What You Need to Know About Bonds. Your Bonds. – Episode 56

Do you know the difference between a stock and a bond? Maybe you do. But even if you grasp the concept of fixed income versus equity, you may not realize how complex the bond market is. In this episode of Dentist Money™, Reese & Ryan describe the different types of bonds you can own, the risk levels associated with each, and how bonds can be used to lower your taxes. (And they make it through the entire show without telling a single James Bond joke).

Podcast Transcription:

Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I am your host, Reese Harper, here in the studio in Salt lake City with my trusty old co-host, Sir Ryan Isacc.

Ryan Isaac: Thank you, Reese. It is good to be back in the studio. It feels good.

Reese Harper: We are recording, pounding away, there is 2.5 ft. of snow that I plowed through this morning to get here which made me slightly late. Thank you for waiting for me, you have been a patient man.

Ryan Isaac: It’s fair. I appreciate you taking care of the cities roads in that trusty pickup of yours.

Reese Harper: Actually, I live on a non city road and that’s why I have to plow it myself. But don’t bring up that painful point again.

Ryan Isaac: Ok, we will get into it. What are we talking about today, exciting stuff?

Reese Harper: Ya, the fact that I had to drive my trash cans out from my house to the road that I live on which is half a mile away from my house, in the snow, and there is literally three or four inches on the ground and I’m pulling them out to the street. I’m sorry.

Ryan Isaac: You know what we could do, we could propose to your city that they raise a new bond. The city raises a new bond to pave Reese Harper’s street and let the garbage trucks, pay them just a little more money, to get the trucks to go closer to your house. Then you won’t have to walk as far for the cans and you won’t have to shovel it.

Reese Harper: The PERFECT segue. This was unplanned and unscripted. Today we will talk about the massively complex world of fixed income or as the layman would call it: bonds.

Ryan Isaac: A bond.

Reese Harper: I’m excited about this show and you decide we should hit this subject because we get tons of questions about bonds. Why are they up? Why are they down? Why don’t they do what my stocks are doing? These are common questions if you are paying attention to your portfolio.

Ryan Isaac: Ya, I’d say that. The other thing is that it is always lumped into the stocks comment too. It is always stocks and bonds. Its always less questions about what are my bonds doing and its more what’s in your portfolio? Stocks and bonds. There is not a lot of understanding about the difference between these two.

Reese Harper: The reason I brought this up is because recently when the stock market was rallying we had a lot of people asking, “why are my bonds down?”

Ryan Isaac: Ya, they say, “It thought those were safe!”

Reese Harper: Ya, I thought that was supposed to be safe and never go down. Sorry I didn’t actually say it would never change price. You can’t quote me on that, ok?

Ryan Isaac: That is still the nature of an investment. Ok, so let’s start there then. What is the difference between a stock and a bond?

Reese Harper: Let’s just say this simply. Stocks represent ownership in a company. If you own a stock you own all of the assets in the company or a portion of the assets depending on how much ownership you have. If you own all of your dental practice then you own all of the stock in your dental practice. That’s it. Bonds would be, lending money to the company. So technically, Bank of America, issued a bond against your practice when they lent you money for that new cone beam. That would be the way to think about it.

Ryan Isaac: So, one is ownership and one is lending money. What about the nature of those two things. How do they behave? Their risk and their return.

Reese Harper: A stock can be similar to your dental practice. Your collections fluctuate, and so do your sales and profitability. That affects the value of your practice, that is a lot more volatile or it changes a lot more than the Bank of America payments that you are making every month. The amount of principle that just steadily gets chipped away on your loans. That is kind of the way to think about them.

Ryan Isaac: That is a good description. We have stocks as meaning ownership, more volatile, higher return over time? Is that a reasonable expectation? Stocks held over a long period of time have a higher rate of return.

Reese Harper: Ya, owning a business is going to be more profitable and will get a higher return than owning a bond.

