Demystifying Bonds and Understanding Financial Risks: A Path Towards Financial Empowerment
Oct 12, 2023Season 3Episode 31
The Crotchety Old Men
Do you feel like you're navigating through a maze when it comes to understanding bonds? Well, we're here to change that! Unwind with us, George and Gary Smith, as we crack open the world of bonds for you – from corporate to municipal to government bonds - we’ve got you covered. We'll guide you on how to leverage yield rates and purchase bonds using Treasury Direct, leaving no stone unturned.
In our second act, we buckle down on debt and financial risk. We can't stress enough the importance of understanding debt, as ignorance can lead to financial disaster. Therefore, we implore you to do your due diligence, do your own research, and consult a financial professional before making any significant investment decisions. As we uncover the nuances of bonds and highlight the risks, we prepare you for your financial journey. So, grab your note-pads and tune in for a ride towards financial empowerment.
Do you feel like you're navigating through a maze when it comes to understanding bonds? Well, we're here to change that! Unwind with us, George and Gary Smith, as we crack open the world of bonds for you – from corporate to municipal to government bonds - we’ve got you covered. We'll guide you on how to leverage yield rates and purchase bonds using Treasury Direct, leaving no stone unturned.
In our second act, we buckle down on debt and financial risk. We can't stress enough the importance of understanding debt, as ignorance can lead to financial disaster. Therefore, we implore you to do your due diligence, do your own research, and consult a financial professional before making any significant investment decisions. As we uncover the nuances of bonds and highlight the risks, we prepare you for your financial journey. So, grab your note-pads and tune in for a ride towards financial empowerment.
Hi, this is George with the Crotchety Omen podcast. Hopefully you've enjoyed listening to the Crotchety Omen as much as we've enjoyed making each episode. If so, send us some feedback. We'd love to hear from you at thecrotchetyoemanpodcastatgmailcom. Let us know what you enjoy about the show, what you'd like to hear more of. We'd love to receive your feedback. Remember that's thecrotchetyoemanpodcastatgmailcom. As we always say, if you didn't know, nah, you know Peace.
Speaker 2:
Hello, it's me again, Gary Smith, one of the co-hosts of the Crotchety Omen. Well, you know how I like to say it Good day, good morning, good afternoon, good evening, maybe even good night, depending upon what hemisphere you're in. Hey, it's such an exciting time today. Joining me in the studio, as always, is my main man, George Tom Leigh. Top of the day to you, George.
Speaker 1:
Top of the day. So many how we doing today.
Speaker 2:
Man, we're doing great. George, I am amazing. I'm amazing because I'm so dog-on excited.
Speaker 3:
That's what.
Speaker 1:
I say every time we get together, it's a new topic, it's a new day, and you can't help but be excited about that.
Speaker 2:
Absolutely, man, Absolutely. Life has so many twists and turns and you never know where you're going to end up. All you have to do when you get up is continue to put one's foot in front of the other.
Speaker 1:
That's right. Like I said, if I can see the dust on the ceiling fan, I know it's going to be another good day.
Speaker 2:
All right. Well, what you got for us today, george?
Speaker 1:
Well, smith, we always talk about our four pillars, which are information, education, exposure and opportunity. I think we're going to talk a little bit about opportunities today. That opportunity is your normal investor might be missing, which is bond rates. I know we've seen a lot of news about what. The interest rate goes up. The interest rate goes up. The Fed are making the interest rate go up again. They're thinking it's going to control economics and the hiring and things like that. But the flip side for investors is how it affects bond rates. So right now, bond rates are a pretty good investment.
Speaker 2:
All right then, Brother. Hey, bring it on, let's dive into this thing. I'm sure curious about what's the benefit of bonds.
Speaker 1:
Yeah Well, first of all, let's talk about remind our audience again what the interest rate bonds are. I think we're so accustomed to talking about stocks and a lot of times in your 401k and your IRA you have a mixture of bonds and stocks. So a stock is basically you are investing in a company, so that's pretty much a stock. A bond is basically you're loaning that company money based on a specific time that they will repay you, and that's basically an rate. So that's the difference between a bond and a stock.
