The vast majority of retired investors ignore bonds, all bonds. Not because they are risky; just the opposite is true. And not because they don’t pay enough; some actually beat the stock market.
No, the reason is they don’t know enough about them to make a rational choice.
The least understood investments are not options, stocks or even commodities: they are bonds. And this lack of bond knowledge is costing retired folks a lot of money in income, capital gains and losses in stocks they shouldn’t own.
[ad#Google Adsense 336×280-IA]Corporate bonds in particular are a perfect play for all except the most risk-averse.
The high-yield variety – junk bonds – have a 98% success ratio in this market and a long-term, 80-year success ratio of about 94%.
They have shorter maturities, have higher yields and would fill the gap between conservative dividend stocks and cash perfectly for the average retired person.
But I’d bet 99% don’t own a single one.
Here’s a bond offered by Alpha Natural Resources (ANR), a coal company. The CUSIP is 02076xad4.
I know what you’re thinking: coal is dead. Well, not so fast.
Alpha Natural Resources’ stock has taken it on the chin, but its bonds, which more accurately reflect its underlying fundamentals and the real value of the company, have been rock-solid at about 97.23. That’s $972.30 a bond for a $1,000 bond.
This bond will pay a total annual return of about 10.5% a year to maturity in 2018 and annual income of 9.75%. And it has a stable growth estimate of about 5% a year for the next five years.
Despite what the White House says about coal, it is still the primary fuel for most of the world’s electricity, and that isn’t changing for a long time. In fact, demand from China and India is expected to rise in the next few years and coal supplies here at home are at multiyear lows.
Corporate bonds offer market stability, predictable returns and total returns well in excess of the long-term return of the stock market.
And if you can keep your rate pigitis under control and not chase just the highest-yielding bonds, they are a safe income and growth play for virtually all retired portfolios.
You need to get to know bonds, especially corporate bonds.
Lower your risk or pay the price.
— Steve McDonald
Source: Wealthy Retirement