Bonds have always been a staple of Modern Portfolio Theory or the diversified portfolio. The term, “modern”, is quite laughable considering MPT was originally pioneered in 1952 by Harry Markowitz. What Markowitz originally wrote about was how to construct a portfolio based on the investor’s risk tolerance. Depending on how much risk you were willing to take (i.e., how much money you were willing to lose), determined the allocation between stocks and bonds. The more risk (losses) you were willing to take determined what percentage of your money would go into stocks. Say, 70/30 stocks & bonds. The less risk, the more would go into bonds. Say, 30/70 stocks & bonds. That was all good in 1954 when our economy and our markets were stable. But, years & years of money printing by the Federal Reserve has wreaked havoc in our country. By the way, the Federal Reserve is neither “Federal” nor does it have any “Reserves.” It’s a private bank that manipulated our government into giving them control of our money supply in 1913. More on that in a future newsletter.
So, a strategy that was created in 1954 is called, “Modern Portfolio Theory”, and nothing has really changed in the financial planning world. It does not sound very modern to me. Sure, there are a lot more options as far as product selection goes, only today they are way more volatile and interest rates are at an all-time low.
According to Kiplinger’s article on “The 7 Best Bond Funds for Retirement Savers in 2021”, the rates on bonds range from 1% to 3.4%. Okay then, 3.4% doesn’t sound terrible in this day and age, but the devil is always in the detail. Let’s take a closer look…
Vanguard’s Intermediate-Term Tax-Exempt Fund
SEC Yield: 1.0%
Expenses: 0.17%
So, now we’re at a return of 0.83% on your money, but according to Kiplinger’s author, with the tax exemption, you would have a net return of 1.7%. Not bad for a secure bond fund! Oh, but wait. What is the duration of the bond to get that return?
According to Vanguard’s website, the average duration is 4.3 years, and the average stated maturity is 8.8 years. Wow! That’s a long time to earn a net of 1.7%. And even though this is a quote-on-quote “safe” bond fund, can you still lose money in it? Absolutely. Have you heard of the financial mess some of these municipalities are in? Just look at Illinois. Many of their municipalities have over-promised pension plans and have huge deficits.
Now let’s look at the highest return on bond funds according to Kiplinger’s article:
Vanguard’s High-Yield Bond
SEC yield: 3.4%
Expense Ratio: 0.23%
Average Duration: 3.6 years
Average Maturity: 4.2 years
That’s a true return of 3.17%. Hey, not bad! But do you know what “high-yield bond” means? It also stands for, “junk bonds.” Here is what Kiplinger’s author has to say in his own words:
“More than 90% of VWEHX’s holdings are below investment-grade or not rated at all. That might sound hyper-risky, but understand that 55% of assets are BB-rated (the highest tier of junk), while another 29% are in B-rated bonds. Just less than 7% is below B, and a mere 1% isn’t rated at all. Indeed, you even get small parcels of investment-grade debt, including a 5% slug of AAA-rated bonds.”
He makes it sound…okay. But why risk it? Why risk it and pay the expense ratio when you can get better returns in something that has no fees and no risk of loss? It just doesn’t make sense. I’m sure there are individual bonds that your “financial guy” can put you in, but then all your money is betting on one horse to come in, and it wouldn’t shock me if the management fee or front-load will be more than the expense ratio in the two funds listed above.
This is not meant to be a swipe at Vanguard. In fact, of all the brokerage houses in the world, they would be the only one I would consider doing business with. This is not even meant to be a swipe at bonds. They serve a purpose too. This is meant to be a swipe at the tired and played-out retirement planning strategies, like Modern Portfolio Theory. Again, there is nothing modern about something that’s been used since the 1950s.
Even though annuities can be traced back to the Roman Empire, they have gotten considerably better with returns and options on how to use them to accomplish the safest and most efficient retirement. That is considering you are using a Professional Annuity Strategist, and not just someone who sells annuities. There is a big difference and at Atlas, we can show how and why.
Like I mentioned in my email, I will be posting the latest rates on annuities once a month. But in the meantime, don’t wait. Hit the “Schedule A Call” button and let’s talk about an innovative strategy that can get you more income, with little-to-no expenses whatsoever, all while giving you complete protection from loss.
All the best,
Marty