Speaker 1 (00:00.174)
Bond is just a loan. That's a fancy and you've heard, you've heard said my word is my bond, right? And so when you take out a loan, you're giving your word that you will repay it in full plus interest. Okay, so it's just a loan.
Welcome to the Physician Family Financial Advisors podcast, where physician moms and dads like you can turn today's worries about taxes and investing for retirement in college. Hello, physician moms and dads. I'm Nate Renneke, Certified Financial Planner and Primary Advisor here at Physician Family Financial Advisors.
Family.
Speaker 1 (00:27.598)
into all the money you need.
Speaker 1 (00:41.384)
And I'm Bennett Lee, the service team leader here and also a certified financial planner. So today we're going to be taking a question from Richard, who is now seeming to be a frequent flyer on our show because this is his second question in as many days. And what is Richard's question today?
Yeah, so Richard's question is about bonds. Happy to get it because we don't get a lot of questions about bonds.
I'm excited because I love talking about bonds.
Yes. Okay. So I'm read the whole question for some context and everything and we'll get into it. he said, my fixed income bond allocation, which is 20 % of his portfolio is the Vanguard Total Bond Market Fund. Where things get confusing for me are whether I should be investing in treasuries, municipal bonds, high bonds, setting up bond ladders, et cetera.
The way I look at it, these alternatives to the total bond market fund are on par with having a tilt towards small cap funds or value funds on the equity side, where most of my investments are in a total stock market fund. Am I thinking about this the right way?
Speaker 1 (01:57.55)
Short answer is, kind of, kind of not. Mostly not. But we're going to get into that.
Sure. Yeah. So I think what we'll do is take a step back, go into bonds a bit, and then answer his question head on.
Yeah, okay, cool. So before we get rolling, I want to tell a little story. Okay, so there's another Bond that we all know and love, and that's Bond, James Bond. So the backstory about the James Bond character in the James Bond spy novel series is Ian Fleming named him, he wanted him to be like the most gray, normal, boring guy ever. And so he gave him
an old name, James, and the most boring thing he could think of was Bond. Not kidding, not kidding. This is from the 50s. So Bond's have been boring since at least the 50s. But as you know, anyone who's watched the James Bond series, including my daughters, they think it is terribly exciting, right? So Bond's, you know, don't judge a book by its cover, I guess is the thing that I'm saying here, going full circle. So, bear that in mind.
Yeah, it is interesting though. mean, bonds tend to not be all that exciting to people. it sort of feels like at least the, so this may be news to our audience, but I generally work with younger physicians and my goodness is this boring to them. It's so boring that they just want to sidestep it all together a lot of the times. And you have to talk about why boring isn't bad.
Speaker 1 (03:37.388)
Yeah, bonds are supposed to be boring. When they're boring, they're doing their job, right? Exactly. So we'll get into that. So yeah, my favorite topic. let's roll. In fact, today's the whole show is going to be about bonds. So if you think they're boring and you need some sleepy time material, just turn us on right before bed.
Okay, so let's just start with the basics. What is a bond?
What is a bond? A bond is just a loan. That's a fancy and you've heard, you've heard it said, my word is my bond. Right. And so when you take out a loan, you're giving your word that you will repay it in full plus interest. Okay. So it's just a loan. You can think of a certificate of deposit at a bank, a little bit like a bond. It functions differently, but it's basically you're, you're transferring your
your cash to someone in exchange for a promise of repayment and interest for the use of your money. And you know, if we think about the history of securities, I would wager that bonds have a longer history, probably going back thousands of years versus equities, know, stocks, which is the securitization of the company. You know, we didn't have stocks until we had corporations, right?
Incorporations are relatively recent phenomenon, you can look at the Quranic law and biblical law and see that neither Bar or Lender B is something that is age old. So they've been with us forever.
Speaker 2 (05:09.614)
Okay, so let's make this kind of cool just for a minute. Imagine you're sitting at the table with the CEO of a Fortune 500 company and he wanted you to give him a loan. Right? That'd be cooler than just buying the total bond market. You know, but that's what you're doing. You can give loans to big companies. Okay, so it's a loan.
huh.
Speaker 1 (05:24.685)
Yeah.
