Ep. 153 – Bonds Versus Bond Alternatives

Have you heard of the 60/40 portfolio? This means that 60% of your investment money goes into stocks, and 40% goes into bonds.

This is fast changing in today’s world of high-interest rates, and the bond market is increasingly becoming hard. But how about a bond alternative?

In this episode of the Secure Your Retirement podcast, we talk about the changing world of bonds and the importance of bond alternatives. Listen in to learn why a bond alternative is supposed to provide the same goal as a bond, which is to lower risk and provide income.

In this episode, find out:

●     The 60/40 portfolio and how it protects you from stock market volatility.

●     How the high-interest rates are affecting the bond market negatively.

●     A bond alternative is supposed to fulfill the same goal the bond was going to fulfill.

●     Why fixed index annuities provide an excellent bond alternative.

●     How we come up with a long-term bond alternative plan that’s safe, reliable, and not volatile.

●     Bonds are not evil, but it’s important you think about bond alternatives.

Tweetable Quotes:

●     “When interest rates go up, that affects bonds negatively.”– Radon Stancil

●     “Everything about investing is purely about how you understand it, perceive it, and what your expectations are.”– Murs Tariq


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the Full Transcript:

Radon Stancil:Welcome everyone to Secure Your Retirement Podcast. And today, our episode is going to be one of our retirement in action episodes where we handle a topic that we think is important. Today’s topic, as we get right into it, is bonds versus bond alternatives. Now, I’m going to just come right out and say, a lot of people have built their portfolios around this idea of you got to have equities because you want growth but you want to buy bonds to offset any kind of downside in the market. And so there has become this thing over time where, especially people that are close to or in retirement who say they want this portfolio that’s going to survive and be able to deal with market volatility, they come up with what people have deemed the right mix, and that mix is this 60, 40 portfolio.  
 So what does that even mean, 60, 40? 60% equity, so basically you would take 60% of your money. Let’s just pretend you got a million dollars, you’d take 600,000 of it and you would diversify that into a various amount of stocks, equities, mutual funds, all those but on the equity side of the world. Then the 40% you would go buy bonds. And the premise behind that was, if you have a stock market volatile position or correction, you’re not going to be exposed to all of that because 40% of your money is in bonds and we all know that bonds are safe and that bonds don’t lose, until now.  
 And all of a sudden now, that whole atmosphere is changing. Bonds have had a very, very difficult run and we believe that they’re going to continue to have a difficult run for probably the next decade. And the reason why is because of the low interest rate environment that we have lived through for the last number of years. We’ve actually been on a very low interest rate environment all the way going back to 2008. And so when interest rates go up that affects bonds negatively and you really don’t have anywhere to go right now but interest rates to go up, and people get that.  
 They say, okay, if interest rates go up, hurts bonds. If you’re in bonds and interest rates go down, then that can help bonds, but right now with the environment we’re in it can be very difficult. So Murs, just so that everybody understands kind of how we gauge bonds and maybe how they’ve reacted in the last year or so, can you kind of give us, everybody knows the S&P 500, that’s the index people look to. What’s the index people look to when it comes to bonds?  
Murs Tariq:Yeah. Like you said, when we talk about the stock market in general and the big wigs on TV, they’re talking about the stock market being down or headed into a correction territory or bear market territory. They’re always talking about really three major indexes, the S&P 500, the Dow Jones, and the NASDAQ, and that’s really the equity side, the stock side of the market. When we’re talking about the bond side, we’re really talking about what’s called the aggregate bond index, and there’s been other ones kind of simulated off of that but that’s really the major one. So If I say equities and I say equities are the S&P, then if I say bonds I’m going to say bonds are the Agg, just for a generic way of looking at some benchmarks here and there.  
 And so when we look at the Agg index as a whole, like Radon said, bonds have had issues. There’s a lot of bonds built inside of the Agg index, all different types, a very good, diverse building of bonds. And when we look at that over a few different periods of time snapshots, it’s kind of breaking that story of bonds are going to keep you safe when the market has issues. So if we look at just year to date, we’re recording this really kind of around the 1st of May, 1st of April, I’m sorry. And if you look at year-to-date for that Agg index it’s going to be floating but roughly around six to six and a half percent is kind of where it’s in this trajectory of. And…  