Ryan Isaac: Then the nature of a bond is that you are lending money over a finite or definite period of time with usually a fixed rate of return or at least a fixed interest rate against that loan.

Reese Harper: Unless, it is a floating rate bond, or a variable rate, or put option bond. or callable bond.

Ryan Isaac: Ok, so let’s go there. Let’s talk about some common types of bonds and the diversification of bonds. These are types of bonds that you can actually buy. Let’s start with federal government.

Reese Harper: Ya, you can go online right now to treasurydirect.com and you can buy U.S. treasury notes or U.S. treasury bonds. U.S. treasury notes are issued in denominations of usually like 1 yr. up to 10 yr. Then there are treasury bills that are like 1 month to a year. Then treasury bonds that are 10 to 20 yrs. Bonds are longer term, notes are medium term, bills are under year. You can go online and buy those right now you will give the US. government some of your cash and they will pay you interest in either bi-annually, or in more frequently, annually and in some cases more frequently than bi annual and you will get all of your money back at the end of the period. So you could do a one year treasury bond or note.

Ryan Isaac: So are we going to get into what do they do with the money when I give it to them?

Reese Harper: No, no we are not. That will be another podcast itself.
Ryan Isaac: That is the controversial one that we got coming up. Ok, so you can give money to the federal government can you do that to other governments outside of our country? Can we give money to the country of Singapore?

Reese Harper: Yes, you can. That would actually be a relatively good bond because that is a fairly stable capitalistic economy. That would be a decent decision.

Ryan Isaac: Germany?

Reese Harper: Not a recommendation. I would not recommend this over the year. Nothing on this podcast is a recommendation. All countries issue bonds for their infrastructure and you can invest in bonds. It is a little trickier you can’t just go and do it. It would take a minute to explain how to do that.

Ryan Isaac: Let’s go back to the first example of, “I really want the city that Reese works in to pave his road and put his garbage cans closer and allow for more convenient garbage collection.” How do we give money to our local municipalities, our cities, and our states.

Reese Harper: You know, I don’t think people in my little city will ever vote for that. They want their privacy. They like their non-city, private roads that no one can come down. But let’s assume that I was not living in the city that I live in, and the people wanted their trash cans taken out, which would be a normal request. Then you get what is called a municipal bond for that. Utah did a big rail system over the last fifteen years and that was largely funded through municipal securities or municipal bonds. The state says, “we have got to build this railroad, and some trains, and have this awesome light rail system because like two people will use it some day.” I love when I’m driving down the freeway and I’m like there is the old light rail system carrying no one and there are a million Chevy SUV’s piling up next to it.

Ryan Isaac: There are two college students on the train who ride for free anyway.

Reese Harper: I hope it’s working. I don’t know. I am not privy to the data. So all I have is anecdotal information looking into the windows of the train.

Ryan Isaac: Scientific. What you are saying though is that our local cities and states raise money the same way our federal government raises money which is through bonds. Our cities do things that our cities do. They build water treatment facilities, golf courses, roads, public transportation, schools, universities, hospitals. That covers the governments though, let’s talk about corporate bonds.

Reese Harper: Well, the one thing on municipal bonds that people need to remember. Think about that from a tax perspective. All of the interest that you receive from a municipal bond you do not have to pay federal income tax on. Let’s say you invest $100,000 and you got 5% interest rate. You are getting $5,000 a year in income. If you are in a US bond or a corporate bond or any kind of taxable bond you might only get $3,000 a year of that after taxes. Where municipal bond you get to keep all of that money and if it is bond that is issued in the State you live in you get to keep all of the interest exempt from state taxes as well. So if you have got a 5-10% state income tax you don’t have to pay state income tax on that interest either. Municipal bonds have a pretty compelling tax treatment for most of our listeners. That is a reason to consider having them in certain portfolio. You wouldn’t want to own those inside of a 401 k, however, for example.

Ryan Isaac: Thanks for bringing that up, because there are different tax implications. That is an excellent thing to talk to your advisor about, “what types of bonds am I going to own in which types of accounts?”