Speaker 1 (05:30.242)
Yeah. Okay. So on that, I'm going to dovetail on that. So alone, could give a loan to a company. So that's known as a corporate bond because you're loaning money to a corporation. All right. you could give money to the United States treasury. Okay. That's, that would be known as a treasury bond. That's how the tremendous debt of the United States is, is floated. you could lend some money to buy a home.
And that would be known as a mortgage backed security or mortgage bond. have all kinds of names. You could give someone money to buy like, I don't know, rail cars. That would be a collateralized mortgage obligation. Right. And so you can lend people money for all kinds of stuff. One of my favorite bonds is municipal bonds. So municipalities, a state, city, or other government and
I don't know, for some reason we here don't seem to be so great with holding on to cash. know, cities are spenders of cash, states are spenders of cash. And so basically we've never got anything in the kitty when it's time to build a bridge or a school or something. So we go out and we borrow from the public, right? And so if a school is going to be built in your area, they're going to float a bond measure. They're going to ask you to vote on should we borrow, yes or no, to build this school or this bridge or this road or whatever it is. Okay.
And of course, with municipal bonds, have a strongest kind is called a general obligation bond. They call them GO bonds. And what that means is it's backed by the full taxing power of the municipality. And municipalities typically tax us through our property taxes. So what happens if you don't pay your property taxes? You lose your house. Right. Right. So there can be some really strong backing behind municipal bonds. And some of them are a little skeezier.
right? Because they might not have that same general obligation backing. But I like munis and we'll get into why I like munis in a little bit when we talk about interest.
Speaker 2 (07:32.098)
Yeah, you want to know kind of where your property taxes are going. I actually this year I just I'm actually looking at the end blow right now. I won't pull it into screen. you can look at your property taxes and we'll show you where all payments and your property taxes, which bonds it's going to. Okay, so how exactly does it work? Like how to bonds? I mean, you gave a lot of examples. So you gave the
Exactly.
Speaker 2 (08:02.27)
example of municipal bond. They're taking a loan from you. How do the other ones work?
I'm not going to go into the origination of bonds, like how they get securitized and how they're born. I'm not going to go into things like original issue versus off the run, secondary market, probably won't touch on how they trade. I know these things. I've done these things and you don't have to know all that stuff to invest in bonds. But the thing you really need to know about bonds is that when interest rates go up, bonds go down.
Yeah. simple and an interest rates go down, bonds go up. And the reason for that is the fixed nature of the interest. So, you know, if a bond's issued for $100, which they're not, they're usually issued in increments of a thousand or 10,000. If a bond's issued for $100 and it promises to pay a 5 % rate return or 5 % yield interest, okay, that bond is going to pay you $5 a year. Okay.
Well, it's going to pay you $5 a year no matter what interest rates do. Okay. So let's say interest rates are 5 % when the bond is issued, they're promising that they'll pay you $5 a year until the bond matures. And then let's say that interest rates rise. Okay. So when interest rates rise, let's say they rise up to 6%. So if I go out and I buy a brand new bond, it's promising me $60 a year. Okay. So if I hold my bond to maturity, I don't have to think about any of the stuff I'm about to say.
If I decide that I want to sell my old bond, then everybody's going to look around and they go, why on earth would I buy your bond that gives me 50 bucks a year when I could buy a brand new bond that pays me 60 bucks a year? They wouldn't. But they might say, I know you paid 100 bucks for that bond, but maybe I'd pay you like 95 for it. So that when you take that $50 and divide it by 95, it's closer to the new 6%.
Speaker 1 (10:00.034)
And so that's an example of why bond prices go down when interest rates go up.
Exactly. Cool. Okay. So this is kind of a loaded question, I guess, but we do get this quite often, especially from younger positions. Why would you own bonds? And I think the root of this is why would you own bonds when historically they underperform stocks?
Yeah. I think it's a really good question in the mouths of young physicians. bonds buffer the storms that we see in equity markets, right? So, you know, historically stocks have turned around, I don't know, 10 % ish, right? And bonds historically have done around five or 6%. Right? So you're like, why would you
Why would you do without that 4 % or 5 % in return? And the short answer is because you've crossed the finish line. Right? So when you get into the early portion of your retirement, you're spending money out of your portfolio and you don't want the portfolio value to bounce around a lot. because that can lead to a sequence of return risk, which can actually lead you to people running out of money prematurely.
