John Ristow from IL posted over 11 years ago:

Where would a person obtain advice on putting together an appropriate bond portfolio?

R Scher from New York posted over 11 years ago:

Would closed end shorter term bond funds be equally as good as suggested in Barron's?

Charles Rotblut from IL posted over 11 years ago:

Unless you are holding defined maturity bond funds, bond funds never mature. The advantage of holding individual bonds is that they mature, giving you a predictable (assuming the issuer does not default) stream of cash flows. -Charles

Hildy Richelson from PA posted over 11 years ago:

If you would like information on creating a bond portfolio, please contact us, John. You can find our contact information at www.allbondportfolios.com.

Hildy Richelson from PA posted over 11 years ago:

A closed end fund is not the same as purchasing an individual bond. Closed end funds are leveraged, which means they have more risk. Also a closed end fund never comes due. You have to sell the closed end fund in order to get your invested funds back. In addition, closed end funds have management fees, while when holding an individual bond has none. The key is to purchase high quality bonds that you can hold until maturity.

Hildy Richelson from PA posted over 11 years ago:

We recommend zero coupon bonds as part of a ladder because you can knowingly plan for a return of principal at a specified time. It is like purchasing a target date fund that promises to give you your money back at a specified time. The difference is that the fund has fees and transaction costs, while the zero coupon bond has none. You purchase it at a discount and it comes due at face value. If what you want is a stream of income currently, then you would want to purchase bonds that pay interest twice or more times every year. It is more defensive to purchase current interest bonds if you believe that interest rates are going to rise because you will have cash flow to reinvest at higher rates. The yield-to-maturity computation assumes that you are going to reinvest the interest payments at the same rate at which you purchased the bonds. With a zero coupon bond, the yield-to-maturity you are quoted is the yield you will actually earn. With current interest bonds, the yield may actually be the same,higher or lower than that quoted, depending upon whether you reinvest the interest at the same, higher or lower yields. If you are not going to reinvest the interest payments, then the yield-to-maturity computation gives you a way to compare one bond to another when you are buying the bonds.

John Klein from OH posted over 11 years ago:

I am surprised that the article did not include typical or average cash returns over the life of the bonds, or the high-low % for the different kinds of appropriate bonds. - John Klein jklein@jklein.com

Joanne D from PA posted over 11 years ago:

Could you please a provide a sample bond ladder and the type of expected and realistic returns possible in this current yield environment ? Additionally, what is the ratio of short term versus intermediate and long term bonds you would propose?

John Broderick from OR posted over 11 years ago:

This plan does not provide for one time costs, such as a new car, new roof, loan to children, etc. My plans have been derailed by costs like these. JB

Norman Holcomb from MA posted over 11 years ago:

It would be interesting to see the investment/ income results of a bond and preferred stock portfolio, diversified with various rated securities, over the long term. I believe that a patient, conservative bond and preferred stock investor has much higher return potential than is generally believed or represented in the mainstream investment media.

Peter Rasmussen from MN posted over 11 years ago:

I totally agree with your thesis. What about using a sequence/ladder of ETFs like (for instance) BSCG that will mature in 2016? Would these types of target date maturing ETFs give close to the same result, without the risk of individual bonds defaulting?

Charles Rotblut from IL posted over 11 years ago:

Peter, The answer is not exactly because you are buying a fund instead of individual bonds. I discussed the pros and cons of defined maturity bonds in the AAII Journal. -Charles

Hildy Richelson from PA posted over 11 years ago:

Hello Joan, Ladders are personalized for individual needs. We have been purchasing longer dated bonds because that is where the yield is. Given the choice of earning less than 1 percent or 4 percent, we choose 4 percent. The media was predicting rising short-term interest rates, but that did not happen. Rates as of 11/12/14 look something like this. Taxable municipal bonds from the State of Hawaii rated AA2/AA/AA yield approximately 3.32 percent in 2025 and 4 percent in 2034. Tax-exempt interest is about 3 percent in 2028 and 3.52 percent to 3.72 percent in 2034, depending on the coupon and call date. We see some 4 percent returns out 30 years.

Steve Farrar from Arizona posted over 9 years ago:

