The Finance Blogger

There are many financial beliefs that consumers follow and are also supported by many financial advisors. Some of those make no sense at all and some make no sense depending on the person’s situation. Depending on how long you’re going to live, depending on how long you’re going to work, and how much income you need during retirement, these beliefs may make sense for some people and not for others.

Financial beliefs –

Taking social security early at age 62

If you take Social Security early at age 62 there’s no question that you’re going to incur a penalty compared to taking it later in life say at age 65 or even later. We all know this and understand this, but what it really comes down to is how long will you live. Will you need the extra money in the future? Many people are worried they could die at a younger age and not receive Social Security at all or for a limited time.

Other consumers and financial advisors will look at the age of the parents when they passed away, assume that they may live a few years longer and make a decision based on their projected lifespan. For example if both parents passed away and 75, then you probably want to take your Social Security early. On the other hand if both parents passed away in their 80s or 90s, there’s a very good chance that you also live into the 90s. If you can afford it then obviously you should delay your Social Security and take larger benefits so that you have more money later in life.

Individual bonds are superior to bond funds

Bond funds are more complicated in the sense that as interest rates change so does the value of the bond fund based on the average interest that they are collecting from bonds that they were invested in. Individual bonds will also change their value based on the change in interest rates. If you have to sell the bonds early then you may incur a penalty if interest rates are lower. If you plan to hold the bonds to maturity you will collect all of your interest and your original investment. By owning bond funds you also have the management fee that is charged on any bond or mutual fund.

Paying ahead on your mortgage.

Whenever you can pay ahead on your mortgage you’re definitely saving money. In terms of the amount of interest that you will not pay as a result. Let’s assume that your mortgage carries an interest rate of 4% and your mortgage amount is $100,000. Therefore you will pay $4000 in interest each year. Right off the top you will save $4000 if you can Pay off 100,000. Most people would have to earn at least six or $7000 including taxes in order to pay the $4000 interest.

If you have $100,000 to invest and collect 4% your earned $4000 in interest income or dividend income. Then you have to pay taxes on that income. Depending on their tax structure, most people are much further ahead to pay as much money on their mortgage as they can. They will benefit by reducing the total amount of interest that they pay each year. It is also an extremely nice feature to have your mortgage paid for, and your house paid off, when you retire.

For more ideas and thoughts about bonds, click here.

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What is a bond ladder and why should you follow this advice? Your investment portfolio should have a mix of cash, bonds and stocks in it. The percentages of each will depend on your goals, your age, time to retirement and your risk tolerance. Maintain diversity in your portfolio. Most investors will not be caught losing a lot of money  if one company or one sector does not do well and tanks in terms of value. Owning bonds is one segment of this diversity component. More importantly you can protect yourself in the bond market as well.

Invest Well, Diversify

This article is about bonds specifically and how you should always ladder them. But first we suggest bonds from good quality companies, blue chip and paying decent interest rates. Which at the time of writing this article is only around three or four percent. You will want to make sure that your bonds are from several companies and / or governments to provide diversity. Lots of companies and even some governments have not done so well of late. You definitely do not want to have all of your investments in one place.

What is a Bond Ladder – Stagger Maturation Dates

Next they should have maturation dates that are staggered. In other words if you had ten bonds, each at $10,000, ideally they should have maturity dates that mature each year going out 10 years. This way you have only one bond maturing every year for a total amount of $10,000. Your average interest rate will move up and down based on the direction the market is going on interest rates. Some years the interest rate at renewal time will be high. While others the rate will be lower. Either way only a small portion of your portfolio will be renewed in a year. You will be somewhat protected from the fluctuation of interest rates.

Near Term Investments

This assumes of course that you have a longer term investment strategy and are not saving for something specific in the near term. Near term investments would be better off in GIC’s that do not fluctuate in value and pay a fixed low interest income for various maturation’s. They can be purchased in 30 day, 6 months and 1 year maturation’s, but traditionally have not paid a very high interest rate.

Bond ladders that are invested across several companies with various maturation dates are the best way to protect your long term investments from the always changing market. In the worse case, you do not want to have to cash in all your bond investments to live on in retirement when your bond value has dropped. Interest rates have risen, or your bond is worthless because the company went bankrupt are examples. Laddering them and sticking with blue chip companies will help to ensure that you never face this reality.

Evaluate Bond Investment Risk

There may be higher interest rate bonds available. However always evaluate the risk of your principle being there when the bond matures. Also the risk of always receiving your interest payment every month or every six months depending on the type of bond that you have.

Some bonds will be callable. Which means that at a certain time, the company can cash in the bond and return your principle along with accrued interest to you. They usually will do this at a time when interest rates are lower than what they are paying on the bond that you own. They can borrow money at lower rates and reduce their overall cost of borrowing money by doing this.

If you are buying corporate or municipal bonds always confirm if your bond is callable or not. Most investors do not like surprises. This can be one surprise you may not want to have. When the bond is cashed, you do get your money back, but now you have to invest it at a lower interest rate which is not always to everyone’s liking.

For more information on bonds and bond ladders, click here.

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