Going all bonds?

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Going all bonds?

Postby ARBear » Fri Apr 05, 2013 5:02 pm

Hi -

I hope I am posting this in the right spot. If not, I apologize.

My brother-in-law is a very successful business executive, but does not have a financial background. He recommended my 71 year old mother gather up her investments, tax information, etc. and talk to the two men who manage his investments. I attended a meeting with them recently and listened as they recommended my mother, who has a bad run of luck with "advisors," liquidate the $400,000 she has in blue chip stocks (there is another 150k in an annuity and the rest is in tax managed bond funds for a total portfolio value of 650k) and invest the money in a select number of carefully selected individual bonds and bond funds -- no more stocks at all and just a small amount of cash.

They argued there's no point risking her portfolio for a 5-6% return when she could make 3% on bonds. They said that since these bonds are guaranteed to produce a certain amount of money for investors, she could depend on them, and not worry about losing money or the volatility of the market. They used GE corporate bonds and city municipal bonds as examples. When I asked them if they would invest their mother's money the same way, one of them flinched, while the other said yes. (Not that I take them at their word)

Given that she is worried about being too heavily invested in stocks (her portfolio is over 60% stock) and wants to preserve her money for future healthcare concerns, I understand wanting to decrease her stock holdings, but going ALL bonds? Is this nuts?

As you can tell, I myself am not a sophisticated investor who knows all the ins and outs of investing (I stick with a Total Bond/Total Stock/Total International portfolio), but this "go all bonds" pitch made me leery.

What do you all think?

Thank you in advance for your advice.
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Re: Going all bonds?

Postby greg24 » Fri Apr 05, 2013 5:11 pm

I think all bonds is nuts. And bonds definitely default, so stating that she can't lose money is extremely misleading. I would avoid these advisors.

If she wants to drop as far as 20% equities, that would be fine with me. Anything less, and she is making a big gamble against inflation.
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Re: Going all bonds?

Postby NYBoglehead » Fri Apr 05, 2013 5:26 pm

I wouldn't go less than 20% equities either. No point, really. You need some sort of protection against inflation (other than Social Security) and you want at least some exposure to the equity markets.
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Re: Going all bonds?

Postby Raymond » Fri Apr 05, 2013 5:35 pm

I could never imagine that these "advisers" would suggest selling your mother's stocks in order to generate commissions for themselves (and to make their yacht loan payments.)

Oh, no, I would never think such a thing... :twisted:

And what kind of capital gains is your mother going to be smacked with when she sells the stocks?

I think that if she follows the advice of these two geniuses, her run of bad luck will continue.

My thoughts are a minimum of 25% stock.
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Re: Going all bonds?

Postby Occupier » Fri Apr 05, 2013 5:50 pm

I think the guy's get paid to trade. Your mom is going to incur a lot of capital gains on stocks I suspect she has held for years, just to buy an asset class that is yielding 2-3 %. It's ridiculous. Dave
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Re: Going all bonds?

Postby mdpsychcrnp » Fri Apr 05, 2013 6:08 pm

ARBear:

Clearly these two men who "manage your brother's investments" are merely seeking to make commissions at her expense. Run from them.

You havn't disclosed some particulars of her scenario. Is all of her wealth (with the exception of the annuity) in taxable accounts? This is what you seem to imply. This is the presumption given the number of tax-managed bond funds. Or is some of it in IRA's? Also, regarding her annuity, is it a fixed annuity or a variable annuity? What kind of investment is it? And if you know, what are the particular blue chip stocks that she has?

We would really need to have this information before we can make an informed reply.

Christopher



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Re: Going all bonds?

Postby mikep » Fri Apr 05, 2013 6:11 pm

Occupier wrote:I think the guy's get paid to trade. Your mom is going to incur a lot of capital gains on stocks I suspect she has held for years, just to buy an asset class that is yielding 2-3 %. It's ridiculous. Dave


There's also a huge hidden markup on corporate and municipal individual bonds. The market is not transparent like treasuries. This is in addition to the commissions.
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Re: Going all bonds?

Postby noyopacific » Fri Apr 05, 2013 6:19 pm

A pretty simple test is to look at your brothers' advisers': "select number of carefully selected individual bonds and bond funds" and see what the management expenses are on their fund suggestions and how much the total commission will be on the bonds and loads (gasp!) might be charged on the bond funds.

This will demonstrate quite clearly if the adviser has a conflict between their own economic interest and your mom's interests.

Also, if interest rates go up (can anyone imagine that happening?) and mom needs money to pay some unforeseen expense, she may have to sell the bonds at very steep discounts too.

Good Luck
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Re: Going all bonds?

Postby ARBear » Fri Apr 05, 2013 6:26 pm

I forgot to say in my original post:

The advisors said they are fee only and that on an account of $600,000-650,000 they would take $3,000 a year in fees.

To answer one reply, the overwhelming majority of her stocks (all blue chips) are in a taxable account, as are the tax-managed bond funds. The annuity is a variable annuity. She has five or six blue chips in her ROTH plus a bit of Vanguard VWINX, if I remember right. Other than that, I don't have further specifics available at this time. They claimed if she sold all of her stocks, that she could use a $65,000 loss she has left over from WorldCom so that she wouldn't pay more than $15k in taxes. I'm not an accountant, nor is anyone else in the family. It's a long story, but like I said, she's had a lot of BAD advisors.

