How to Make Money From Bonds

by Stan Richelson and Hildy Richelson

Editor’s note: Portions of this article were excerpted with permission of the publisher, John Wiley & Sons Inc., from “Bonds: The Unbeaten Path to Secure Investment Growth,” Second Edition. Copyright © 2011 by Stan and Hildy Richelson.

We endorse a buy-and-hold strategy for bonds because, when following such a strategy, you only need to make one right decision: when to buy.

With high-quality bonds, the variations in a bond’s price while you hold it are not a serious concern because, unless there is a default, you will be paid both your scheduled interest and the face value of the bond at its due date. Long-term bonds experience greater price swings and thus more visceral discomfort than shorter-term bonds; but the ups and downs of a bond’s price should not matter to you if you can hold the bond until it comes due at face value.

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About the author

Stan Richelson is a representative of Scarsdale Investment Group, a registered investment adviser based in Blue Bell, Pennsylvania, that specializes in fixed-income investments. Stan and Hildy Richelson are co-authors of several books on bonds, including “Bonds: The Unbeaten Path to Secure Investment Growth,” Second Edition (Bloomberg Press, 2011).
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Hildy Richelson is president of Scarsdale Investment Group, a registered investment adviser based in Blue Bell, Pennsylvania, that specializes in fixed-income investments. Hildy and Stan Richelson are co-authors of several books on bonds, including “Bonds: The Unbeaten Path to Secure Investment Growth,” Second Edition (Bloomberg Press, 2011).
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When you trade bonds, however, you must make two right decisions to be successful: when to buy and when to sell. We recommend to investors that they avoid market timing and leave this activity to traders who move big positions and watch the trading action all day, every day. Making one right decision of this nature is hard enough; making two is a risky choice.

Of course, there are exceptions to a buy-and-hold strategy. There are certain times when it may be financially necessary or strategically advantageous for you to buy or sell bonds. Understanding the implications of different yield curves, placed in the context of your own particular needs, can provide insight into bond market opportunities. The yield curve can also help you compare one bond to another and decide which specific maturities, among the many alternatives available in the market, make sense for you to buy.

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→ Stan Richelson is a representative of Scarsdale Investment Group, a registered investment adviser based in Blue Bell, Pennsylvania, that specializes in fixed-income investments. Stan and Hildy Richelson are co-authors of several books on bonds, including “Bonds: The Unbeaten Path to Secure Investment Growth,” Second Edition (Bloomberg Press, 2011).
Hildy Richelson is president of Scarsdale Investment Group, a registered investment adviser based in Blue Bell, Pennsylvania, that specializes in fixed-income investments. Hildy and Stan Richelson are co-authors of several books on bonds, including “Bonds: The Unbeaten Path to Secure Investment Growth,” Second Edition (Bloomberg Press, 2011).

Discussion

Please reword your section on junk bonds and avoiding over-valued bonds. You say that junk bonds that move to 200 basis points of treasuries are over priced, but that makes the reader have to guess whether the desired spread is under 200 basis points or above. I would find it clearer to give a rule of thumb on how many basis points above treasuries that I want to make junk bonds worth the extra risk.

posted about 1 year ago by Owen from California

I have not invested in corporate bonds but have become interested in a select few. I cannot seem to find information on the Internet and am considering a subscription to Investor Pro if it includes corporate bonds information for term, interest rate, and yield for each company. Where is the best place to find this information?
Thank you for your response,
Peggy Smith
psmith44@comcast.net

posted about 1 year ago by Peggy from District of Columbia

Peggy, our Stock Investor Pro program only screens for stocks, not bonds. http://www.investinginbonds.com is a good website for finding information on corporate bonds. I would check with your brokerage firm, as its website may have a bond screening tool. - Charles Rotblut

posted about 1 year ago by Charles from Illinois

I am one of those investors, "deathly" afraid of long term bonds and I didn't really see anything in your "Strategies for Reducing Market Risk" that made me feel better.

I realize that I have lost out in the last couple years thinking interest rates could not go lower, but it seems to me that holding a bond for 30 years paying 3%, while the rest of the market is doing 6% would not be much fun either. Nor would selling it and losing half my principal.

It just seems like a tuff place to be right now.

??

posted about 1 year ago by Dave from Washington

What is the advantage of creating your own bond ladder, as oppossed to buying a bond fund and essentially letting the professionals do it? Seems like you would get a lot more diversification from a bond fund, especially for those that are not bond experts.

posted about 1 year ago by Dave from Washington

I agree with Dave...how do the various bond funds stack up against a do it yourself strategy...if the difference is just the expense ratio, then my decision is made.

posted about 1 year ago by Chris from New Jersey

My problem is the opposite. I want out of a bond ladder my previous broker set up. I have not been able to get rid of 20+ bond positions because "The Expert" purchased mostly in 1,000 and 2,ooo quantities. More shocking was my "advisor" had 38 options(60%)of my IRA and 2 old American Funds. Needless to say I've moved from there and am using Fidelity to help clean up the mess. Long story. The 20+ bonds I do not want to keep are only traded in 5,000 to 25,000 quantity limits and the company will not deal with 1,000. As above, why have $ tied up for 20 or 30 years at 3% - 5%?

DOES ANYONE have a SUGGESTION how I can dispose of the remainder of my useless ladder? I've talked with the Fixed Income and Bond Desk at Fidelity who have helped me dispose of 2/3 of my ladder but hve no resolution on the remainder.
Never, never, never use a fee based broker even if you're sick or dying. I have yet to total my losses.

posted about 1 year ago by Ina from North Carolina

I like high yield bonds, which have done well for me over the years. I seldom see any constructive discussion of investing in this asset class. I have made a presentation at an AAII meeting and written an article about this:
http://www.wonderfulwebwork.com/documents/Investing_In_High_Yield_Bonds2.pdf

posted about 1 year ago by Bernard from California

I own some convertible bonds that are well in the money. However, one is callable in Apr. '12 and its value has fallen from over
$115 to $105 in the past few months.

How do you assess at what point the time value left on a callable bond is not worth holding onto the bond? Even if the stock continues to rise, the bond is likely to be called at $100 at the call date.

posted about 1 year ago by Steve from Connecticut

Dear Owen from California
It is very hard to tell you how many basis points you need to have before it is worth your risk to invest in junk bonds. Post 2008, high yield corporate bonds yielded as much as 823 basis points or 8.23 percentage point more than comparable Treasuries. Was that a good deal? Only if in retrospect we know that the bonds did not default or lose substantial value. The problem with buying high yield bonds is that they may default, and you may lose some or all of your principal. From our perspective it is not worth taking the extra risk of losing your principal.
One of our California clients worked with a high yield California broker who systematically sold his high quality bonds and purchased high yield Community Development District bonds for him. They are in a very shaky state currently and he cannot sell them. If you want to invest in junk bonds, then your best bet is to purchase a fund.
As we describe in our book BONDS: THE UNBEATHEN PATH TO SECURE INVESTMENT GROWTH, Second Edition, there are many different kinds of junk bond funds. They are not all created equal.