Reese Harper: Exactly.

Ryan Isaac: Good conversation to have. We give money to governments to do stuff. Can we give money to companies to do stuff?

Reese Harper: Ya, you can. You can give them money to blow up all kinds of projects they screw up, but either way they have to pay you back! You can fund operations with your bonds, there is like general obligation bonds that are just for overall, overhead expense that they are trying to cover that are not project specific bonds. They have a lot of different features. Some corporate bonds are callable and some are non callable. Meaning if the company that issues the bond doesn’t like the interest rate that they are paying they can take the bond away from you. Certain bonds have those call features on them so that if you are owning it for three years and it is a ten year bond and you are three years in and the company decides they don’t want to let those bonds be out there anymore, then they will retire them and call them. They will take them away from you.

Ryan Isaac: All done.

Reese Harper: Some of the bonds you own you have just got to pay attention to if they are callable or noncallable. There are also convertible bonds where you can have a bond in a company that converts to a stock. So I might have Ford bonds that then convert into Ford stock shares. Anyway, there are a few different variations of that. Those are interesting.

Ryan Isaac: Just for everyone listening too, we will kind of get through talking about some of the characteristics and types of bonds and then we will wrap up with how to know when to use them or how to use them in a portfolio. Keep that in mind as we talk about this. The last type of bond we will talk about is a mortgage backed security, which reminds me of 08’ and The Big Short.

Reese Harper: Ya, sometime you will hear of MBS’s.

Ryan Isaac: So are they evil? Are the bad? It sounds bad.

Reese Harper: No, they are really common and they are actually some of the most secure bonds when they are properly underwritten and when they are transparent and clear, but that was the problem in 08’ and 09’. A lot of these mortgage backed securities were not what we thought they were and some of the loans that were in them were just being rated the wrong way. We could talk about that a little bit later but I think it is just probably important to know that some of the bonds that you can purchase are investing in government agencies. They are government agencies that are borrowing money to fund loans with. You can kind of have different qualities or different variations of security. Like bad loans, and good loans, really high quality loans and you can fund those and get interest payments and get your money back on those as well. That is a big part of the bond market. The bond market is a massive, massive market. It is huge. People don’t realize how essential it is to the functioning of our overall economy.

Ryan Isaac: Ok, so those are types of bonds. Those are bonds that you can purchase let’s talk about characteristics of these bonds. The things that make them what they are, that give them risk or return, or the cost that they have. The first things that let’s talk about is yield. The yield of a bond. This is the interest rate or the coupon payment. The rate that you are going to get when you buy this bond. You lend money and then they give you back x percent over a certain period of time.

Reese Harper: Ya, there is a few things that are kind of important to know and one of them is that there is a stated yield that is called the coupon that you get right when a bond is issued so let’s say Ford wants to raise money to build some of their new electric vehicles to compete with Toyota and Tesla. They issue this bond and they want to raise a billion dollars and they do it at 5%. That is the coupon of the bond, but as soon as those bonds hit the market and as soon as people start buying them and trading them that coupon really doesn’t have anymore meaning. It is kind of meaningless. It was meaningful originally to issue the bonds and to get them sold, but now that the yield or the rate of return that you will get has to do with what you pay for the bond. Most of these bonds come in increments of $1,000, sometimes it’s as much as $10,000, or $5,000. So what happens is if you have to pay more than $1,000 to buy the bond, then even though the original rate of return was 5% because you paid more for it you are going to have a lower rate of return between the time that you buy it and the time that it expires. That is what we in the bond world will call premium that you paid for the bond. You paid above the original value of $1,000, or a discount would be if you bought it cheaper than the $1,000 for whatever reason.

Ryan Isaac: So you are talking about the characteristic of the bond that give you an actual rate of return. The real rate of return happens when the bond is done. It has to do with the interest rate that it is assigned with and the price at which you purchased the bond in the first place. That is going to give you your overall return, those two things.