Speaker 2:
Okay, so the corporate bonds. That acts in essence is like a debt obligation versus the stock is more of an equity participation. Would that be a correct way to look at?
Speaker 1:
that Absolutely correct. And it's not just corporate bonds. You got corporate bonds. You got municipal bonds, which are those that from your local government. In fact, here in my city we just approved a municipal bond of over $170 million to reduce some parts of the city. So that's a bond that's floating out there right now. And then you got your government bonds, which are, in most cases, are used to benefit, you know, to invest in wars and things of that nature. You got to finance some of the stuff that the government is doing some kind of way. So that's usually what they'll do is they will issue bonds, and there's a couple of different types of bonds. There's a T bill, which matures in less than one year. You've got the treasury notes, which are five years, and then you've got the treasury bonds that mature within 20 to 30 years. So you'll hear them referred to as T bills. So you've got three different flavors and I think each one has its own unique value. So right now you can buy a. So hold on. Just a quick question.
Speaker 2:
I'm sorry, I'll interrupt you real quick. So just for the basic information just you just shared there in terms of the T bills and 30 years and five years and all that. Where can the average person find that information?
Speaker 1:
Well, I mean to invest in that.
Speaker 2:
It's called Treasury Direct, which is you just go online just talking about it, to invest, just to find out that, okay, what those rates are. You know, because that's an educational thing and I think, man, by you sharing that with them, with us, you know how can I go after I listen to this podcast and find that out?
Speaker 1:
Well, gary, it's, it's simple, it's Google, I mean it's not. It's not as like this information is hitting under a rock somewhere. All you got to do is Google what. What is an eight week T bill selling for, and it'll pop up 5.360. What is a two-year Treasury note, you know yield? On that it will say 5.08 percent. So, yeah, you can track it on a daily basis. So, no, it's not hitting under a rock or anything. It's. It's out there for the public.
Speaker 2:
Oh yeah, amen Continue sir.
Speaker 1:
You know, like I said, this is the, the yield, and let's talk about yield. Yield is what you know, you, you expect to make on the investment in a specific amount of time. So that that's pretty pretty much how a bond works. And, as I kind of alluded to not answering your question, if you want to purchase these, you just set up an account on this. It's a website called Treasury Direct and you're basically buying these corporates, federal bonds, straight from the government. There's no middleman involved, whereas if you want to buy a corporate bond you know Charles Swab or Vanguard, they have they have bond funds, just like buying an ETF. They have bond funds being. But you need to be careful because obviously those come with a fee. So you want to make sure that you know you, you know what all the ends out of those are. So, yeah, that's how you pretty much purchase the bonds.
Speaker 2:
Good info. Good info. Well, in terms of risk, you know, it's been my understanding that bonds come with a certain rating. You got your AAA rated bonds, your AA. Well, everything from A, I guess, aaa, all the way up to what they call jump bonds. I would assume Now, in that risk reward type situation, alice, is it the longer the bond term is, the higher the yield, or is it short term bonds get a similar yield? Can you share with us how that works?
Speaker 1:
I don't know if there is a specific correlation between the amount of time and the actual yield on the bond. I'm sure at some point there is, but, like I you know, like I just said, an eight week Treasury bill is 5.360 and a two-year Treasury note is 5.08, so it's a lower yield with the two-year bond. I think one of a couple of things that you need to look at is, first of all, the duration of how long the bond is. I mean, you want to make sure that it fits within your what you're trying to do. I would think that, if you're, if it's in your 401k or your IRA, you may want to look at a 30 or 20 to 30 year bond. If it's in your normal budgeting money, you may want to look at a short term T-bill, less than one year. I mean, you can do these, like I said, you can do them at two weeks, three weeks, four weeks, all the way up to 52 weeks, and get a pretty good return. And then the one in the middle, the T-note, is between two and five years.
Speaker 1:
Here again, you got to do your homework and, like I said, you've got to ask yourself a question what am I trying to benefit here. What's my goal? What am I trying to do, you know? So that, is it a long term plan? Is it a short term plan? Do I just need to have some money sitting somewhere? Would be sitting in a bank somewhere, or I can move it over for two to three weeks, eight weeks, and get some good interest on it. So here again, what's your plan?
