Using Bonds Instead of Stocks for Portfolio Income
by Stan Richelson and Hildy Richelson
We believe that municipal bonds are an excellent investment for those individual investors who wish to preserve their principal and generate a predictable cash flow of tax-free income. We consider this to be the case even though yields on bonds have gone down to historically low rates over the last five years.
Although individual investors generally allocate their assets between investments in stocks and bonds, maximizing consistent and predictable cash flow is the most important factor for individuals with retirement income needs, college expenses or other long-term financial objectives.
In this article
- Investing in Stocks for Income
- Investing in Bonds for Income
- Comparing Stocks and Bonds
- Our Investment Principles
- Our Strategies
- How to Monitor Muni Bonds
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Investing in Stocks for Income
Individual investors buy stocks and stock funds (we will refer to both as “stocks” throughout this article) in the hope of maximizing their investment returns as a result of stock appreciation and dividends. The historical return of 9% to 10% is pointed to as their hoped for strategy of success. However, many investors saving for retirement and those in retirement have lost their taste for stocks because of the substantial losses that they have incurred. These losses were due to the dot-com crash in 2000 and the bloodbath in 2008. Two massive stock market crashes in eight years have demonstrated to many investors preparing for retirement or in retirement that stocks offer no guarantees of growing steadily or providing the required predictable cash flow when needed over a long period of time.
A retirement fund must be designed to last for 20 to 40 years. How do you deal with a big crash that results in a 30% to 50% decline in assets when you are no longer working and earning more money? Backtesting your current portfolio against previous crashes is no predictor that your current portfolio will be safe in the future. As financial planner Michael Dubis has pointed out, “Hope is not a strategy.” While there is always the possibility of outsized gains on stock portfolios, do you want to bet your retirement on this outcome?
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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).