Reese Harper: Yup, and those things that we measure, we call them your coupons. Then we call them yield to maturity. There is also what is called a yield to worst. It is like the worst case scenario that you could have. There is a yield to call which is if the bond gets called away from you how much return could you get until that point. There is a lot of different ways to calculate yield, but it is all based on what the price is at the time you are buying it. A lot of times if you are buying individual bonds, a lot of these things are really, really important. For us as financial advisors they are pretty crucial as well. They are crucial to buy individual bonds and they are critical to understanding what is happening inside an ETF or a mutual fund as well.

Ryan Isaac: You touched on tax implications a little bit before. Talk a little bit about the way bonds are taxed. When you own a bond you are receiving income throughout the holding period of the bond and you receive, or you could receive, some growth when you go to sell the bond if it actually grew in value so talk just for a minute about how those different things are taxed to an investor.

Reese Harper: You are going to pay taxes as you receive the payments from the bonds and so if those payments come to you every month because you are in a mutual fund or every quarter or every year or twice a year. Whenever you receive payments or interest on your bonds you are going to pay income taxes. If it is a municipal bond you won’t pay any taxes and if it is a corporate bond or an MBS then you will pay it as you earn it. You are not taxed on the price changes until you sell it. If you pay $1,000 for the bond and you sell it for $1,200 you are going to pay taxes on that $200 gain. Or if you sell it as a loss then you can write off that loss when you sell it, but the price changes in the bond. The underlying bond you don’t pay any taxes on those until you realize the price change, but you will pay taxes along the way as you earn the coupon payments. Stocks are different from bonds that way in that most stocks the return from them comes from capital appreciation or from growth, not from interest payments or regular distributions or dividends. Stocks you are buying and holding and hoping you get some capital appreciation. Dividend paying stocks, even dividend paying stocks, most of their return doesn’t come from the dividend it still comes from the growth. That is different from bonds. The returns you are going to get from a bond comes from the interest or at least that’s your expectation. You don’t expect it to go up or down. You just expect to earn the interest in most cases.

Ryan Isaac: So again, this is a point to consider when buying bonds whether individual or in funds which we will talk about. Which types of accounts to hold the bonds in will make a difference in the way you pay taxes on these investments. Let’s talk about two concepts of a bond that are, they seem really related, the math to these concepts is where the difference is. The two concepts are duration and maturity. Duration being how sensitive is the bond I own to changes in interest rates. If they raise rates on me what the price of my bonds going to do. Maturity is similar to duration in that duration sounds like how long do bonds last for, is it a five or ten year bond? Maturity is the time that the bond is held for. Do you want to chat about that for a minute?

Reese Harper: We should probably just say, every bond has a duration and you might see it called like a Macaulay duration or modified duration. There are different labels for duration. If you look at your bond or your mutual fund it will have a measure of duration on there. An easy way to think about it is that it is not exactly the way that it is, but it is pretty close, is that duration measures the length of the remaining time on your bond or your group of bonds. It is a measure that is close to the remaining number of years left before all of your bonds are paid out or before your individual bond is paid out so you might be in a mutual fund that has a duration of five. That means that if you average all of the bonds together it will talk about five years for all of them to get paid out. My academic friends are going to kill me for saying that.

Ryan Isaac: They are not happy right now.

Reese Harper: That is an easy way to think about it. The reality of the thing that you need to know as an investor is the longer duration bonds, the things that are really lengthy, call it ten, twelve, fourteen, or thirty year treasury bond, the longer that duration is the more sensitive your bonds are. The more volatile they are. The scarier it is going to be when interests rates move. So if you have a ten year duration bond and interests rates on a ten year bond go up 1%, you could see a 10% decline in the price of the holding that you have. The price of the bond that you own. So if you own $10,0000 bond that is paying you 5% and you are expecting rates to go up to 6%, and it is a ten year duration, what you do is you take that 1% interest rate change going from 5-6% and you multiply it by your duration of ten years and you will see the expected price change that you will have. You could see our $10,000 account drop to $9,000 if interest rates go up. That’s what you should expect. Know that duration times the change of rate is the amount of change you can expect in your portfolio.