Radon Stancil:When you say just for, because everybody’s listening, six to six and a half, what?  
Murs Tariq:Percent.  
Radon Stancil:Yeah.  
Murs Tariq:Yeah. Six to six and a half percent year to date. And you think about that, that is a bond. That is something that you’ve been told all your life, that this is something that’s going to be safe and it’s going to protect you. And it’s going to make a decent rate of return, not going to blow away the markets, but it’s going to be safe and steady. And all of a sudden now I’m telling you we’re four months into the year and that index is down already in the 6% range, just for the four months of this year of 2022. And then you say, okay, well, if the bonds are down that much, then surely the market, the equity side, the stocks, the S&P, the NASDAQ, the Dow, they should be down significantly more. And the answer right now currently is that’s not true.  
 The S&P is actually right around that negative 3% for the year. And so now, this makes us think a little bit of, go to the scenario of Radon talking about the 60, 40 portfolio. And the reason you have that 40 is to offset your risk of that 60 to 60 being say the S&P. Well, it’s not doing that. It’s actually making your portfolio worse. You’re actually feeling more than what the market is actually doing from a downside perspective. And so now we’re having to think a little bit and kind of realize where is the future going when it comes to this interest rates scenario that we’re in. For the past 10 years, we’ve been in a very low, low interest rate scenario. And now what happened in 2020, essentially, we’re paying for it in the world of inflation.  
 And now the Fed having to do what the Fed is doing, making decisions here about raising interest rates. And we don’t know where it’s going to go, but it seems like there’s going to be some significant raises over the next few years to get inflation back under control. Well, that’s going to hurt the bond market. And every article you read, every big wig that you listen to, and everyone is worried for the next, not just couple years, but 10 years when we’re looking at the bond environment.  
 So that leads us to kind of, how do we handle this situation? The world has been built off of this construction of a portfolio saying 60% equities and 40% bonds in retirement. You should be just fine. Now we’re being flipped upside down. And so that’s why we’re bringing this up because we thought about this and that’s why there’s other things out there that we’ve utilized for years and years before interest rates had an issue. And that’s why we’re having this podcast today is kind of to just give you a little bit of an idea of I’m worried about bonds. So what else can I be doing with my portfolio?  
Radon Stancil:Yeah. I think it’s also interest when you look at that AGG that Murs was just talking about. For the last three years, if you were just in this Agg environment, meaning you’re just in a bond portfolio for three years, you’re down 2%. That means you’ve lost money for the last three years. So as we say, in this particular episode, it’s called bonds and bond versus bond alternatives. So what are we even talking about when we say a bond alternative? Well, if you’ve listened to our podcast for very long, and if you haven’t, you can go find the episodes where we talk about actively managing your money. Well, we do that on the equity side, in fact, our overall money management approach is we ourselves will protect from significant loss because we have a sale side discipline, but how do we still though go and get assets that are going to be an alternative to bonds?  
 And for us, if you think about it, what’s the purpose of a bond? Lower risk and to provide income. That’s really what our goal with that is. So if I’m going to go to a bond alternative, I need to test it and compare it to what my goal was with bonds. So I need to say, is it going to be volatile, or is it going to be safe compared to the stock market? And then number two, can it provide me income? So when we go out and look at different places to do that, a place that comes up in conversation, and over the years, it has come up more and more in topic are using fixed annuities and specifically fixed index annuities. Now you probably, if you’ve ever read anything about these, you can find pros and cons articles about them, pros or cons, but when you put it in the context of not comparing it to the stock market, but comparing it to bonds, annuities provide a very, very good alternative to bonds.  
 Why? First of all, an annuity, a fixed index annuity cannot lose in a year. So had you been in, if let’s just compare it from the perspective this year, you were in a fixed index annuity. Instead of being down 6.33, worst case your down zero. That’s your worst case, is you’ve made nothing. For the last three years your worst case is you have made nothing. That’s your worst case, but what is the reality? Well, we’ve been doing these for a long time and what we find is it’s a pretty safe number to say over a 10 year period, the fixed index annuity is going to earn in that three to 6% range, three to 6% on average.  
