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
The advice of Hildy Richelson, PhD, and Stan Richelson, JD, LLM, on bond investing is sought across the United States by individuals, financial advisors, and the media. As nationally recognized bond advisors and financial authors of five bond books, they have translated the complex world of bond investing into diagrams and layman's language, enabling motivated investors to take control of their financial lives. Scarsdale Investment Group, Ltd. restricts its practice to the design and implementation of bond portfolios for high-net-worth individuals. Visit their website at www.allbondportfolios.com and sign up for a free newsletter to receive updates on bond market trends.
"There's no such thing as risk-free investing, but Bonds, Second Edition gives investors practical advice on ways to minimize risk while growing their assets." - Bill D'Alonzo , Chief Executive Officer of Friess Associates, manager of the Brandywine Funds family of growth-stock mutual funds "Over the past decade the "truth" that investment in equities is a sound and perhaps the surest path to long term portfolio success has been severely tested. The Richelsons make a persuasive case for taking a path less travelled - that of investing in individual bonds. With historical examples comparing the stock and bond markets, risk-reward analyses and exploring the "magic" of compounding, the book is at a minimum a fascinating read and for many will be a blue-print for a revolutionary new portfolio design." - Victor Keen , Of Counsel, Duane Morris LLP "Hildy and Stan have written the 'Everything You Always Wanted to Know About Bonds But Were Afraid to Ask' book. This book provides clear and concise insights into bond investing." - Alan Schapire , CFP(R), CPA/PFS, Principal, Libra Financial Planning "Stocks are always risky, no matter the long-run. Bonds should always have a place in investment portfolios. Stan and Hildy have been saying this correctly for years. Bonds: The Unbeaten Path to Secure Investment Growth, now in its second edition, is one of the best in-depth reviews of wisely navigating the bond markets and how to practically implement thoughtful strategies for financial advisors and advisor-clients alike. Fellow colleagues, this is a must read." - Michael Dubis , CFP(R), President, Michael A. Dubis Financial Planning; Adjunct Lecturer, University of Wisconsin Graaskamp Center for Real Estate; past NAPFA National Conference Chair "Bonds still aren't part of the nation's financial culture, years after this book's first edition and through the stock market's ups and downs. Don't blame the Richelsons. Better yet, leaf through their book for a detailed examination of the only investment where income is king." - Joe Mysak , editor of Bloomberg Brief's daily Municipal Market " Bonds, Second Edition explains the reality of today's complex world of investing. It shows how bonds can be more predictable and more profitable for somebody's financial future. The Richelsons take the facts of investing and they explain how to make it safe. What could be better than that?" - Paul H. Frankel , Partner, Morrison & Foerster "The Richelsons have advocated the virtue of bonds long before they became in vogue when the stock market tsunami hit every American in 2008/2009. The second edition of their book about bonds is a must read for anyone who hasn't invested in bonds because they don't understand them, or, who wants to understand what they already own. Stan and Hildy's passion for bond investing is contagious." - Kent R. Addis, Jr. , President, Addis & Hill, Inc. "With every conceivable bond topic discussed in plain English, this book is the most useful and practical guide to bond investing. If you're looking for the "how to" and "why" of prudent bond investing, this book is for you. In thoughtful reflection, the 2nd Edition will enhance your understanding of the 2009 credit crisis, and will help you steer clear of bond investing mistakes." - Jeffery B. Broadhurst , MBA, CFA, CFP, President of Broadhurst Financial Advisors, Inc. "Finally an up-to-date practical book on fixed income vehicles as well as strategy in using them. A must-have resource for all levels of investors as well as advisors interested in growing their assets as securely as possible. Readers will truly benefit from Hildy and Stan Richelson's independent thinking and experience on effectively using this major asset class." - Harry Scheyer , CPA/PFS, CFP, Pinnacle Financial Advisors "A great insight on understanding bond portfolios. It is an area of investing that is often overlooked and not understood." - Fred Amrein , Founder & Principal, Amrein Financial