And so it's nice to have something in there that is less volatile, because that dampens volatility, so you have less sequence of returns risk. So they belong in portfolios that are kind of nearing the finish line. And with that said, in younger position portfolios, we'll typically see like a 10 % exposure to bonds, particularly through something like a target date fund.
Speaker 1 (11:50.808)
You know, if you're looking at the most aggressive life strategy funds, they'll typically have a 20 % allocation to bonds. And it's kind of like this, you know, if stocks go down and I should say when stocks go down, if you don't have any dry powder, you can't take advantage of those low prices. And so they go down and they go back up. But if you have a small portion in bonds, when they go down, you can sell some of your bonds to buy into stocks. And when they go back up, you can sell some of your stocks to buy into bonds.
They're just, they function as dry powder.
True. And you just described an example of a 401k or something like that. There's also in a taxable account, think young physicians just are very, they just seem to think that things will continue to go exactly as they've gone. And young physicians, myself included, I've just heard so many stories, even though I haven't seen a huge
Mm-hmm. Yeah.
Speaker 2 (12:52.654)
Maybe during COVID, I saw a huge market dip, but I haven't experienced anything other than that. But I've seen so many stories where I can have a healthy understanding of the volatility of the stock market. But most young physicians, haven't experienced even things like in real day-to-day life, job loss, divorce. They haven't experienced needing money.
So they come to me and they'll say, I'm never going to touch this. I'm just going to stick it in equities. You might need to touch it someday.
Thanks
Isn't that what emergency funds are for? Very true. I mean, so I'll take the other side of this. I could make an argument that young physicians should not invest in bonds. But I could also say that young physicians shouldn't invest in emerging market stocks because they haven't performed the best. And I can say they shouldn't invest in international because they haven't performed the best. Maybe you put it all in US. Maybe you can see where this is going.
It's a fair argument to make.
Speaker 1 (13:59.662)
Maybe you shouldn't invest in small cap and value stocks because they've underperformed the market. Maybe you should put it all in the S &P 500. In fact, maybe you should put it all in the tech sector. Right? Well, no, wait a minute. Don't stop there. I mean, let's pick the best performing stock in the tech sector or the best performing seven and let's put it all in those. Right. Or why even be that diversified? You know, why not just pick the very best one? And while you're at it, why not mortgage your house to buy it? Yeah. Right. And now we're getting into stupid.
territory. And I guess the thing I would say is that there are shades of wisdom as we go up and down the spectrum of risk. And in fact, when you study this from a theoretical perspective, when we look at the academic studies behind whether or not it had bonds, they always begin with what they call a risky portfolio.
So risky in academic studies is all equities. So this could be all stocks. It could be all real estate, right? Real estate is an equity investment stocks or an equity investment. Businesses, privately held businesses are an equity investment. And so they always assume the riskiest portfolio. And then they say, if you're not comfortable taking that level of risk for whatever reason, then you, you lend your money instead of investing in equities and lending your money means buying bonds, right?
And so you can add bonds back to a portfolio to dial down the equity risk. Now on the flip side of this, this is something I don't read about online very often. I've only seen it in textbooks. It is said that if the equity risk is not enough for you, if it's not generating the returns that you want, that you can borrow to invest, right? And that gets into leverage and margin and whether or not you pay down your
your home mortgage. mean, we get in the deep end of the pool with that. And it's a huge conversation. But the thing I see is I see people issuing bonds, but I don't see them jumping into all into equities and then borrowing to buy equities. Unless, you know, this is this is hilarious. People think real estate is safe as houses. And people borrow to invest in real estate all the time.
Speaker 2 (16:13.004)
Yeah. Yeah. I guess what I was trying to, what I'm trying to get out here and you just detailed it out really well. there's a chance. Yeah, there's a chance. Okay. That, that you, the listeners should potentially get less comfortable with all stocks. There's a chance.