Ryan Isaac: Ok, the duration is going to be a measure of the riskiness of the bond.

Reese Harper: Ya, that’s great.
Ryan Isaac: The other measure of risk in a bond is actually the risk of a bond. It is what they call the quality or credit of a bond. Who is the lender, or who is the borrower basically. How credible is this borrower that is receiving the money from the bond? How likely are they able to pay back the money over that time period and with that stated rate of return? Do you want to talk for a minute about the quality and credit ratings of different bonds? This is what we were talking about before where we got in trouble in 2008 with the packaging of all the mortgage bonds.

Reese Harper: Yes, totally. There are two major rating agencies that rate bonds: S&P and Moody’s. The easy way to think about it is that it starts with A’s and then goes to B, C, and D. The highest quality bonds are triple A rated. Those are kind of the highest quality bonds. You remember when the U.S. a few years ago lost its triple A rating? Do you remember that?

Ryan Isaac: Lost it. It was gone.

Reese Harper: You were crying about it.

Ryan Isaac: I called in sick! I remember.

Reese Harper: There are a lot of variations to A rated bonds. There are triple A, there are AA, there is a single A, and there is a huge difference between a single A and a triple A. Massive difference. Then when you get into the B’s there is triple B, which is your strongest B rated bond. Anything rated triple B or above is considered investment grade. That is considered investment grade. Now again S&P and moody’s and all the different rating agencies label these things differently, but the common thread is where you have three letters that is the strongest bond in a category. The only thing that I want to say that is important about this is when you are buying bonds you can either be in investment grade or what we call junk. Investment grade is anything triple B or greater, triple B meaning three big B’s. That is the S&P rating. Moody’s equivalent is BAA, but you want to stay in investment grade or above. If you get into junk bonds, there is just a place for them, but they are definitely more speculative.

Ryan Isaac: Ok, so that is quality, risk, rating.

Reese Harper: Yes, and you get those ratings from similar things you would expect in your dental practice. There are a lot of reasons why, if I was lending you money, I would look at things in your practice. There is a thing called a coverage ratio in a bond, there is a leverage ratio, a liquidity ratio, a profitability ratio, cash flow to debt, all of these ratios tell me how healthy you are in your ability to repay. So if your profitability on your practice is super low, I don’t have a lot of comfort lending you money. If your liquidity is super low, I am not as comfortable. If you are highly leveraged, if you can’t cover all of your debt payments with free cash flow, that is how bonds get rated. We recommend that people stay in the investment grade kind of quality for most of their bond purchases. If not all of them. You don’t need to buy junk bonds, take your risk in the equity side.

Ryan Isaac: Ok, so let’s talk about probably the more helpful part of this discussion. How do I use bonds in a portfolio? That is really why we are talking about this today. When people come to us for the first time and they ask us to look at their portfolios and we start directing things and asking questions. Why do you own that? Why do you own this and in this type of account? A lot of times they don’t know, and they want to know why do I own bonds and how should I own them? What are some of the main reasons why you want to own bonds in a portfolio?

Reese Harper: One of the primary reasons for me is that in financial science you mix stocks and bonds for one reason. That is to decrease standard deviation: the waviness, the up and down movement of your portfolio. The more stable you can make your portfolio, the more predictability you will get from it. The more stable you can make it by mixing stocks with bonds, it actually allows you to get more money out of it over time. You actually get more money out of it if you can increase the stability and get the same return. In a lot of cases that is kind of the whole point. I guess of investment science and why we talk about this today is that if you can combine different things to gather then you can extend the life of your portfolio and make the ride a lot more profitable for you than if you just have improper diversification. Buying bonds, the reason you are going to do it is that it is going to give you the ability to actually get the same return or in some cases even a greater return than you would by just buying stocks, but the ride will be a lot smoother to get there.

