds are. I think we're so accustomed to Talking about stocks and a lot of times in your 401k, in your IRA, you have more a mixture of bonds and and and stocks. So a stock is basically you are investing in a company, you know, so that's pretty much a stock. A bond is basically you're loaning that company money Based on a specific time that they will repay you, and so that's that are basically in a rate. So that's that's the difference between a bond and a stock.
Speaker 2:
Okay, so the corporate bonds. So that acts in essence is like a debt obligation Versus the stock, is more of an equity participation. Would that be a correct way to look at?
Speaker 1:
it Absolutely correct. And it's not just corporate bonds. You got corporate bonds. You got municipal bonds, which are those that from your local government. In fact, here in my city we just approved a municipal bond of over 170 million dollars to reduce some parts of the city. So that's a bond that's floating out there right now. And then you got your government bonds, which are, in most cases, are used to Benefit you know to, to invest in in wars and and things of that nature. You got to finance some of the stuff that the government is doing some kind of way. So that's usually what they'll do is they will issue bonds, and there's a couple different types of bonds. There's a T bill, which matures in less than one year. You've got, and You've got the Treasury notes, which are five years, and then you've got the Treasury bonds that mature within 20 to 30 years. So so you'll hear them refer to as T bills. So you've got three different flavors and I think each one has its own unique value.
Speaker 2:
So right now, so just for the basic information just you just shared there in terms of the T bills and 30 years and five years and all that, where can the average person find that information?
Speaker 1:
Well, I mean to invest in that it's. It's called Treasury Direct, which is you just go online.
Speaker 2:
Just talking about it, to invest, just to find out that, okay, what those rates are. You know, because Educational thing and I think, man, by you sharing that with them, with us, you know how can I go after I listen to this podcast and find that out?
Speaker 1:
Well, gary, it's, it's simple. It's Google. I mean, it's Not. It's like this information is hitting under a rock somewhere. All you got to do is Google what what is a eight-week T bill selling for, and it'll pop up 5.360. What is a two-year treasury note, you know yield? On that it will say 5.08%. So yeah, you can track it on a daily basis. So, no, it's not hitting under a rock or anything. It's, it's out there with for the public.
Speaker 2:
Oh yeah.
Speaker 1:
You know, like I said, this is the, the yield, and let's talk about yield. Yield is what you know, you, you expect to make on the investment in a specific amount of time. So that that's pretty pretty much how a bond works. And, as I kind of alluded to not answering your question, if you want to purchase these, you just set up an account on this. It's a website called Treasury Direct and you're basically buying these Corporate, these federal bonds, strict straight from the government. There's no middleman involved, whereas if you want to buy a corporate bond, you know Charles Swab or Vanguard they have, though they have bond funds, just like buying an ETF. They have bond funds, convink, but you need to be careful because obviously those come with a fee. So you want to make sure that you know you, you know what all the ends out of those are. So, yeah, that's how you pretty much purchase the bonds good info.
Speaker 2:
Good info. Well, in terms of risk, you know, it's been my understanding bonds come with a certain rating. You got your triple a rated bonds, you double a. Well, everything from a, I guess, triple a, all the way up to what they call jump Bonds. I was soon Now in that risk reward type situation. I was. Is it the longer the bond term is, the higher to yield, or is it short term Bonds get a similar yield? Can you share with us how that works?
Speaker 1:
I don't know if there is a specific Correlation between the amount of time and the actual yield on the bond. I'm sure at some point there is, but, like I you know, like I just said, an eight week Treasury bill is 5.36, so, and a two-year Treasury notice 5.08, so it's a lower yield with the two-year bond. I think one a couple of things that you need to look at is, first of all, the duration of how long the bond is. I mean, you want to make sure that it fits within your. What you're trying to do. I would think that, if you're, if it's in your 401k or your IRA, you may want to look at a 30 or 20 to 30 year bond. If it's in your normal budgeting money, you may want to look at a short term T-bill, less than one year. I mean, you can do these, like I said, you can do them at two weeks, three weeks, four weeks, all the way up to 52 weeks, and get a pretty good return. And then the one in the middle, the T-note, is between two and five years.