Speaker 2:
Got to have a plan. Excellent, excellent, you know. It's got me thinking now is that I wonder what is the yield on the corporate bond? I'm kind of going back to those businesses. Let's say, for instance, we just took the Fortune 500, the top 500 American corporations, and you know they have a market for us, you know the stock market and stuff like that. I'm sure there probably is an index somewhere out there for the bond market, those finding out. Okay, what are those top five Fortune 500 companies? What, from a bond perspective? How does that look? Because if I'm and I could be wrong on this, so use Google is that, if bonds are considered a debt, all right? And if any of those corporations go out of business or go bankrupts, are those bonds still payable? Because, since it's debt and not an equity participation, as it is with stock, is there more security there than it actually talked about or shown? And those are some questions. Go ahead. I'm sorry, george, go ahead.
Speaker 1:
Yeah, I mean those are all good questions and I think as we go down the list of you know risk or things to be concerned about, you know that kind of comes into play. We talked about the duration and how long the bond is. That's something that you need to be concerned about. The second one is probably what you're talking about there. So if you have a longer bond, it's more risky because something could happen to that company Exactly Not necessarily going out of business, but how much money they're bringing in from a capital perspective. So you have to look at how long that rate is gonna be there, what the risk is. So, yeah, it's gonna be a bigger risk if it's a longer term.
Speaker 2:
And that's the whole psychology of investing. I don't know if I'm using the right term, even if I use it with terms psychology but having the opportunity, you know when you look at, if you gotta pay me to wait, all right, and that's why it makes more sense that the yield is gonna be higher and I was figuring that's on any investment the longer the term is, because the time value of money and the discounted cash flow that you lose yeah, lose from having that money tied up for that length of time, Not only are you missing out on opportunity costs, you're missing out upon the interest that you could have made, You're missing out on another opportunity that you could have invested that same money in that you tying up for five or five, four, three percent, for 10, 15 or 20 years. So, going back to your statement, George, one has to make sure that they understand why they're doing making an investment more so than what they're investing in.
Speaker 1:
Yeah, absolutely. And then just to kind of hear again piggyback on that and you kind of touched on it, you have to look at the credit rating of the company that's offering it. Because here again, if the, if the company does not have a high credit rating, that's riskier. So they may be offering a higher yield, but you know, what are the chances of you getting your money back because of the fact that their credit rating is not as high as some of the other Company? So those are the kind of three things that you need to look at how long, what is the credit rate, credit rating and how much risk is involved in basically getting your money back. And when, anytime, you invest in a bond.
Speaker 2:
Oh man, absolutely, absolutely. You know, when we look at what's going on in the world in terms of labor and Jobs and things of that nature, the economy is going up and down. And Well, not so much the economy is going up and down. But I take a look at these statistics that come out, I think, every quarter, and you talk about how many no, I think it comes monthly how many jobs has come on. It's interesting that now, the good opportunity I think I've heard, or said that, you know heard in terms of buying those bonds, or Particular set of bonds, because of the interest rate as it ties into the treasury. Now I'm not about to get out there in a wheeze, but, george, can you explain? You know, talk a little bit on that.
Speaker 1:
Well, yeah, I mean here again I mean the upside of buying a bomb. Say you put ten thousand dollars in a bond, say in a year, a year bond. Okay, so if it pays quarterly, you're gonna get that yield From that bond on a quarterly basis. So you're gonna get paid out four times and then at the end of the year You're gonna get your ten thousand dollars back.
Speaker 1:
So you know, it's there in itself is you're almost kind of like, you know, creating a hero passive income Because of the fact that it's gonna be paying you out. And then some bonds pay monthly, some big quarterly, some pay yearly. So that's another thing that you have to look at is what, what the year yield is and when does it pay out? So yeah, but once you get into that, that's what it's gonna be. So here again, there's a couple different ways. Benefits of buying that mean that in itself. The other thing is the tax benefits of bond. If you buy a municipal bond and you live in the city, I mean in the state where that bond was issued, chances are you may not have to pay state and federal taxes on a corporate bond, I mean that's on a municipal bond, on a Treasury bond you don't have to pay state Taxes, but you do have to pay federal taxes.
