Suze Orman says no bond funds

[Debinnov a]

I know there is not alot of love for Suze here but Im confused as bond funds were going to be my go to conservative investment. She didnt elaborate, but said no bond funds. Can someone explain this? I guess she is anticipating change in interest rates?

Deb

[Dawg52]

Yes, rates go up bonds go down.

[Debinnov a]

Ok so does that mean my options are CDs, and stock index funds? What will most conservative retired investors do if they get out of bond funds?

[Birdie Num Nums]

Quote:

Originally Posted by Debinnov a Ok so does that mean my options are CDs, and stock index funds? What will most conservative retired investors do if they get out of bond funds?

Orman recommends municipal bonds; she's opposed to bond funds.

[clifp]

Suze's advice is spectacularly bad for a retiree, with our generally lower income tax brackets.

I am a pretty sophisticated investor, and while I do have a single legacy muni bond. The boglehead thread points out the many hidden risks with muni fund. I don't think they are necessarily particularly risky in that you will lose money, but there are all kinds of ways for you make less money than you thought. I couldn't recommend them for anybody making under $200K/33% tax bracket.

[ETFs_Rule]

Warren Buffet has terminated credit default swaps regarding 8.25 billion dollars in municipal debt.

Ric Edelman talked about this last week on his radio show. It's either take some risk or let inflation eat away at your nest egg.

Don't abandon bonds. Focus on shorter and medium term bonds, which are less affected by interest rates. Don't lose sight of what bonds are for. They're a hedge against stock market drops. People run to the safety of bonds when stocks go down.

[daylatedollarshort]

Quote:

Originally Posted by Debinnov a Ok so does that mean my options are CDs, and stock index funds? What will most conservative retired investors do if they get out of bond funds?

Do you have any stable value funds in your 401Ks? Some other options are short term bond funds, floating rate funds, TIPS, CD ladders and I bonds.

[bUU]

I've slowly started recasting my conservative investments from broad-based and municipal bond funds to short-term bond funds and floating rate funds.

[foxfirev5]

Most floating rate funds I see have very low duration and interest rate sensitivity. However, they have longer maturities and are made up of largely junk credit quality.

[bUU]

As far as I can tell, there's no one option which has all the good attributes. You need to choose between how far you want to take the ride down the slope with bonds when interest rates go up.

[Debinnov a]

Thanks everyone, for the tips! I wish I was not so opposed to risk but just burned too many times over past 30 years and now I dont have the luxury of time. Im cutting it close with the the $$$$ but I cant take working another day. So matching or edging out inflation inflation is my main goal.

[ziggy29]

Suze is way too "one size fits all" for my tastes. Not to mention that she tries to convince everyone to keep working as long as they are able, no matter how much they hate their job and no matter how much they can afford to quit. Blecch!

[Debinnov a]

I agree about Suze.... I think she has good basic advice, especially for those in debt, etc. And I cringe EVERY time she tells someone that has plenty of money and even a pension - to work another five or ten years.

While she loves her job, not all of us want to keep working and put off the dream....

[karluk]

DW and I were watching Suze last night, and I thought her advice concerning municipal bonds went way past the tipping point of questionable into downright awful. If she had stuck with her basic position of buying individual bonds instead of bond funds by recommending, say, U.S. treasury notes instead of a government bond fund with a similar duration, then I would consider her advice eccentric but harmless. The two approaches have the same credit risk and similar interest rate risks.

But instead she throws in the concept of municipal bonds with the allure that they supposedly offer safe 5.5% or 6% yields. Naturally such a high yield has a lot of appeal to income-hungry investors, but there wasn't a single word from Suze about the added risk investors would be taking on. She did, however, suggest hiring a financial advisor to help decide which munis to purchase. That probably protects her legally, but doesn't do a thing to caution her audience about the dangers of her advice.

[Ready]

I watched the show last night too, and saw Suze once again tell people to buy individual bonds instead of bond funds. I like Suze and enjoy her show. I like a lot of the advice she gives, and I'm not a Suze basher, as are many people on this forum and around the internet. However, I continue to scratch my head at the advice she gives people about buying individual muni bonds rather than bond funds. It just makes no sense.

Suze argues that bond funds lose value because they have no defined maturity date, whereas individual bonds can be held until maturity and then give you the principal back in full. This is an overly simplistic argument.

If I buy a bond for $100.00 that pays 5% interest for 20 years, and interest rates go up, I will have to sell the bond at a discount to liquidate it. The bond will only hold its value if I keep it for 20 years. However, doing so means I will be accepting a lower return than what current bonds are paying, and doing so for 20 years will cost me a substantial amount of lost opportunity to earn a higher yield. I believe Suze focuses on the psychological aspect here that as long as you hold the bond for 20 years it will always return your $100.00, where the bond funds can lose money each day, thus resulting in a lower net asset value. In reality, the individual bond is losing money every day too in an environment where interest rates are rising. You are just not paying attention to it because it's not as easy to determine the current market value of an individual bond as it is a bond fund, which has an ending value each day the market is open.

In the end, every article I've read has suggested that bond funds are generally better vehicles for the average investor who wants bond exposure. It is suggested that you must invest at least $300K in individual bonds to create enough diversification to make it worthwhile. And, you either need to find a bond broker you really trust who will not rip you off, or become an expert yourself in buying bonds. Either way seems somewhat difficult for the average investor to do.

Suze may have the skill to personally select individual municipal bonds, but for those of us who don't want to take the time to learn how to do so, a bond fund with a low expense ratio is still the best way to have exposure to bond funds in a well diversified portfolio.

[brett]

We all know what free advice is worth.

I think that any decision has to be taken as part of an entire financial strategy. Coming out and saying something like this is meaningless to me unless it is in the context of my financial situation.

That is why we have a pay for service financial advisor who we are very satisfied with....and not glued to the radio or TV listening to all of the Suze Orman's of the world spout off with free advice.

[ERhoosier]

When considering muni's, also remember that "tax-exempt" interest is added to your AGI to figure your MAGI for ACA subsidy. Concept of "tax-free muni bonds" ain't as simple as it once was

[daylatedollarshort]

Quote:

Originally Posted by foxfirev5 Most floating rate funds I see have very low duration and interest rate sensitivity. However, they have longer maturities and are made up of largely junk credit quality.

I agree they are far from risk free. But we have a small allocation to them. There just aren't a lot of great alternatives right now for fixed income choices.

[ETFs_Rule]

Brokers earn about a 3% commission when they sell individual bonds. They basically don't earn anything if you buy BND.

[bUU]

Quote:

Originally Posted by daylatedollarshort I agree they are far from risk free. But we have a small allocation to them. There just aren't a lot of great alternatives right now for fixed income choices.

Precisely.

What do you consider a "small allocation"? I actually wasn't focusing on a specific split, but found that EAFAX is 21% of my domestic bonds allocation and 38% of my global bonds allocation.