Speaker 1:
So here again, you got to do your homework and, like I said, you got to ask yourself a question what am I trying to benefit here. What's my goal? What am I trying to do? You know so that, is it a long-term plan? Is it a short-term plan? Do I just need to have some money sitting somewhere? Would be sitting in a bank, somewhere where I can move it over for two to three weeks, eight weeks, and get some good interest on it. So here again, what's your plan?
Speaker 2:
Got to have a plan. Excellent, excellent, you know. It's got me thinking now is that I wonder what is the yield on the corporate bond? I'm kind of going back to those businesses. Let's say, for instance, we just took the Fortune 500, the top 500 American corporations, and you know they have a market for us, you know the stock market and stuff like that. I'm sure there probably is an index somewhere out there for the bond market, those finding out. Okay, what are those top five Fortune 500 companies? What, from a bond perspective? How does that look? Because if I'm and I could be wrong on this, so use Google. Is that, if bonds are considered a debt, all right? And if any of those corporations go out of business or go bankrupts, are those bonds still payable? Because, since it's debt and not an equity participation, as it is with stock, is there more security there than it actually talked about or shown? And those are some questions. Go ahead. I'm sorry, george, go ahead.
Speaker 1:
Yeah, I mean those are all good questions and I think as we go down the list of you know risk or things to be concerned about, you know that kind of comes into play. We talked about the duration and how long the bond is. That's something that you need to be concerned about. The second one is probably what you're talking about there. So if you have a longer bond, it's more risky because something could happen to that company, not necessarily going out of business, but how much money they're bringing in from a capital perspective. So you have to look at how long that rate is gonna be there, what the risk is. So, yeah, it's gonna be a bigger risk if it's a longer term.
Speaker 2:
And that's the whole psychology of investing. I don't know if I'm using the right term, even if I use it with terms psychology but having the opportunity, you know when you look at, if you gotta pay me to wait, all right, and that's why it makes more sense that the yield is gonna be higher and I was figuring that's on any investment the longer the term is, because the time value of money and the discounted cash flow that you lose yeah, lose from having that money tied up for that length of time, Not only are you missing out on opportunity costs, you're missing out upon the interest that you could have made. You're missing out on another opportunity that you could have invested that same money in that you tying up for five or three percent for 10, 15 or 20 years. So, going back to your statement, George, one has to make sure that they understand why they're doing making an investment more so than what they're investing in.
Speaker 1:
Yeah, absolutely. And then just to kind of hear again piggyback on that and you kind of touched on it, you have to look at the credit rating of the company that's offering it. Because here again, if the, if the company does not have a high credit rating, that's riskier. So they may be offering a higher yield, but you know, what are the chances of you getting your money back because of the fact that their credit rating is not as high as some of the other company? So those are the kind of three things that you need to look at how long, what is the credit rate, credit rating and how much risk is involved in basically getting your money back. And when, anytime, you invest in a bond.
Speaker 2:
Oh man, absolutely, absolutely. You know, when we look at what's going on in the world in terms of labor and Jobs and things of that nature, the economy is going up and down. And Well, not so much the economy is going up and down. But I take a look at these statistics that come out, I think, every quarter, and you talk about how many. No, I think this comes monthly how many jobs has come on? It's interesting that now, the good opportunity I think I've heard, or said that, you know heard in terms of buying those bonds, or Particular set of bonds, because of the interest rate as it ties into the Treasury. Now I'm not about to get out there in a weeds, but, george, can you explain? You know, talk a little bit on that.
Speaker 1:
Well, yeah, I mean here again I mean the upside of buying a bomb. Say you put ten thousand dollars in a bond, say in a year, a year bond. Okay, so if it pays quarterly, you're gonna get that yield From that bond on a quarterly basis. So you're gonna get paid out four times and then at the end of the year You're gonna get your ten thousand dollars back.
Speaker 1:
So you know, it's there in itself is you're almost kind of like, you know, creating a hero passive income Because of the fact that it's gonna be paying you out. And then some bonds pay monthly, some big quarterly, some pay yearly. So that's another thing that you have to look at is what, what the year yield is and when does it pay out? So yeah, but once you get into that, that's what it's gonna be. So here again, there's a couple different ways. Benefits of buying it I mean that in itself. The other thing is the tax benefits of bond. If you buy a municipal bond and you live in the city, I mean in the state where that bond was issued, chances are you may not have to pay state and federal taxes on a corporate bond, I mean that's on a municipal bond, on a Treasury bond you don't have to pay state Taxes, but you do have to pay federal taxes.
