The Wall Street Journal recently published an article titled How You Can Survive a New Era in the Bond Market. The article suggests that investors adjust their bond allocations to tilt more towards high-yield (aka junk) bonds (both corporate and municipal) and global bonds, which tend to yield more than U.S. bonds. This advice resonates with an Op Ed by Burton Malkiel, famed author of A Random Walk Down Wall Street, at the end of 2013.
The case against bonds is straightforward. The best estimate for the expected future return from bonds is their current yield. If you hold a bond until maturity, your total return will be very close to the current yield. There are nuances to this rule. With high-yield bonds, you should expect a total return that is a bit less than the current yield due to the fact that some of these bonds will probably end in default. With bond funds, you don’t necessarily end up holding individual bonds until maturity, so the correspondence between current yield and expected return is a bit weaker. Nonetheless, with current yields as low as they are, bond investors should not expect attractive returns from most bond classes.
Municipal bonds are issued by states and municipalities and typically have tax advantages relative to other fixed income assets. In general, income from muni bonds is tax exempt at the federal level and at the state level for investors living in the issuing state. Municipal bonds have historically been favored by investors in high tax brackets who, of course, derive more benefit from the tax exemptions by virtue of being in the highest tax brackets. Continue reading →
Generating Income: Part Four of Our Special Five Part Series
During their working years, investors focus on saving and investing with a goal of building wealth. As they enter retirement, either by ceasing paid employment entirely or by scaling back paid employment, investors shift their focus to using their portfolios to provide a reliable long-term stream of income. This transition from building wealth to income generation is the subject of a great deal of research in retirement planning. Once investors are at or near retirement, the most significant financial challenge is using their accumulated savings to provide substantial income for their retirement years. Continue reading →
Yesterday Mel Lindauer, Forbes columnist, book co-author, Boglehead extraordinaire, offered some advice for younger investors. Rocky markets like the one we’ve been bobbing along in are great for the young, Lindauer argued, because investments are essentially “on sale” at the moment.
But the perfect market for someone in their 20s is a tough one for someone in their 60s. The last few years have been extremely tough for those close to retirement. In today’s post, drawn from the same interview with Lindauer, he addresses the challenges older investors face and the downside of a down market. Continue reading →