Ryan Isaac: Ok, and from a behavioral standpoint if you need somebody to stick to a portfolio for the next thirty, forty, fifty years, the likelihood of them doing so if it is not as volatile or scary then is a little bit higher. Which also increases the chance that they will have a better return over time.

Reese Harper: Yes, if it is too volatile than people tend to get scared. I got a call, probably a month and a half ago, this was right before, maybe two months ago, it was right before the election. I had a pretty long heart to heart about wanting to completely get out of the market because the day that the election happened the Dow’s future market was down almost 1,000 points that night. I got kind of peppered that night with calls and everyone was really freaking out because they thought the next morning their account would be down 1,000 points. Turns out nothing really happened and it was actually the exact opposite and the last two months have been a big bull market rally with great returns which I wasn’t expecting. That was just the way it has panned out. My feedback to that person was, “how do you know what the outcome of this is going to be over the next two months?” This could be good this could be bad it is hard to say and that is how markets work. The very fact that there is such volatility, right? That made the calls come in. I guess the more volatile your portfolio is the more likely you are to bail on your plan. This person has been really consistent over the last 7-8 years, but anytime there is significant downside in their portfolio, I will commonly get a phone call. This is someone whom I have mixed about a 50/50 portfolio. So half of their money is in bonds already, and I am still getting this downward pressure. I have some clients, also, who have 100% of their money in stocks and they are least affected by volatility. I think you just have to know yourself and know how you are going to react.

Ryan Isaac: Yes, temperament and personality, that is true. One of the reasons then is to change the nature of the volatility in a portfolio. Second reason for how to use bonds in a portfolio would be, based on the goals or the time frame that you need the money in. We have a lot of clients, it’s the nature of dental practices, that they might have some big purchases looming on the horizon at any given time. You might need to be improving your space or buying a new building. It might just be for your personal residency or picking up a second practice. It is likely that there will be periods of time during your career where you need to stockpile cash for a short period of time. One to three, maybe up to five years, you’d like it not to sit in your checking or savings account if you could get some growth that would be good. But it needs to be conservative and liquid. Do you want to talk about using bond accounts for some of these short term goal type things?

Reese Harper: Ya, I think that is a really good point. A lot of people do major purchases around houses or properties or second location and might be sitting on anywhere from $50 to half a million dollars of cash that they know they need to deploy and they sit on it with their checking account and don’t do anything with it for years. That is what we call cash drag. The cost of that over a lifetime is pretty extensive. I mean you sit on an average balance of a few hundred thousand over your lifetime, instead of having it invested even in a two year maturities or durations, so they don’t have super, super long frame durations and by having that money invested you are just earning interest that you wouldn’t earn that the bank is not paying you. If you just invest in bonds with short durations like that you are really not putting yourself in for much risk either, especially if you match it with the time frame you’re expecting too. I like that. I would rather invest it and earn eight grand over that period of time. That adds up if you do that every year of your life.

Ryan Isaac: Another questions is, do I buy them individually or do I buy them in bond mutual funds and ETF’s? How should I think about this as an investor?

Reese Harper: Well, the larger you are, the more flexibility you probably have. There is a lot of research done on whether bonds and ETF’s are better than individual bonds or if ETF’s are better than mutual funds. You can do either one, but the smaller you are, the riskier it is going to be for you. If you are small and you are buying individual bonds you are putting all of your eggs into one basket. If you are a larger investor you have the ability to buy 100 to 150 bonds. You will see that a well diversified bond portfolio needs to have a lot of holdings because if one of those holdings goes bankrupt you are in trouble. There is no reason to own individual bonds, it is more from my perspective with the advent of good indexes, it is just a hobbyist thing. It can offer a large, large investor and a large institution a little bit more return if they pick the right bonds at the right price and spend a lot of time acquiring the right bonds at the front end. Just like you would with real estate or a practice, but most people should just be in ETF’s or mutual funds. They should be in an investment that allows them to get exposure to thousands of securities instead of a dozen or a handful. I think that is probably the better route for most people.

