Retirement Answer Man

This is the third episode in our April series on bonds. On this episode, we discuss interest rates and how they affect bonds. One question we explore is, are interest rates the nemesis of bonds? To help me explore this question and explain a bit about bonds Chief Investment Strategist, John Lynch of LPL Financial joins me. Together we discuss rising inflation and interest rates and find out what this all really means for the economy and your portfolio. If you are worried about what rising interest rates mean for your portfolio then you’ll want to listen to John’s explanation

Interest rates are rising, but what does that mean?

Now that interest rates are rising everyone is in a panic, but the reality is that interest rates have been at a historic low and were dropping for more than 30 years. We still aren’t even back to normal levels. The Fed’s job is to control the rate at which interest rates rise and it ensures that they don’t rise too high too fast. So even though interest rates are rising it’s not the end of the world. Learn more about what rising interest rates mean to you by listening to this episode of Retirement Answer Man.

How do rising interest rates affect bonds?

Interest rates and bonds have an inverse relationship. When interest rates drop, bond returns increase. So now that interest rates are on the rise again after 37 years of falling, bond prices will probably fall. According to Bloomberg Barclays U.S. Aggregate, interest rates may continue to increase. These rising interest rates can seem scary for the bond market, but it may not be as scary as you think. Listen to this episode of Retirement Answer Man to learn how rising interest rates may affect the bonds in your portfolio.

Bad news for interest rates leads to good news

These rising interest rates seem like really bad news, but rising interest rates and inflation are actually good news for the economy. The economy is growing and employment rates are on the rise. Inflation means growth for the economy. The interest rates have been artificially low to stimulate the economy but now that the economy is moving again the Fed doesn’t have to keep interest rates artificially low. The Fed can now help them to rise slowly back to normal rates. Listen to this episode of Retirement Answer Man to hear how this bad news is actually good news all around.

What is duration?

Duration is the mathematical formula that indicates the value of a bond. It is the amount of time that an investor has to receive coupon payments to and get the principal back. It is a useful tool that investors use to measure risk or volatility. The benchmark used by financial professionals is Bloomberg Barclays U.S. Aggregate. Barclays predicts that long-term investors should not have a problem with interest rates and duration as long as bonds are used in a balanced approach to your portfolio. Listen to this episode of Retirement Answer Man to hear how and why you should still add bonds to your mix.

OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN

  • [1:22] Are rising interest rates the villains of bonds?

HOT TOPIC SEGMENT

  • [5:36] Interest rates may rise faster than we are used to
  • [7:26] Meet John Lynch
  • [13:29] What do interest rates mean in terms of bond performance
  • [15:15] Bad news leads to good news

PRACTICAL PLANNING SEGMENT

  • [22:44] What is the relationship between bonds and interest rates
  • [27:40] What is duration?

THE HAPPY LAB SEGMENT

  • [33:03] Who is your favorite villain?

TODAY’S SMART SPRINT SEGMENT

  • [34:49] Look at where you keep your cash reserves so that you don’t leave money on the table

Resources Mentioned In This Episode

John Lynch on LinkedIn

BOOK - Rock Retirement  by Roger Whitney

Ask Roger a question

Work with Roger

3-video Series: 5 Minute Retirement Makeover

Roger’s Retirement Learning Center

The Retirement Answer Man Facebook Page

Intro music by bensound.com

Direct download: RAM217.mp3
Category:general -- posted at: 6:00am CST

Why would you ever add bonds to your portfolio if their return is so low? This is the second episode in the April bond series. This month we are learning all about bonds. On this episode, we delve into the question: why do we even have bonds in our asset allocation? I really get into the science behind why bonds are in our portfolios. If you are planning on retiring soon your role as an investor is changing and you may want to have more bonds than you think. Find out why you need bonds in your mix and what bonds add to your portfolio by listening to this episode of Retirement Answer Man.

What is the difference in investing when you’re younger vs when you’re older?

When you’re younger you have a lot of time for your investments to work for you. When you’re in the wealth accumulation mode of youth you’re on autopilot, socking away money each month without even paying attention. This strategy no longer serves you when you are preparing to retire and you stop accumulating wealth. Now your role is changing, soon you will start tapping your wealth. So when the markets dip you will actually feel it in your portfolio. Psychologically you will feel more vulnerable because the market volatility becomes pretty scary. This changes the way you think about markets and investing. Listen to this episode to understand how your role as an investor has shifted with age.

What can bonds add to your investment cocktail?

Bonds add more than you think to your portfolio. Soon you will stop adding to your portfolio and you will be taking money out of it. Now that you don’t have as much time to play the markets, the security that bonds bring to your investments will provide peace of mind. And a healthy mix of bonds in your asset allocation can actually bring about good returns while also providing stability and less risk. It may be time to start thinking about managing your assets differently. Listen to this episode to understand how bonds can lead to the perfect investment cocktail.

What is the science behind asset allocation?

Let’s get to the science behind why we have different asset classes and what their benefits are. The modern portfolio theory is considered the best practice in portfolio management. This theory states that for a given level of return you will try to minimize as many risks as possible. And that for a given level of risk you will try to optimize returns and get the most bang for your buck. We measure this by using standard deviation. Is this bringing on flashbacks from college? Listen to me explain standard deviation in a way that you can finally understand, I promise there won’t be a pop quiz at the end!

