Episode-1669- Expert Council Q&A for 10-30-15 — 2 Comments

  1. Bonds: I have a different view of what was presented, and no doubt it may be controversial. I would never, ever buy individual bonds, corporate or municipal. If you want to find out how many ways you can get screwed by buying individual muni’s from a broker, try this book,
    I would only buy bond mutual finds, having the lowest expense ratio, and here is why. There is a very interesting property of bonds which makes them distinctly different from stocks, which is called the duration, not to be confused with the maturity. The duration is given in terms of years, but is actually the percentage change in NAV of the bond or bond fund per each one percent change in market interest rates. So, as stated in the answer, if you buy a bond or bond fund with a high duration and interest rates spike the NAV tanks. If you are mathematically inclined look here,
    Duration is taken advantage of by CFA’s (not to be confused with CFP’s) who manage pension funds, mutual funds, insurance trusts, etc. CFA’s must buy and sell bonds and other assets to match their future liabilities in case of insurance trusts and pension funds. They are continually buying new bonds to replace those maturing. What you will find is that the new bonds purchased at the higher interest rates will completely offset the NAV losses on the older bonds if you continue this process for a period of time equal to the duration in years. This is laid out in the CFA primer for their exams; “Investments” by Bodie, Kane, and Marcus. The bottom line is that if you buy a bond mutual fund of 5 years duration you don’t have to worry about NAV losses if you hold the fund for that period of time. Of course if you need the money before then you better be in a very short duration bond fund or just a bank savings account.
    There are many components to bond risk, and interest rate risk is only one of them. However, bond duration can be used to your advantage if you know how it works.

  2. I’m surprised that Steven did not mention a mini-split/heat pump system. This would have done away with the need to add in another source of energy and are very efficient and easy to retrofit all wrapped up in one tidy little package.