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Five Bond Errors Can Be Costly for Investors Listen Now
 Terms, Ratings and Tax Implications Often Trip Up the Unwary WASHINGTON, D.C.///April 1, 2003///Bonds get no respect from most investors - and the result can be a portfolio that involves much more risk, volatility and cost than is necessary, according to three fee-only financial planners from across the United States. In warning that many investors do not understand the proper role of bonds in an asset allocation strategy, the experts outlined the ups and downs of bonds, how they are best used and, just as importantly, what to avoid. The investment advisors, who are members of the Zero Alpha Group, LLC (ZAG), are Plancorp Vice President Chris Kerckhoff, Jr. (Chesterfield, MO), Savant Capital Managing Director Thomas Muldowney, CFP, CHFP (Rockford, IL) and Petersen Hastings Vice President Scott Sarber (Kennewick, WA). The members of the nationwide ZAG network of seven fee-only investment advisory firms manage a total of more than $1.75 billion in assets. THE FIVE MOST COMMON BOND ERRORS The ZAG members issued the following reminders for investors who are considering changes to their portfolios: 1. "File" your bonds; get an index. Many investors have learned the power of "indexing" their stock investments - that is, buying an S&P 500 indexed mutual fund and receiving the benefit of automatic diversification over several industry sectors. Smart investors realize this same benefit exists in the world of bonds. Even after the difficult bear market in recent years, index funds were a wise choice. They can be much less volatile than active management that focuses on a smaller number of stocks. Plancorp Vice President Chris Kerckhoff, Jr. said: "It has been proven time and again that a passive investment strategy through indexed products can be more effective than an active strategy in achieving a solid return with low risk. While it is a popular remedy in stock investing, not as many people realize the power of bond indexing. It's more diversified, lower cost, and serves as a superior building block for implementing an effective asset allocation strategy." 2. Life is short; your bonds should be, too. Short-term bonds offer less risk than long-term bonds. Short-term bonds produce income and lower volatility in an investment portfolio. Long-term bonds may sometimes have a higher return, but that return is often tempered with higher risk. The longer the term on the bond, the more its return is tied to fluctuating interest rates. 3. Remember the taxman. Most investors aren't sure how to balance their portfolio in terms of tax-deferred investments vs. taxable investments. Unfortunately, there is no sure-fire answer to this dilemma. But there are some important points to remember that any investor could benefit from considering. Interest earned from bonds is taxed at the investor's normal income tax rate where stocks are taxed at capital gains rates. Investors in higher-income tax brackets probably will be best served by keeping their bonds in a tax-deferred account. Petersen Hastings Vice President Scott Sarber said: "The delicate balance between taxable and tax-deferred investments is a tricky and sometimes nerve-wracking quandary for investors. It's not easy to think through all the tax implications of your investment portfolio - which is why we suggest that most investors seek the help of an investment advisor to help them sort it through." 4. Stick with a long-term strategy; don't chase bonds. In the boom-and-bust stock era of the late 1990s, investors impulsively snapped up highly volatile stocks in an attempt to bolster their portfolio performance. Many investors do the same thing with bonds when the stock market slumps or during periods of uncertainty, such as war. It's a mistake with stocks and it's a mistake with bonds. Savant Capital Managing Director Thomas Muldowney, said: "Most people are understandably anxious about the sluggish stock market. Unfortunately, there's just as much a cry to move money into bonds right now as there was to move everything into stocks in the late 1990s. Most investors hooked their wagon to the tech star too late - and the same can happen with bonds during a sluggish market. Investors need to understand that if they build a solid asset allocation strategy without taking into account the emotional and anxiety-ridden market swings, they'll sleep a lot better at night." 5. Clean your portfolio as you would your house; get rid of the junk. Institutional investors look to high-yield bonds to diversify their portfolios and, with the ability to invest in numerous companies' debt, lower their risk. Individual investors rarely are so lucky. Their "junk" bets, by virtue of involving less money, end up being much riskier endeavors. ABOUT THE THREE FIRMS Petersen Hastings, Kennewick, WA. - Petersen Hastings, an independent investment advisor founded in 1962, manages assets through a strategy of asset allocation and indexing. The firm serves its clients - including retirement plans, trusts, non-profit organizations, foundations and established individuals - using its proprietary Disciplined Wealth SolutionT and Core Values Investment ProgramT, which is a solution for socially responsible investing. Petersen Hastings is on the Web at http://www.petersenhastings.com. Plancorp, Chesterfield, MO. - Plancorp focuses on the management of wealth for high net worth individuals and has done so since 1983. The firm provides personal and business transition planning, investment management, family office services and business consulting services, using its Personal Transition ProcessT and Intelligent Investor SolutionT. Plancorp is on the Web at http://www.plancorp.com. Savant Capital Management, Rockford, IL. - Savant Capital Management was founded in 1986 as an independent, fee-only financial advisory firm. Savant provides financial planning and investment advisory services to financially established individuals, trust funds, retirement plans, non-profit organizations and fiduciaries, using the firm's proprietary Wise Wealth IntegratorT and Wise Wealth Investment SolutionT processes. Savant Capital Management is found on the Web at http://www.savantcapital.com. |