Yeah, you know, it's funny. I've actually had a client not too long ago. In fact, it was a couple years ago. had Horrible bond market performance. We should talk about performance history a little bit They were nervous having bonds, know 30 or 40 percent in bonds, which is appropriate for them at their stage of retirement You're like bonds gonna lose money. Well, so now we get into the performance So before the show you and I looked up the long
Yeah. The long-term history of US Treasuries, which you're going back to 1926. So we're looking at the Ibbotson data set, the series gone all back. We almost have a hundred years of US bond performance in Treasuries to look at. So the performance, depending on the maturity of the bond is five or 6%. Okay. The yield after you deduct out inflation, as you inform me, is two or 3%. All So they do outperform inflation or those they have.
perform things like CDs and things like that which is pretty much right in line.
They can, yeah, because you're taking a term risk, right? So, you know, their performance is not bad. And if we look at equities, they've probably gotten about 9 or 10%. Okay. But something happened back in, was it 2022? Yeah, that put a bad taste in everyone's mouth. We had the best, excuse me, we had the absolute worst performance of US bond market in history since 1926. And they lost 13 % of their value.
Speaker 1 (17:59.246)
13%, a negative total return of about 13%. So it's like, wow, bonds really suck. Not only am I not getting paid much, but I've got this, that's the downside risk. Well, that was the worst risk that we've ever seen, right? And that was at a time when the Fed was aggressively fighting inflation as a result of the shock from COVID, which we don't get that kind of shock very often, right? So that's as bad as it gets.
You know, I was around for the last two or three stock market collapses, know, tech bubble burstage, the COVID shock, the 2008 housing crisis debacle. And stocks lost like half their value and more if you look at the tech bubble bursting over a couple of years, they lost half their value, 50 % haircut. And the yield on stocks at that time was like 1%, right? The yield on bonds has been, lately it's been around 4 5%.
So, um, you know, people shouldn't fear loss in bonds. They should fear loss in stocks. And I'll tell you that there people that are listening to us today that are like, yeah, I can take this. I'm, I'm a man, you know, I can take an equity loss or I know what I'm doing. I've seen those folks freak out at the bottom. Yeah. Freeze, just freeze. Everything changes.
There's just this universal truth that I think people miss. If you're getting a better return, which historically you do in equities, is because you took more risk. That is why you got a better return. So to think that somehow bonds are more risky is just incorrect.
Yeah.
Speaker 1 (19:36.283)
Yeah, they're less risky, but they're a little easier to understand in terms of what makes them go down.
Yeah, and there's a, you know, I think people are really comfortable with stocks because they just for the last hundred years, they've always come back. But there's this famous, infamous story of Japan where their, you know, their stocks went down, I think it was in the late 80s. And guess when they finally came back, late 80s?
Mm-hmm.
Speaker 1 (20:06.806)
It was like last week or something.
it was this year. 35 years later. Yeah. I mean, this, of course, it looks great and it feels like it's always going to be peaches and cream here in America. But this stuff happens. It's just when, when, you know, so.
And you know, those, those, those investors in Japan where there were stocks like hello Sony, right? Hello Toyota, the big companies that everybody banked on and trusted. you know, they, they lost their value, but in Japan, part of the reason is they had a real estate bubble burst. Right. So everything was very expensive at that time and Japan does have bonds. fact, people listen to the show probably do have some Japanese bonds and some of their bond funds.
Right? But if they had been balanced over that time, then, you know, 35 years, they might've had a positive return. Right? And here we assume that it's, everything's going to go to the sky forever. But, you know, we have had periods, a decade or so where, you know, bonds have done at least as well as stocks have. And during that time, the diversification has value. it's not that bonds are for weenies.
There's a good academic discussion to be had around bonds. there's always going to be a hot asset class. People are always going to think that that's the way to go. In my career, I've seen it be tech stocks. I've seen it be oil. I've seen it be real estate. I've seen it be bank stocks. It's always rotating. You never know exactly what's going to be the one to be in. It's like musical chairs, right? Bonds are just another asset class.
Speaker 2 (21:45.452)
So the answer to why would I own bonds, is the thing that everyone says but nobody fully understands. It is diversifying because you don't know which asset class is next. so, you know, have little bit of a...