Speaker 1:
And then if you have a bond fund in your 401k, in your IRA, remember again you don't pay taxes until you remove that money out.
Speaker 2:
Man, that's good information.
Speaker 1:
Yeah.
Speaker 2:
I hope people are listening to that. You know, because, like we always say, if you don't know, now you know. We say that for a reason right, you know it better know it.
Speaker 2:
So, man, good, good, good information, george. You know, diversification is one said that for people who don't know what you're doing, all right, and that's not a negative or a pejorative statement, in that there's so many African American households that we're not taught these principles, we're not taught these information. In terms of investing, importance of understanding, collecting interest is a lot better than paying it. So when we come before you with information like this, we're just as excited and delivering it as, hopefully, you are getting it. So, as we go to continue on our trek to the understanding bonds and I was going in that direction about diversifying, because, even if you do know what you're doing, it's good to have an overview of the entire market, from the stocks and bonds I think and, george, you speak to this now is having a well-balanced portfolio, whether it's a municipal bond or a corporate bond. You've heard some of the tax benefits as it relates to each. I think it's just a wise move, man, to seek out more information about how you can add bonds to your portfolio. What are your thoughts, george?
Speaker 1:
Absolutely. Most financial professionals suggest that you have a mixture of 60% stock and 40% bonds in your portfolio. Yeah, I mean, that's probably a good balance you want to look at. Considering the fact that, here again, with funds, 401ks, iras the more you have they play off of each other so that you're not taking any huge losses. Those kind of things make sense. Yeah, that's what you have to look at is being well-rounded, diversification and making sure that it's doing exactly what you want it to do.
Speaker 2:
Right, man. Well, it's interesting because a lot of information is out here for us. I know somebody's probably out there saying well, what about junk bonds? Junk bonds? I know Mike Milligan. Of course he's not available, but I understand he's one of the king of junk bonds. But junk bonds has a place just like you have your. They call it the sellers. Oh my God, it comes to the downsellers anyway, the people who go against the market. George, you know what I'm trying to say here.
Speaker 1:
Anything that's going to be a high-risk investment. I mean, when you start talking about junk bonds, you just talk about high-risk investments. Oh yeah, I mean. But one of the things and I'll mention this before we close out this thing is another way to make money on bonds is by you can sell your bond. Say, for example, they keep raising the interest rates, your bonds keep going up, but then all of a sudden at some point we know they're going to drop the interest rates. So when they drop the interest rate, the bond rates are going to go down too. So what if the bond rates go down? Those T bills that I talked about at 5% drop down to 3% or 2%, but you're sitting back, happy with a bond that's paying 5%. Well, you can turn around and sell that bond on an open market. So they're here. Again is another opportunity to sell bonds and sell your bond and make you some money. So, yeah, there's a couple of things that you can look at and there's people out here doing this every day. But you've got to look at it and it's nothing that you want to spend a lot of time on, but it's something you want to spend some time on.
Speaker 1:
I always tell people take a look at your portfolio once a quarter. You're looking at your bills, so you might as well look at what your investments are. And as we kind of learned on one of the other podcasts is we kind of have it backwards. We always want to spend first and invest second. We got to flip it around we got to invest first and spend second. Those are kind of things that get us into the next level of being able to support ourselves in that retirement line. So with that said, smitty, I'm going to turn to you and figure out how we're going to close this thing out. You've got a good set of words for us to put with our audience today what you got for us.
Speaker 2:
Oh, George, I'd be remiss if I didn't have something to say. It's been said that when a wise man has something to say, a fool has to say something. So I'm not saying I'm the latter.
Speaker 1:
Go ahead and enlighten our audience.
Speaker 2:
I'm not saying I'm the latter. However, here's our quote for today those who fail to understand debt are at a higher risk of failing financially.
Speaker 1:
Well said. And as we always say on the Crouchy Deal, man, if you didn't know, now you know. Take care, be safe.
Speaker 3:
The Crouchy Old man podcast is not a registered investment legal or tax advisor or a broker dealer. All investment financial opinions expressed by or on the Crouchy Old man podcast are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur. Before you invest or make any investment-based decisions, consider your own personal circumstances. You should do your own research and seek advice from a financial professional.