Thank you so much to everyone who has responded so far - you have helped confirm that this their suggestion is unsound. I will steer her clear.
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Re: Going all bonds?

Postby rmelvey » Fri Apr 05, 2013 7:18 pm

20% equities and 80% total bond market is less risky than 100% total bond market. These guys are probably clowns.
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Re: Going all bonds?

Postby protagonist » Fri Apr 05, 2013 7:48 pm

On top of what others have said, many people believe that we are experiencing a "bond bubble" that has to pop at some point, since interest rates are so extremely low.Whether you agree or not, if those people are correct, then being 100% invested in bonds is a recipe for potential disaster. I would stay well diversified.
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Re: Going all bonds?

Postby chicagobear » Fri Apr 05, 2013 8:26 pm

All bonds worked out so well in Argentina and Brazil in the 1980s (not).
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Re: Going all bonds?

Postby Munir » Fri Apr 05, 2013 8:48 pm

Have you considered using the Vanguard Life Strategy Income Fund (80% fixed income) or the Target Retirement Income Fund (70% FI)?
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Never less than 25% stocks. -- Benjamin Graham

Postby Taylor Larimore » Fri Apr 05, 2013 9:12 pm

ARB:
Benjamin Graham, in "The Intelligent Investor," wrote:
"We recommend that the investor divide his holdings between high-grade bonds and leading common stocks; that the proportion held in bonds be never less than 25% or more than 75% with the converse being necessarily true for the common-stock component."


Assuming your mother can sell her holdings without a large capital-gain tax (which will be forgiven at death), I agree with Munir that a Vanguard Target Fund or Life Strategy Fund, designed by experts for retirees, could be an ideal very-low cost and easily managed one-fund portfolio.

Best wishes.
Taylor
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Re: Going all bonds?

Postby chicagobear » Fri Apr 05, 2013 9:26 pm

"I think that long-term government bonds are fake wealth these days. There has to be some kind of default on future government commitments. There is an off chance that the future commitments that get cut will be entitlements. There is an even more remote chance that the government will find tax revenue to cover all of its commitments. We can inflate away some of our past debt, but since our projected future deficits are even higher, inflation does not make the problem go away. So I think that it is likely that we will get some sort of default. The fake wealth will be marked down at some point in the future, either through inflation or default."

http://www.arnoldkling.com/blog/fake-wealth/
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Re: Going all bonds?

Postby Random Musings » Fri Apr 05, 2013 11:03 pm

The advice recommended by these two advisors makes it any easy decision that no other conversations with them are needed. For a $600K portfolio, you can purchase a diversified portfolio (at need or willingness of risk) for 0.15% ER weighted or $900 a year.

Again, you have to take into consideration tax consequences as well with respect to individual securities, but it isn't rocket science when developing a core portfolio. You just have to realize that one must accept market returns.

RM
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Re: Going all bonds?

Postby BL » Fri Apr 05, 2013 11:08 pm

Munir wrote:Have you considered using the Vanguard Life Strategy Income Fund (80% fixed income) or the Target Retirement Income Fund (70% FI)?


+1

To get really good advice she needs to get all her information together to get a good picture of where she is and where she wants to be. This should be presented in the suggested format: http://www.bogleheads.org/forum/viewtopic.php?f=1&t=6212

Get her the Bogleheads Guide to Retirement Planning (you can click on Amazon.com here on this site) so she can gain some knowledge before making any decisions. One way to handle it would be to have Vanguard Brokerage pull all the accounts in (sell first any that they won't accept) and then use their guidance along with this forum to select a simple low-cost portfolio with adequate bonds (80-60%) for safety and some stocks for covering inflation. Disclosing her tax bracket and how much loss she still has in taxes is important in the planning, as she could easily sell enough with capital gains to balance the losses carried over from the past, but she may not want to sell much more if she has to pay capital gains tax. She needs to get the basis of her stocks and funds so as to find out how much gain or loss there is. I am assuming she has her current funds with a broker who is charging her annual fees and has her in high cost mutual funds. The expense ratio (ER) is probably over 1% compared to 0.06-0.35 at Vanguard, and then if there is a 1+% management fee on top of that, she is losing much of her retirement income.
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Re: Going all bonds?

Postby OverTheHill » Sat Apr 06, 2013 11:21 am

$3000 per year in their AUM fee, then what other fees are attached to the bonds, bond funds, or whatever they might put her money in. In the end, she'll almost certainly be paying at least $6K per year in total fees, both to the advisors and the investment vehicles. This would be close to 35% to 40% of her annual yield from her bonds. Rediculous, just plain rediculous. Your BIL is rich, so he doesn't care about these fees, plus he gets to brag about having his own investment advisors. Forget it! Invest in Vanguard funds and pay about $600 per year at most. Plus, as others have said, going 100% in bonds is just plain stupid for someone with this amount of money and at her age. She should have at least 20% in an equity index fund.
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Re: Never less than 25% stocks. -- Benjamin Graham

Postby richard » Sat Apr 06, 2013 11:47 am

Taylor Larimore wrote:ARB:
Benjamin Graham, in "The Intelligent Investor," wrote:
"We recommend that the investor divide his holdings between high-grade bonds and leading common stocks; that the proportion held in bonds be never less than 25% or more than 75% with the converse being necessarily true for the common-stock component."

I'm rather fond of that quote and believe it to be very sound advice for just about everyone, although I'd say broad-based low cost equity index mutual funds rather than leading common stocks.
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