I'm gonna break it down and make it easier. So I'm gonna show my cards as a Texan today I can't say I'm a proud Texan, but I'm that's where I'm from. Okay Teeboon Pickens was an old man down there and he said money's like manure when you spread it around it don't There's your diversification argument, okay, so we talked about like why own them, right?
Yeah. kind of getting to Rich's question here. Yeah. We'll get into it directly, kind of what are some of the, what's the right way to do this? And I guess the wrong way to own bonds.
Yeah, okay. So the right and the wrong way goes to the way that you get paid for owning bonds. So stocks tend to appreciate and they pay a small yield in the form of a dividend. Bonds typically do not appreciate. If you hold them to maturity, you get back what you paid for them. And in the meantime, you get interest. So at the top of the show, we talked about corporate bonds, treasury bonds, and municipal bonds, which I would kind of say are the broad three classes.
The kind of bond that you own dictates the way that the interest is taxed. All right. So the most tax icky bond interest comes from corporate bonds. Okay. So if you live in a state like, I don't know, California, New York, any state with a state income tax, if you loan your money to Apple and you buy one of their bonds, then you're going to get your interest and you're going to pay state and federal income taxes on those. Okay. So.
Speaker 1 (23:37.242)
because we have two layers of, of government in our country, you have the federal layer and you have the state layer and all the other layers that go below that. we want to make sure that one of these powers cannot tax the other one unduly. Right? So the rule is that if you own federal debt, treasury bonds and some other bonds in particular, but definitely treasuries, that the interest that comes from treasuries.
is state income tax free. State income tax free. So you don't care about this if you live in Texas or Florida or Alaska or Washington, right? You care about this if you live in a state that has an income tax, right? So, and then you have municipal bonds. So municipal bonds are issued by the states and the converse of the rule is the same. Most of your state issued and local issued municipal bonds
are not taxable on your federal income tax return. Okay? And then to make things more interesting, we have a flavor of municipal bonds called double-E tax exempt. So if you live in California and you buy a California municipal bond, it is exempt from California state income tax and it is exempt from federal income tax provided that it meets the qualifiers, which most of them do.
Okay, so kind of what I'm hearing you say is, let's say you have a reasonable understanding of how these things are taxed. You look at the bonds returned, a physician should be very focused on the after-tax returns.
Yes, exactly. Because if you put the right bond in the wrong account, you get results that are worse than you should. You know, I like to say that there are not very many things that you can control in investments, but taxes typically is one of the things that you can control. So the second physician I met and served came to me with taxable bonds in a taxable account. And that's a no-no. So you either do one of two things. You put your taxable bonds in a tax-deferred or tax-exempt account.
Speaker 1 (25:41.73)
right? So they could go in a Roth or traditional IRA. Okay, that's one way to go. The other way to go would be to get rid of those and buy municipal bonds in a taxable account. So you tax exempt bonds in a taxable account or taxable bonds in a tax exempt account. But you don't want taxable bonds in a taxable account. And you certainly don't want tax exempt bonds in a tax deferred account because tax exempt bonds pay a lower rate of interest.
Exactly.
Yeah. So, yeah, so you want to put the bonds, the right bond in the right place. It's like, I'm a gardener at heart. You know, I read a book one time called, I don't know, it's like the wisdom of plants or something. And if you're a good gardener, they say right plant, right place. You just put the right plant in the right place. That's nine tenths of the battle making that plant grow.
Right. Yeah. I need you. I need you to talk to my wife.
I got a few things I want you to talk to my wife about too, so maybe we can trade.
Speaker 2 (26:41.336)
We got lots of plants in the wrong place. Last question before we get to Rich's question. Is there something that you found most people just most physicians don't know about lawns?
There you go.
Speaker 1 (26:56.622)
Yeah, there is a belief that somehow individual issues, which is individual bonds, that somehow they are safer than owning a bond fund. So the belief is that if I buy this bond and I hold it to maturity, there's no way I can lose. I'm going to get all my money back. And assuming that they don't default on the bond, it's just Welch on the promise, then that's true. invest $100, you get your interest over the years, you get your $100 back. Okay? That is true.
