Part 10 Investing in IOUs

Some financial planners feel that investor should be speculators when they have 10 or more years to go before retirement. They should have their money totally in the stock market. I disagree with that view. Not all individuals such as me are comfortable working with stocks. I am a bond investor not a stock speculator.  With bonds, I know how much I am investing and how much I hope to receive. I know when I will get my return. I can take my interest received and buy more bonds giving me more returns, compounding my account.  With stock, you are speculating on future events that may or may not go in your favor.

Stock Sales Personnel or brokers say that bonds carry more risk than stocks. Is that why my 2.5 year old corporate bond retirement portfolio increased in value 4.743% per month? That is far better than the inflation rate.

I know people who invested in their government or company 401K programs, placing their money in stock mutual funds and received a return in the same amount of time giving them a negative 2 to 10 percent return.  These people paid for professionals to give them such losses. 

What you can do with Bonds.

A bond is an IOU issued by a corporation or a government. When you buy a bond, you are making a loan to the bond issuer.  In return, the company or the government agrees to pay a specified interest rate known as the coupon rate.  The investor will be paid a fixed amount of interest, usually twice yearly, until the bond matures, at which time the investor is paid the bond’s face value usually $1,000. The investor may pay a discount for the bonds say $850. In times of high demand, the investor may pay a premium for the bond say $1,060. Some time, the market place may demand par or $1,000 to buy the bond. 

Still bonds are not riskless securities. They carry interest rate risk as well as business risk. If the company files for bankruptcy, you may not get your money back. Plus the bond market thrives when interest rates fall. For example, a bond paying 8% that was issued last year will be worth more this year if new bonds are only paying 6%. Meaning if you paid $1,000 for the bond, you could probably sell the bond for about $1,300. 

Here is the rub.

When interest rates rise, bond values drop and if you happen to be holding some of these bonds, you can lose money if you had to sell.  This is why you are buying these bonds in your retirement account. You know when you will need the money so you buy bonds that mature on or before the date that you need the money.  If you are speculating in bonds and you bought an 8% bond for $1,000 and the going rate for new bonds jumped to 9%, your bond would be worth only about $890. But you will still earn 8% and if you hold the bond to maturity, price swings don’t matter.  You still receive full value when it comes due.

Brokers do not like me because they make very little money off of me. My commissions to buy my bonds are only $10.95 per transaction and I hardly ever sell so they get very few return commissions. That is called keeping your expenses down. 

As with stock, there are several major categories of bonds that you can buy.  We will not cover Municipal Bonds because they are already tax sheltered and you will have to pay taxes on the interest if you put them into your retirement account.   

U.S. Treasuries are the safest bonds to buy. When they mature in two to ten years, they are known as Treasury notes.  Treasury bonds are 10 to 30 years. They are backed by the full faith and credit of the federal government. Interest is paid semiannually.  Notes and bonds are sold starting at $1,000 and sell in $1,000 increments. U.S. Treasures are state tax exempt. But here, you have a high degree of interest rate and inflation risk.     

 

Corporate Bonds are backed by the company that issued them. They are riskier than government securities so they pay higher than government securities. The safest bonds are those given the highest ratings from agencies such as Standard  and Poor’s Corp. (www.standardandpoors.com) and Moody’s Investors Service (www.moodys.com).  Bonds issued by the strongest corporations get an “AAA” rating. Bonds with the weakest financial ratings get lowest ratings such as “CCC” to “D” or no rating at all. Junk bonds are bonds with a rating of “BBB” to “D”. They pay the highest returns because the investor is taking a higher risk. Here is the area where I invest because as compare to “AAA” bonds that are not as safe but compared to stock, they are very safe. For my retirement account, I normally stay between “BBB” and “B-“ratings when investing.  They normally sell for $1,000 with increments of $1,000. They usually pay twice a year.   

 

Convertible bonds are bonds that participate in the movement of the company’s stock.  These bonds can give you the investor an added return if you sell the bond at a premium due to the company’s stock movement.  You still receive your interest so the investor really has a floor on the downside of the bond market.  Convertible bonds are harder for small investors to buy because of the large demand for them and the small supply in the market place.  

Zero Coupon Bonds known as Zeros, pay interest only when the bond matures. At that point the investor gets all the accumulated interest. For example, you buy a $1,000 bond for $235 over 20 years. You get an interest rate of 7.5%. In twenty years the company will give you $1,000. With Zeros you know just how much you the investor is going to get on the maturity date. They are good for buying when just starting out in your retirement account. I would not buy them outside a retirement account for tax reasons. With Zeros, you will not be able to compound your interest like you can with regular bonds.

 

Foreign Bonds just like foreign stock offers opportunities beyond U.S. borders. They may pay higher rates because you are taking on more risk such as currency risk.  

Mortgaged Back Securities are not really bonds. They are pools of home mortgages that have been made by lenders around the country. Owners of these securities receive payments of both interest and principal through out its life on these mortgages. These securities carry a higher risk and pay a higher return than bonds. The rate of return may change if homeowners refinance their mortgages.

I hold mortgage bonds on oil tankers in my IRA. Since they are first to be paid in times of bankruptcy and they pay me 8.04%, I consider them as being very safe and profitable.
             

A Special Note for all my reader’s around the world!  

Hi my loyal readers around the world. I just finished making my final plans of my life. I will be retiring in a few short years and moving into my luxury retirement home. I will spend most of my time getting my seven year old grandson ready for the 2028 Olympics. I have no idea what my younger grandson is going to do. As of now, I would say it has something to do with electrical engineering because at 1 years old, he knew how to operate an IPad. But whatever it is, I will be around to lend assistance to his education.


My plans also involves my readers. I am starting an online stock club design to give my loyal readers as much as one million dollars, maybe more depending on when you start my plans. That money will be to remember me by.


Please read the blog below and follow my instructions if you want a chance to get one million dollars.

http://bondinvestments.blogspot.com/2012/06/how-would-you-like-to-have-over-one.html

The younger you are; 35 and below, the greater the chance of getting over one million dollars. If you are starting at 60 years old, chances are you will only make it to $100,000.



I started out at age 23 and spent a lot of time laid off and giving money away to my children for cars. I bought 3 homes. One home was paid off in full. The other I bought in a partnership paid in cash. All my cars since 1971 were the current year and I have not had a car note since 1983. I even gave two girlfriends a car each. That is why I don’t have a million dollars today. But if you become one of my “Greedy Friends” I am sure with my instructions, you can get that million.