 Is it going to make it every single year? No, but what is it never going to do? It’s never going to lose. Now Murs and I, we talk a lot about how to structure our plan. We want to have some money that’s for growth. We want to have some money that’s for income. So Murs, could you just kind of maybe walk us through a little bit about if we use this bond alternative, we don’t lose and when we don’t lose, we can then depend on the income. So how do we structure maybe an overall plan, just a high level on how we would do that?  
Murs Tariq:Yeah. So the big part of this is there is no cookie cutter approach. It’s not just saying, Hey, let’s put a 60% into the growth side of things and let’s put 40% into a bond alternative. It’s really, every family is different. And so we start everything off and you’ve heard us talk about this quite a bit with a retirement financial plan. What that does is it gives us a very good idea in a couple different ways, is here’s where you are today, here’s where you’re headed when you reach retirement, and here’s what your retirement’s going to look like based off of some assumptions, of course. And what that does is give us a picture on a couple different things. Hey, are we going to be okay? And what is our income need going to be? When I say that, we’re looking at what is coming in from various sources.  
 So maybe you’ve got social security, maybe you’ve got pension, rental income, but then where’s that deficit of living your normal life, how much extra do you need on top of that? And whatever that number is, that’s where we’re going to start strategizing saying, Hey, we need to cover this. And typically we’re going to use that bond alternative. Now, whatever that number is, we’re going to walk you through it. And basically it’s a whole other conversation that we get into talking about different buckets that we want to have money in. But ultimately we look at it from this perspective and everything about investing is purely about how you understand it and how you perceive it and what your expectations are. And when we’re talking about income, like Radon said, we want to be using something that is safe and reliable and not volatile so that we can count on it to be there for the next 10, 15 years or even longer.  
 And that helps us make a plan. So now think about this. We come up with a plan that has your income covered for the next some odd years, 10, 15, 20 years, whatever that number is, whatever you desire, and you’d still have your growth bucket, you still have your money in the market and growing, also taking risks there that has the ability now to grow and grow over, not just a few years, but you’re not touching it for the next 10, 15, 20 years. Imagine the power of that. And so that’s kind of how we look at it, is saying let’s structure this so that we know that we have income we can count on so that the other assets can grow untouched for a very long time. And then if we have to rearrange, because things happen in life, we have plenty of flexibility to rearrange, but that’s the overall concept there of how we structure these income plans.  
Radon Stancil:So ultimately what we’re trying to say is, is that we’re not trying to say that bonds are horrible. Don’t buy a bond. That’s not our message. What we’re saying though is, is that we do believe that bonds have had a hard time for the last few years. We believe that’s going to continue as we deal with the interest rate environment that we are in currently. And as already has been said, the Fed has said, they’re going to raise rates. They’ve given us this idea that they’re going to do it multiple times throughout this year and next year, significantly raising the interest rate of where we were, which was basically zero.  
 And so if you are right now looking at your portfolio, and you’ve been in that 60, 40 kind of mix, if there’s never, ever been another time, this is the time that you want to reevaluate how you’re looking at that portfolio. Maybe get a fresh set of ideas or set of eyes on that portfolio. And we’re just feeling really strongly right now that we want to look at things different than we ever have. And because, the reason why is the world’s a little different than it ever has been before. So keep that in mind.  
 By the way, we do appreciate you listening to us today. Go check out the website, pomwealth.net. Go to the blog page. We have a whole article on this very topic of bonds versus bond alternatives. You can go through it and read it and find all what we just talked to you about and that’ll be all your notes for you. Also, if you would like to have a conversation with myself or Murs, please just go on the website. Top right hand corner, you got a little button there you can click on for a 15 minute, no obligation phone conversation. We would love to be able to hop on the phone and have a conversation with you. We hope this has been of benefit. We hope this helps you to get at least your mind thinking about some alternatives to what you might felt was already a bad scenario. But thank you very much. We’ll talk to you again next week.