However, just because I put that in a mutual fund wrapper doesn't mean that that math changes. So the thing that people say is if I buy a bond for $100 and interest rates go up, then I'm going to keep getting my 5%. I can't lose. But as we spoke, when interest rates rise, there are new bonds being issued all the time. So we saw interest rates rise from darn near zero on certain treasuries.
all the way up to four or 5 % on treasuries. And so the person who bought the bond yielding 1 % for 20 years is still holding that bond waiting to get their capital back. Whereas the people are like, okay, I'll buy the 1 % and then I'll buy the 2 % then I'll buy the 3 % bond and the 4 and the 5 and I'll own all these. That person is getting a higher yield. Whereas the person who owned the 1 % they're going to keep getting that. So even though you do get your capital back, you continue to get this kind of crappy interest.
And so there's an opportunity cost there, right? You bear that opportunity cost where you, whether you have it in a bond fund or you have an individual bond. They, I've done the math on this. I've drilled down on it. One time I did a deep dive. had a client who's going to put seven figures in bonds and I wanted to know, I spent days studying this. talked to all kinds of people and the takeaway from that is it's the same. It's the same. Yeah. So I, I personally am,
very much against owning individual issues. Treasuries, they might be the exception to the rule, maybe, but when it comes to corporate bonds, we're accustomed to stocks trading through a market maker, which is to say that at any time there's somebody ready to sell you up to 100 shares of stocks or buy 100 shares of stocks from you because there's an exchange. Bonds are not traded that way. Bonds are traded dealer to dealer, kind of like homes.
Speaker 1 (29:21.356)
You go to buy a bond and the dealer says, I don't have that in my inventory, but I can go out and see if I can get it. I'll broker it for you. Or here's what I have in inventory. What do you want to buy? And bonds are bought and sold dealer to dealer. they're, they go out of one bond dealer's inventory and into another's inventory. And some of those get bought into a person's portfolio or sold into a person's portfolio. And as a result, it's, there's the market's less liquid for individual bonds.
And you pay a premium for that. It's a liquidity premium. So you lose money in the transaction. And the more rare the bond is, like some municipal bonds trade at, you know, the transaction costs are large. Not the case with treasuries. They're the most liquid security on the planet. You you can buy a billion dollars worth and pay next to nothing. yeah, trading bonds is not for the faint of heart.
And I could tell you some war stories about people who fat fingered bond trades and lived to tell the tale. I read about these in Reddit all the time. It's not for the faint of heart. And I don't know why a person would bother to do that because one of my favorite bond funds is a Vanguard Total Bond Market Index. You can get the ETF for the Vanguard Total Bond Market Index for what we call four basis points. So a basis point is 1 one hundredth of 1%.
So basically for 0.04%, you can invest in the ETF that owns most all of the US bond market index. And to put that in perspective, if you have a million dollars that you put into a bond, the bond fund through this ETF, you're going to pay about $400 a year for owning that. And it's like a buck a day for having huge diversification, practically free transactions.
Really nothing to worry about. Yeah. And so that's, that's, that's how I handle my money is I put it in bond funds because I've done the homework and, but you know, not all in bond funds. I have the appropriate asset allocation for me, the right mix of stocks and bonds for my age and my risk level. And it does include some bonds. Yeah.
Speaker 2 (31:35.022)
Okay. All right. So we'll get to Rich's question now. So 20 % in his portfolio. He's asking, essentially he's confused by all these different options, right? And he's wondering if he's looking at this the right way to say that should he be more diversified in bonds? It's kind of how I'm hearing this. Like you are diversified or have a tilt toward small cap funds or value funds.
Yeah.
Speaker 2 (32:05.366)
So I think we answered his questions by explaining it, but is this the right way to think about bonds? Do you need I bonds, unistal bonds, treasuries? And do you need to tilt toward any of those like we might tilt toward small cap or value?
