‘Safe’ Bonds May Ruin Your Retirement

Nowadays, you must take control over your own financial destiny. Don’t believe what the financial services industry tells you-in fact, question it. Doing so will have a dramatic impact on your retirement. The message often communicated to investors is that owning stocks is risky while owning bonds is safe. Wall Street promotes this belief every time they talk about shifting a larger portion of a portfolio to bonds in order to ‘reduce risk’. If moving from stocks to bonds decreases risk, it must be because stocks are risky and bonds are safe.

The experience investors had between 2000 and 2002 (when their advisors sat there and did nothing) only confirmed that view. People saw the value of their portfolios drop 30-50%. That drop was caused by the stock portion of their portfolio, not the bond portion. This reinforced the idea in investor’s minds that stocks are risky and bonds are safe.

It’s this perception that stocks are risky that makes it more difficult for people to retire. It’s this message that results in people having to work years longer and to live with less during retirement. It’s this message that results in a smaller financial legacy left to their children and grandchildren.

We’re all familiar with story of The Parable of Talents from the Bible (Mt 25:14-30). The master is going away and gives money to three servants for them to manage while he is gone. Two promptly set to work and eventually double the money. The third is afraid and, instead of putting the money to work, buries it in the ground.

When the master returns after a long absence, he is very pleased with the two that doubled his money—“Well done,” he says. But he is furious with the third, “Throw him out”.

The third servant made the decision of how to invest the money out of fear. Since he was so afraid of losing the money, he just buried it. He didn’t even put it in the bank so it could earn interest—seen as the ‘least’ he could have done.

When it comes to investing, are you like the third servant? Are you so afraid of losing money that you aren’t willing to take any risk? Many people are. And believe it or not, the messages you get from Wall Street only reinforces it!

Investment decisions should not be based on fear. Many advisors will prey on your fear to get you to buy their ‘safe’ insurance products. Don’t fall for it. You shouldn’t trust any advisor who manipulates you with fear.

And believe me, that’s exactly what they are doing. Advisors are specifically trained to do it. They are taught that the two ways to get you to act is to play on either your fear or your greed.

There are two things that you must understand in order to properly evaluate which investments to use. These two core principles should be the foundation from which you construct a portfolio.

First, all investments have risk. Each is susceptible to different risks. Stocks seem risky and bonds seem safe because there isn’t the loss of principal risk in a bond that’s held till maturity.

So a bond protects you from that risk, but exposes you to the risk of rising prices. Bonds aren’t intended to increase the amount of food, clothing and shelter you can buy. With a ten-year bond, you’re lucky if you can buy as much when it matures as when you bought it.

It’s more appropriate to say that bonds are stable. Just because something doesn’t fluctuate in value, that doesn’t mean it will help you achieve your dreams sooner.

Second, the root of the problem has to do with an advisor’s ability to manage risk. The financial services industry doesn’t train the advisor to manage money---that’s not their job. It also encourages the advisor to follow a buy and hold strategy. In those situations, the only way to manage risk is to reduce stocks and increase bonds.

I don’t play by their rules. Neither should you. Don’t accept their arguments as fact because they aren’t. There are other ways to manage risk, but you won’t find it with the typical advisor. I’ll share more about that next week.

I’ll personally respond to your questions, free of charge. Go to http://www.guardingyourwealth.com and click on ‘Ask Jeff’.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.