What does modern portfolio theory mean for your assets?

Modern portfolio theory is great for helping to measure your risk tolerance. And this is the whole reason that your financial planner asks you to fill out risk tolerance questionnaires. The problem with all this science is that once you reach your 50’s and 60’s everything changes. You should no longer be measuring your maximum amount of risk tolerance, but how to live the life that you really want to. This episode will help you to understand how much science and how much art you should apply when managing your money, so grab your favorite pair of headphones and listen in.


OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN

  • [1:22] What can bonds add to your investment cocktail?

HOT TOPIC SEGMENT

  • [4:00] What happens when you accumulate assets when you’re younger?

PRACTICAL PLANNING SEGMENT

  • [11:02] What role do bonds have in your investment cocktail?
  • [12:25] Let’s understand the science behind different asset classes
  • [17:28] Why are risk tolerance questionnaires are so important?

THE HAPPY LAB SEGMENT

  • [24:42] Try a new cocktail (or a new recipe!)

TODAY’S SMART SPRINT SEGMENT

  • [26:13] What is the role of the bonds in your portfolio

Resources Mentioned In This Episode

BOOK - Rock Retirement  by Roger Whitney

Ask Roger a question

Work with Roger

3-video Series: 5 Minute Retirement Makeover

Roger’s Retirement Learning Center

The Retirement Answer Man Facebook Page

Intro music by bensound.com

Direct download: RAM216.mp3
Category:general -- posted at: 6:00am CST

April is Bond Month on the Retirement Answer Man podcast. Over the next four weeks, we will be discussing all things bonds. This is the first episode in the bond series in which we will discuss what exactly a bond is and why we all love them. You’ll want to listen to this series to find out what a good bond is and how to get one. Start learning about bonds by listening to this episode to find out exactly what a good bond is, how to buy them, and what the future holds for bonds.

Is our love affair with bonds coming to an end?

We have had a love affair with bonds for the last 30 years, but is the love affair with bonds coming to an end? The reason we have had such a good run with bonds is that they have had great returns while at the same time being a pretty low risk. Over the past 37 years, bonds have yielded an average of 8% a year. The worst year in bonds has brought -10% profit. Let's compare bonds with the stock market during the same period. The stock market yield has averaged 10.4%, not much higher than bonds. But the stock market low was -50%! Listen to this episode of Retirement Answer Man to find out if the stability and high rate of return of the bond market are at the beginning of the end.

What do interest rates have to do with bonds?

Interest rates may end up spoiling our love of bonds. Interest rates and bonds have always had an inverse relationship. As interest rates have dropped, bond returns have increased. Over the past 37 years, interest rates have dropped steadily, but it looks like that time has come to an end. According to Barclays, interest rates may continue to increase. These rising interest rates can be scary for the bond market. Listen to this episode of Retirement Answer Man to learn how rising interest rates may affect the bond market.

What is a bond?

A bond is basically a loan to someone else. Different bonds have different ratings depending on the borrower’s credit rating. The coupon rate is the amount of interest that the borrower pays depending on their credit rating. The maturity date is the length of time that the money is borrowed for. There are many different types of bonds including treasury bonds, corporate bonds, municipal bonds, and international bonds. All of these different types have various characteristics. If you want to learn all about bonds you need to listen to this episode of Retirement Answer Man.

How do you buy a good bond?

There are a couple of different ways that you can go about buying good bonds. You can research the kinds of bonds that you are interested in and have your broker find them for you. The pricing of bonds is a bit shady and not as straightforward as with stocks and it’s hard to tell whether you are getting a good deal. Make sure to diversify your bond portfolio. Mutual funds and exchange-traded funds are ways to diversify. By buying mutual funds your portfolio never really matures like with buying individual bonds. But they make it easy to reinvest the interest payments. Listen to this episode of Retirement Answer Man to hear about the various ways to buy good bonds so that you can decide what’s right for you.

OUTLINE OF THIS EPISODE OF THE RETIREMENT ANSWER MAN

  • [0:52] This month we explore bonds

HOT TOPIC SEGMENT

  • [4:01] We have seen a steady decrease in interest rates for 37 years
  • [6:29] Let's look at bond returns
  • [9:19] Is the love affair with bonds coming to an end?

PRACTICAL PLANNING SEGMENT

  • [10:40] What is a bond?
  • [15:23] What are the different types of bonds
  • [16:57] How do you buy a bond?
  • [20:06] Next week we discuss what role bonds play in your portfolio

THE HAPPY LAB SEGMENT

  • [21:05] What is your favorite James Bond theme song or soundtrack?

TODAY’S SMART SPRINT SEGMENT

  • [21:58] Identify what kind of bond investments are in your portfolio

Resources Mentioned In This Episode

Listen to listener questions on Retirement Answer Man on YouTube

BOOK - Rock Retirement  by Roger Whitney

Ask Roger a question

Work with Roger

3-video Series: 5 Minute Retirement Makeover

Roger’s Retirement Learning Center

The Retirement Answer Man Facebook Page

Intro music by bensound.com

Direct download: RAM215.mp3
Category:general -- posted at: 6:00am CST

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