With small cap and value, there's a premium. There's a small cap premium. There's a value premium that's been demonstrated actually in the same 19, since 1926, Ibbotson data set. Right. So these are something that they see in US markets, international markets. The value thing has been documented. The small cap effect has been documented. There are similar things in bonds. For example,
there is a default risk premium that you get when you own a junk bond. And so they do yield a little bit more than the tried and true quote unquote safe bonds. Treasuries typically yield less than corporates because there's less default risk. And then you also have a term premium when the yield curve is not inverted, when it's normal. Typically the longer your duration or your maturity of the bond,
the higher the yield is going to be. Right? So a one-year treasury would yield less than a 30-year treasury would yield. That all breaks down when the yield curve is flat like it is right now, or it's inverted, we're expecting recession. So there is a term premium and there is a default risk premium. Okay. And then there's also liquidity premium in some of the less traded bonds. But, you know, I think with stocks versus bonds, with stocks, you can reach for a little bit more return by tilting your portfolio.
But I look at bonds as like, that's my, that's supposed to be the steady eddy portion of my portfolio. Right? I don't want that thing doing cartwheels and tricks and, you know, adding value and all that good stuff. I want it to be stupid easy, just reliable. when bad things happen, I want to be in something that is, that is safe, you know, something that's dependable, because that's what's going to hold up my portfolio value.
Speaker 1 (34:14.942)
And if inflation is just right, you know, then when stocks go down, sometimes bonds go up. Right? So you get true diversification out of it. But if I reach for yield in something like a junk bond, well, junk bonds are relatively correlated to stocks. Right. Right. So I won't salt my portfolio with junk bonds because I want that to be my safer portion. I might make an exception if I had a very aggressive portfolio with some bonds in it.
But, you know, for the most part, people that are going to own a material chunk of bonds, like somebody has 60-40 portfolio where 40 % of their stuff is going to be invested in bonds, generally the best idea is to get the bonds that are going to do the bond shop, which is to be boring.
Right. Because anything more than that, might as well just go buy some more.
Exactly right rather than getting cute with owning junk bonds, know, just bump up your your asset allocation to stocks, you know
Okay.
Speaker 1 (35:21.058)
Yeah. So he's, he's thinking about bonds. I would say that his asset allocation 80-20 is appropriate for somebody who's probably, you know, somewhere between 15 and 20 years from retirement. That's typically where we see 80-20. And I wouldn't, I think the, thinking is not right about premiums in terms of like, you know, small cap and value, that kind of stuff. The premium exists, but it's not.
It doesn't apply here because bonds are supposed to be the steady eddy portion. And I think you can screw things up very easily by over complicating stuff. I don't see a problem with just a broad market index bond fund. certainly, you know, I don't want munis in my taxable account. And, you know, I don't want junk bonds in my quote unquote, full bond market index, broad market index. you know, I think that's a...
perfectly good vehicle for, geez, like most investors, the broad swath of investors.
Okay.
Richard, man, thanks for bringing it. You gave me an opportunity to talk about the most boring topic. As you can tell, it's near and dear to my heart, which is not to be taken that, you know, I want to invest everything in bonds or we invest all of our clients. mean, stocks and bonds, those are my children. I love all of my children equally for various reasons. Right. So, uh, you know, I'm not an overly conservative guy. It's just, uh,
Speaker 1 (36:53.228)
Maybe I'm kind of a geeky guy who likes tools. see bonds as tools and stocks as tools, right? I don't like my hammer any more than I like my screwdriver. They both wind up with fasteners, yeah. Sword and shield, perhaps. Yeah. Maybe so. Yeah. Maybe your equities are, we could go, you know, equities are your offense and bonds are your defense. We could pull up like a football analogy or something silly like that. Yeah. But there's room for both of them.
They should have said sword and shield.
Speaker 1 (37:22.422)
Right? So, Richard, thank you so much for your question. And I guess it's time for us to take ourselves out, right? Okay. So, new thing that you might be interested in, we have a quiz. We have what we call a retirement well check and it's at PhysicianFamily.com. In fact, you can check it out at PhysicianFamily.com forward slash quiz. We'll put a link in the show notes. And of course,
If you'd like to find out if we're a match, then you can visit physicianfamily.com and click on Get Started, schedule an interview or apply for an interview, I should say, and find out if we're a match. until next time, remember, you're not just making a living, you're making a life. Thank you for.
listening to the Physician Family Financial Advisors podcast. You're getting all tax breaks you want. To find out, get your copy of the Uber Tax Doctor's Retirement Investing Checklist at physicianfamily.com.
Are you really deserve
Thank you for listening. Please read the show notes for disclosure.
