In this week’s case study, the “Money Talks” hosts take a look at a retired couple who have been offered a high-yield bond portfolio by their broker.
At Henssler Financial, we recommend keeping money you’ll need within the next 10 years in fixed-income investments. We recommend government Treasury bonds, as they are as close to a safe investment as an investor can get. While bonds still carry an interest rate risk, if you have matched maturities to your liquidity needs, you should still know how much money you will receive once the bond matures.
Bond funds are not the same as individual bonds, because their value fluctuates with the market. Their volatility may be less than common stocks, but the value can move either way, positive or negative. Additionally, an investor does not know what the value will be when he has to sell.
High-yield bonds are considered less than investment grade by bond rating services. They’re also known as “junk bonds.” Investors demand higher interest rates because of the high level of uncertainty around the issuer’s ability to repay its debt. Not only do high-yield bonds carry interest rate risk, but they also carry the risk of default. While default risk can be tempered with diversification, it is extremely hard to be diversified in individual bonds. A high-yield bond fund can provide the diversification needed, but you are then taking on the risk of the unknown value when you need the money for liquidity.
One product we have been watching closely is high-yield maturing bond exchange-traded funds. These ETFs are generally diversified, holding 100 to 300 individual bonds in three different fixed-income spaces: corporate, municipal and high-yield bonds in annual maturities up to 10 years. The ETF shares have a maturity date, so you know when your shares “mature” and you will receive your money. As with all investments, maturing bond ETFs are not guaranteed, but you may feel relatively safe in their diversification and maturity date.
For clients looking to boost the yield on their fixed-income portfolio, we recommend putting a small percentage into a maturing bond ETF, such as those offered by iShares and Guggenheim Investments. Because of their significantly higher yield compared to U.S. Treasury bonds, even a small investment can increase the benefit you receive from your fixed-income portfolio.
The reason we are able to recommend these is that we have run many cash flow projections for our clients, and we know when they will need their money for liquidity. Without knowing this, any investment can be a shot in the dark. If you have questions about your fixed-income portfolio, experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
