Back in the day (when I was young and single), a wise older woman decided to give me some of her hard-earned advice. Chatting at a cocktail party, she pulled me aside and whispered conspiratorially in my ear, ” Whatever else you do, honey – always buy your own jewelery.”
Now I was never really sure if she meant buy your own jewelery so that you don’t get dependent on a man to keep you in diamonds and pearls or if she just meant buy your own jewelery because most men don’t have a clue what looks good on you and therefore you are better off just doing it yourself.
Either way, the advice has stuck with me and I offer it up here to all you women out there who have never owned a bond, wanted a bond or have relied on someone else to do your bond-buying. You, too, should “always buy your own bonds”.
Here’s why – WOMEN LIVE LONGER THAN MEN. And if you are going to live to be 90, you will need some money. A regular stream of it, in fact. Now, there are a lot of ways to get this regular stream of money every month, but one of the easiest is to own a bond that pays you interest. Even better is to own a whole ladder of bonds with various maturity dates and paying varying interest rates. This way you will usually have something paying better than the current rate and will probably also have something paying less than the current rate. Which is okay. It is still paying you some cash on a regular basis and you no longer have to try and figure out what interest rates are “going to do” at any given time. Or rely on someone else to give you money every month.
Right now there is a lot of debate going on among the financial wonks about what’s going to happen to stock values, interest rates and inflation. Some experts are arguing that everyone should shift their asset allocation heavily towards bonds because stocks are not going to appreciate as rapidly as they have historically. Others would argue that the promised land lives in Equityville and you are going to end up on the wrong side of the tracks following the bond gang.
WHO CARES? You need to own some bonds. AND HOLD THEM UNTIL MATURITY. Despite the Lehman Brothers debacle and the CIT wipeout, bonds are still the best place to park SOME of your money for a nice mix of stability, downside portfolio protection and steady income. And, if you get the ladder right, you are going to outpace inflation. Why is that important? When you need to pay the $20,000 per month for assisted living, you will not be relying on 3-month CD rates to fund your care.
Before you venture out to buy your own bonds, be sure to know the answers to these four questions:
1. What is my tax bracket? If you are in the 25% or higher bracket and are investing outside of your retirement accounts, make sure you consider tax-free municipal bonds for at least part of that ladder.
2. How much money do I put in bonds? Make sure you understand where bonds fit in your overall investment picture. Should it be 20%? 50%? This will depend on your age and your tolerance for risk, but may also depend on how much cash you need on a monthly basis (now or in the future)
3. What if I don’t have enough for a good ladder? Most corporate bonds sell in increments of $1,000 and many brokers won’t sell less than $5,000 in a single transaction. To build a good ladder, you are going to need at least $25,000. If you are starting with less than that, consider using bond FUNDS. They come in all shapes and sizes, so make sure you know what types of bonds the fund is buying. Bond funds may be your only choice, by the way, if you are doing this in a company retirement account.
4. What do I do with the interest I get? If you don’t need the cash from the interest payments now, what are you going to do with it? You can’t reinvest it in the same bond (like the bank CDs) but you CAN consider reinvesting it into the stock market. This is handy for two reasons – if the market goes up, you are getting a piece of the upside. If the market goes down, you are buying more shares cheaply every time you invest an interest payment.
Now that the idea of becoming a bond babe is starting to appeal to you, how do you go about this makeover?
1. Visit www.investinginbonds.com. This is an excellent site for explaining how bonds work and the different types of bonds available.
2. Get thee to a full-service broker or a fee-only financial planner that has access to a good bond inventory. Make them put together a bond ladder for you.
3. Go to a discount broker and cobble together your own ladder, being sure to have a mix of short, medium & long term issues as well as Treasuries, Munis, Corporates, Foreign and maybe even High Yield (a fancy name for junk bond).
4. Visit www.morningstar.com and find a four or five star bond mutual fund.
Do this and you, too will be well on your way to becoming a BOND BABE.