Speaker 1:
And then if you have a bond fund in your 401k, in your IRA, remember again you don't pay taxes until you remove that money out.
Speaker 2:
Man, that's good information.
Speaker 1:
Yeah.
Speaker 2:
I hope people are listening to that. You know, because, like we always say, if you don't know, now you know. We say that for a reason right, you know it better know it.
Speaker 2:
So, man, good, good, good information. George. You know, diversification is one said that for people who don't know what you're doing, all right, and that's not a negative or a pejorative statement, in that there's so many African American households that we're not taught these principles, we're not taught these information. In terms of investing, importance of understanding, collecting interest is a lot better than paying it. So when we come before you with information like this, we're just as excited and delivering it as, hopefully, you are getting it. So, as we go to continue on our trek to understanding bonds and I was going in that direction, about diversifying, because even if you do know what you're doing, it's good to have an overview of the entire market, from the stocks and bonds. I think in George, you speak to this now it's having a well-balanced portfolio, whether it's a municipal bond or a corporate bond. You've heard some of the tax benefits as it relates to each. I think it's just a wise move, man, to seek out more information about how you can add bonds to your portfolio. What are your thoughts, george?
Speaker 1:
Absolutely. Most financial professionals suggest that you have a mixture of 60% stock and 40% bonds in your portfolio. Yeah, I mean, that's probably a good balance you want to look at, considering the fact that, here again, with funds, 401ks, iras the more you have they play off of each other so that you're not taking any huge losses. Those kind of things make sense. But yeah, that's what you have to look at is being well-rounded, diversification and making sure that it's doing exactly what you want it to do.
Speaker 2:
Right, man. Well, it's interesting because a lot of information is out here for us. I know somebody's probably out there saying well, what about junk bonds? Junk bonds? I know Mike Milligan. Of course he's not available, but I understand he's one of the king of junk bonds. But junk bonds has a place just like you have your. They call it the sellers. Oh my God, it comes to the downsellers anyway, the people who go against the market. George, you know what I'm trying to say here.
Speaker 1:
Anything that's going to be a high-risk investment. So I mean, when you start talking about junk bonds, I mean you just talk about high-risk investments. Yeah, I mean, but one of the things and I'll mention this before we close out this thing is another way to make money on bonds is by you can sell your bond. Say, for example, they keep raising the interest rates, your bonds keep going up, but then all of a sudden at some point we know they're going to drop the interest rates. So when they drop the interest rate, the bond rates are going to go down too. So what if the bond rates go down? Those T-bills that I talked about at 5% drop down to 3% or 2%, but you're sitting back, happy with a bond that's paying 5%. Well, you can turn around and sell that bond on an open market. So they're here.
Speaker 1:
Again is another opportunity to sell bonds and sell your bond and make you some money. So, yeah, there's a couple of things that you can look at and there's people out here doing this every day. But you've got to look at it and it's nothing that you want to spend a lot of time on, but it's something you want to spend some time on. I always tell people take a look at your portfolio once a quarter. You're looking at your bills, so you might as well look at what you're making, what your investments are.
Speaker 1:
And as we kind of learned on one of the other podcasts is we kind of have it backwards, we always want to spend first and invest second. We got to flip it around we got to invest first and spend second. Those are kind of things that get us into the next level of being able to support ourselves in that retirement line. So with that said, smitty, I'm going to turn to you and figure out how we're going to close this thing out. You've got a good set of words for us to put with our audience today what you got for us.
Speaker 2:
Oh, George, I'd be remiss if I didn't have something to say. It's been said that when a wise man has something to say, a fool has to say something. So I'm not saying I'm the latter.
Speaker 1:
Go ahead and enlighten our audience.
Speaker 2:
I'm not saying I'm the latter. However, here's our quote for today those who fail to understand debt are at a higher risk of failing financially.
Speaker 1:
Well said. And as we always say on the Crouchy Deal, man, if you didn't know, now you know. Take care, be safe.
Speaker 3:
The Crouchy Old man podcast is not a registered investment legal or tax advisor or a broker dealer. All investment financial opinions expressed by or on the Crouchy Old man podcast are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur. Before you invest or make any investment-based decisions, consider your own personal circumstances. You should do your own research and seek advice from a financial professional.