Ryan Isaac: What about the cost of these different things? Like mutual funds and ETF’s there are expense ratios that have quite a big range so as an investor what kind of cost should I expect to own bonds in my portfolio? Will it be similar to my stock mutual funds?

Reese Harper: Well, ya, if I am going to buy individual bonds, I am going to pay a fixed amount of money to the broker that buys the bonds for me. And by broker, I mean the electronic exchange. There is a person facilitating that transaction or a computer mechanism and there is a speed there. They will capture some amount of money per transaction. It could be ten or twenty five bucks up to a hundred bucks depending on the size of your trade. If you are investing in funds than it will be what we call an expense ratio. It could range anywhere from five to ten basis points or .01% we will call it clear up to 2% a year. The crazy thing about fixed income that you have to keep an eye on, from our perspective, it is very difficult for a high fee funds to make up for their returns. To make up for their fee in returns because the bond market, especially the last ten years and moving forward for a while. The returns are already pretty low. You don’t want to be invested in expensive fixed income or bond mutual funds because it is really hard for managers to pick bonds to compete. That would be in the case of an actively managed bond fund. Then there is indexed funds you can buy that are really inexpensive. They use a computer algorithm where they can own 1,000 plus in their portfolio instead of maybe one hundred or 80. The cost will be more for actively managed funds that have fewer holdings. You have got to be careful because it is hard for those managers to make up for those expenses in returns.

Ryan Isaac: Pretty similar story in buying stock or mutual funds. Last question for investors, do I buy a different type of bond/bond fund early on versus in retirement? Are there pre and post retirement bonds that are more appropriate and better for my situation?

Reese Harper: I think that that probably, from our perspective, I would say the right kind of bonds are always the right kind of bonds. It is more just a question of how much of my percentage as an overall account should I own? Early on in my career, I still think it makes more sense to take risk in the stock market not in the bond market. I would rather see someone have less bond exposure early on in their career, but I probably wouldn’t change the type of bonds I would own. I am a very short duration guy. I think our firm generally, I shouldn’t say I, our firms perspective is that the shorter to intermediate duration bond, something that doesn’t get up over five to six years duration, maybe as much as seven in some cases for corporate. That is starting to get to the point where you have got a longer duration bond, but it won’t be super sensitive to interest rate changes. It will still give you the stability that you need. You don’t have to be that long in duration, I would rather see people be investment grade, high quality throughout their career both early and late and then just get the larger returns that they want from equities. I think that is probably academically the more sound route to go for most people as well.

Ryan Isaac: I would reiterate what you said. I think one of the biggest questions on owning bonds pre or post retirement would be what percentage of my assets or portfolio should be in these investments? I would say there are different tax implications based on the types of bonds or the types of accounts that you will put these bonds in. So as an investor, owning bonds is what percentage of my overall portfolio should be in these things and what types of accounts should I own them in because they will have different tax consequences for me.

Reese Harper: That’s great. You have got to think about different accounts to put them in. You want to put mutual funds that are municipal bonds outside of your 401k and IRA’s and defined benefit plans as we have talked about before, but you will see a lot of people put the wrong bonds in the wrong types of accounts and stocks have the same implications. Where you put them is very important and we will go through that another day. That is probably another podcast. Did you get enough bonds in you today?

Ryan Isaac: Well, the thing that I am laughing about in my head is that we made zero James Bond jokes. None. How did that happen? I kept thinking about that, I had some good 007, Bond, James Bond things prepared.

Reese Harper: It is your job to interject humor, not mine, gosh.

Ryan Isaac: Anyway, thanks to all of our listeners for joining us today. Give us some feedback while this episode is fresh on your mind. Go to the listen tab at dentistadvisors.com and use the comments section for this episode. While you are on the website you can also schedule a free consultation, we would be happy to chat with you any time. Thanks for the good discussion, Reese.

Reese Harper: Have a good one, and carry on.

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