We have been doing this strategy since 2004, using a professional bond management team at UBS to build a tax free municipal bond ladder with an average maturity of six years consisting of A, AA and AAA bonds. Typically the coupon (tax free interest) on the portfolio has been 4.3% and the total return of the strategy (including capital gains realized on the buying and selling of individual bonds) has been a little over 5%. Because I did not retire until 2012, the gains realizes up to that time were all reinvested into the account. During the Great Recession of 2008, the portfolio value dipped briefly to -5% (while equity markets were down 40%+). Municipal bond values quickly recovered and by 2009 our account value was again positive while we continued to receive the 4.3% interest. For the .5% management fee we get the benefit of bond research to vette the safety of the bonds as well as buying and selling to take advantage of opportunities in the yield curve. We also have access to the team to ask questions about our account, the securities selected, and the trends and issues of the municipal bond market. From time to time developments in the bond market raise questions. For example, the Detroit default on their municipal debt and the changing liquidity of the bond market due to federal regulations imposed on banks post 2008 create changes in the market that are important for investors to understand. Likewise the pension pressures on municipalities that have increased in the last ten years create risks that professional security research can help mitigate. And finally, it is important for investors to understand the differences in risk profile of GO and revenue bonds, etc. Since retirement we have yet to draw any income from our bond portfolio. It represents about 80% of our liquid net worth. Instead, given the strange and volatile investment market we have been in we have been liquidating other assets in our portfolio for living expenses. We expect it will be another two to three years before we need to begin using portions of our federally tax free income from our muncipal bond portfolio for living expenses. By that time we expect that we will need to utilize only about 60% of our annual income from the account. Due to that fact, we should continue to see our account value increase while meeting all our living expenses. Because my wife will begin taking her pension and social security in six years and we also have annuities from which we intend to turn on income in seven years, we expect - based on the assumption that our returns from our bond account will continue to be in the 5% annualized range - that our living expenses as a percentage of our total annual return from our bond portfolio will drop to around 40% in seven years. This will leave us a large surplus of income to save for reinvestment, or to utilize for other needs or desires should they arise. Based on this, it appears to us that we have created a lifetime paycheck that meets all our living expenses and provides us a healthy 'growth' bonus as well. This accomplishes the goals stated by financial planners that retiree portfolios should provide both income and growth while controlling investment fees. We can do this while controlling volatility of our asset values of our portfolio. Of course, we remain actively knowledgeable of the macro investment environment as well as changes in the municipal market. No asset class is without risks and complexities. If our assessment of the risks of municipal bonds changes in a negative manner, we remain open to allocating some of our net worth into corporate bonds. We actually have a managed convertible bond account with Wellesley. They have a strong long term track record of delivering annualized returns of better than 8% with a volatility lower than the S&P. We like convertible bonds because while they pay a coupon from the bond and the investor can recover principal from holding the bond until maturity, the account values can also increase during bull markets in stocks. We like the relative predictability of bonds better than stocks and know ourselves well enough that we don't do well during harsh bear markets when equities are down 40-50%. Because we have constructed a reasonable life style that enables us to live below the interest payments generated by our bonds, and have also created other sources of income from social security, my wife's pension, and various annuities, we simply don't need to fret about major bear markets and have predictability of income. We value the psychological benefits of this approach. In essence through planning ahead for retirement we have been able to create an income stream that is predictable and replaces all our pre-retirement income. It is like we are still employed. Plus, our tax returns are simple, and we feel somewhat insulated from the vagaries of changes in tax rates in the tax code we feel are coming as the government continues to run large deficits.

Peter Mc Dougall from TX posted over 9 years ago:

Question to Steve Farrar Could you give more information on Wellesley? The only Wellesley I know is the vanguard Wellesley fund but they don't buy individual bonds as they are a fund. Like the idea of individual convertible bonds. Peter

Gary Jaffe from CA posted over 9 years ago:

The Paycheck Strategy makes total sense but the article omits key asset classes. Using bonds leaves too much money on the table. I have owned a portfolio of closed-end preferred stock funds for 25 years. My annual return has been 10.0% vs. 9.7% for the S&P 500 and 6.2% for the Barclays Aggregate Bond Index. My portfolio returns have been less risky (standard deviation) and achieved a higher Sharpe ratio than the S&P 500 (.54 vs .36). My portfolio currently yields 8% (paid monthly). It is a broadly diversified portfolio composed of mostly investment grade securities. I can spend 6% of the income and leave 2% to cover inflation. I receive enough income so I don't have to tap my principal. (So much for the assertion that you can only spend 4% of your retirement portfolio annually). I don't need to decide which stocks to sell to generate monthly income, I don't need to cut my withdrawal rate after nasty market plunges, and I don't need to perform hundreds of Monte Carlo simulations to ensure I don't run out of money. I have built a time-tested retirement pension plan that beats the S&P 500 with less risk and automatically churns out 8% income. Who needs common stocks? Or bonds? I don't care that my preferred funds don't have a specific maturity because I'm not ever going to sell them. GJ

Hildy Richelson from PA posted over 9 years ago:

Hello Steve, You might want to check out our website and look at what we charge. It is a lot less than UBS to advise on and create a bond portfolio. Gary, with rates negative in many parts of the world, you have to wonder about the credit quality of a portfolio yielding 8 percent or more. Last year CALPers, the California pension plan made .5% and were happy that the return was not negative as were the returns on other pension plans. If buying preferred stock was such a slam dunk, why does a professionally run fund have such a problem? Individual bonds create a reliability of cash flow, and a return of principal, unlike any other investment.

Linda Campbell from WA posted over 9 years ago:

This is for Peter M from Texas - You asked about Wellesley. That happens to be a Vanguard fund, as you mentioned, I have happily owned for years. To answer your question specifically though, you can find Wellesley @ www.wellesleyinvestment.com All the best!