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VIDEO: Are Bonds Good for Railroad Retirement? Thumbnail

VIDEO: Are Bonds Good for Railroad Retirement?

Financial Planning Investing


Welcome everyone to another edition of the Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors, and today we're going to talk about investments, specifically bonds, right? Big part of people's portfolios. And I'm going to be talking about US bonds, how you want to position them or think about positioning them in your railroad retirement. All right? It's very interesting times we're going in right now with the way interest rates are so depressed. The yields are very low on the interest rates. So I want to go through a little bit of education about bonds and how you want to think about them. And then, we'll talk about some strategies or some ideas that you might want to implement in your portfolios. All right?

So, why do people buy US treasury bonds? This is what we're talking about, right? You get that guaranteed rate of return from the US treasury bonds, so you know what you have coming in, right? Let's say if it's a 5% bond, you know you're getting 5% on your money every year, right? Safety. A US treasury bond, very safe. The best investment there is in the world. It's AAA, right? Nothing higher than an AAA as far as safety, right? Because at the end of the day, they control the printing press. So, as they have the printing press, it's AAA, I guess at the end of the day. And then people buy bonds for diversification, right? I always talk about diversification in portfolios. There's different classes of stocks you want to have and bonds are just another part of diversification that you want to have in your portfolio.

And then the fourth one here is appreciation. Believe it or not, appreciation, right? Your bonds can go up in value, right? So that's why you want to buy them, right? Is you don't want to buy a bond and have them go down in value. So what do I mean by that, right? So appreciation, right? Let's say if I have a bond that yields 5%, right? And now if I go out in the open market and the bonds are now yielding just 3%, right? My 5% bond is now worth a lot more. So it has appreciated. So just to give you a real-life example, this year, the 30 year US treasury bond year to date has appreciated 30% in value, right? So that's significant, right? 30% in value. So people don't think about that. They say, "All these low interest rates." But yet, if you're ... There is appreciation and obviously depreciation risk in the bonds.

So that's another reason some people will buy them. But for the most part, the individual investor, you're just looking for that safe rate of return, right? To know that that's always going to be there. So let me go through an example here, see what I'm talking about. So let's say this is the current state of the situation. This is what I want to talk about here, is let's say if you had $100,000 and you go to the US treasury and you want to buy a 30-year treasury bond. Well, this is the yield that they're going to give you, 1.18% roughly, right around there. And by the hand of 2050, your $100,000 over the years, the US treasury will have paid out to you a little bit over $143,000. So you go, "Wait a second, that's 30 years. 2050, geez. I don't know where I'm going to be in 2050?"

That's not a lot of money, $43,000. And then you factor in inflation rate, right? Our current inflation rate is roughly around 2%, give or take a couple basis points, right? So your real return is a negative number, minus 0.8, right around there. So I'm giving the US treasury $100,000 and now I have inflation risk and I'm losing money. So, why are people buying treasury bonds, right? Well, there's a couple of reasons going on, right? Some people will buy them because they want this appreciation, right? Big funds and things like that. They'll buy them for ... They're making a bet that they're going to appreciate in value, so that's why they're buying it. Because at the end of the day, you're really not buying them now at these levels for the rate of return. They're negative.

So when you look at US treasuries, right? 40% of all treasuries are held by other foreign governments, right? Because the US dollar is the world currency. At the end of the day, despite everything you hear, it's still the best currency in the world. All right? And the markets are reflecting that. So, that's why people are buying them, right? Treasuries are buying them and then maybe pension funds are buying them, right? They got to have a certain amount of money in US treasuries. It's just a safe investment, so that's why they're in there. But from your perspective, you're really not getting, at these levels, not that great a return.

I mean, you go a few years back and, if you say, "Well, I can get a 6% 30 year and inflation's running at 3%." You had a 3% positive real rate of return. So what's going on is the Federal Reserve is saying, "Please don't invest our bonds, invest elsewhere because we need the economy to grow." So they want you to invest in other assets. So let's talk about some strategies here, right? Cash, right? Is a good investment right now, versus saying, "I'm trying to get a rate of return from a US treasury bond at 1.18%." I might as well just put it in a money market and if I need the money I'll get the money, right? That type of thing.

And especially I want to talk about those ... If you need money within three to five years, you just pay in cash anyway and don't really try to time markets and things like that. That gets a little bit dangerous. So you're probably just better off, safer in cash, right? And then the other thing, what's going on is stocks, right? Now, by the time we've filmed this, right? The stock market here in 2020 was down 34% at its lowest. It's now only down 11% on the year to date, right? So what's going on? People are recognizing, "Hey, what am I going to do? Put all my money in these treasury bonds, right? Safe investment bonds, right? I could put them in stock."

Which, personally, I kind of expect to happen with all this stimulus that going on, right? And if they keep these rates return ... Your real rate of return is going to go down a lot lower. So, these are just some things that you really want to start thinking about when you want to talk about diversifying your portfolio and specifically as it relates to bonds, right? Great rate of return this year, 30% on the US treasury bonds, but at some point this thing is either going to zero or negative for it to keep appreciating.

So, just something to think about on why you're investing in bonds. All right? I hope you found this educational. Just to give you some ideas, kind of bring you up to speed on what's going on in the bond market and the interest rates that are really affecting us all at this point. So please subscribe to my YouTube channel if you get a chance. You can reach out to me. If you want to set up a meeting, that's always good. Go on my website, highballadvisors.com, and I have a whole boarding process there that you can take a look at that. All right? In the meantime everyone, please stay safe, stay on track and take care. So long, everybody. Bye.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.