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The Only Guide to a Winning Bond Strategy You'll Ever Need: The Way Smart Money Preserves Wealth Today
Larry Swedroe, the author of The Only Guide to a Winning Investment Strategy You'll Ever Need , has collaborated with Joe H. Hempen to create an up-to-date book on how to invest in today's bond market that covers a range of issues pertinent to any bond investor today bond-speak, the risks of fixed income investing, mortgage-backed securities, and municipal bonds. The Only Guide to a Winning Bond Strategy You'll Ever Need is a no-nonsense handbook with all the information necessary to design and construct your fixed income portfolio. In this day and age of shaky stocks and economic unpredictability, The Only Guide to a Winning Bond Strategy You'll Ever Need is a crucial tool for any investor looking to safeguard their money.
272 pages, Hardcover
First published March 7, 2006
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Displaying 1 - 12 of 12 reviews
March 3, 2018
I found this to be a very enlightening book that helped me establish a strategy for the fixed income part of my investment portfolio. It has some very specific advice, for example:
• Write and sign an investment policy statement (IPS) that defines your objective, risk tolerance, investment strategy, and eligible securities (i.e., maximum maturity and minimum credit rating).
• Purchase assets from the highest investment grades, generally avoiding instruments with a rating below AA.
• Avoid securities with complex features, as they are products generally meant to be sold (by brokers), not bought (by investors).
• Avoid trying to outperform the market either by trying to guess the direction of interest rates or by trying to identify securities that have been somehow mis-priced by the market. There is simply no credible evidence that investors, either individuals or institutions, are likely to succeed in this effort. As Peter Bernstein points out: "The essence of investment theory is that being smart is not a sufficient condition for being rich." The winning strategy is to be a buy-and-hold investor.
• Purchase assets with maturities that are short to intermediate in term, avoiding long-term bonds. If the main objective of the fixed-income allocation is to reduce overall portfolio risk, then maturities should be restricted to the short end of the curve (maximum of two to three years). If the goal is to generate greater cash flow or to manage reinvestment risk, then maturities can be stretched to the intermediate part of the curve (five to ten years, depending on the location of the "sweet spot").
• The longer the maturity, the greater the correlation of the fixed-income assets with the equity assets in the portfolio. Thus, while you reduce reinvestment risk when you extend maturity, you increase the price risk of the fixed-income assets and you also increase the risk of the overall portfolio.
• The historical evidence for taxable bonds is that, on average, investors have not been rewarded for extending maturities beyond five years (remember that for municipal bonds the yield curve is typically steeper).
• The best predictor of future yield curves is today's yield curve. Thus investors are likely to achieve the highest return by extending maturity until the point where the yield curve is no longer upward sloping.
• While extending maturities as long as the yield curve is positively sloped is likely to produce the greatest return, investors accept more risk by doing so. Thus it seems prudent to establish a rule of thumb that requires a minimum incremental yield for each additional year of maturity as compensation for the incremental risk. For taxable investments a suggested hurdle is twenty basis points per annum, and for municipal bonds a suggested hurdle is fifteen basis points. However, if the yield curve is very flat, or even negatively sloped, this rule of thumb will lead to the creation of a portfolio that is very short-term in nature. The result will be a portfolio with little price risk, but with great reinvestment risk. Thus investors using the laddered approach might want to add a second requirement of having a minimum and maximum weighted-average maturity for the ladder. For example, the minimum weighted-average maturity might be three years and the maximum might be five years.
• Avoid the purchase of hybrid securities.
• If using mutual funds (or ETFs) to gain access to the fixed-income market, invest in only very low cost, passively managed vehicles. The same advice applies to selecting separate account managers. Avoid mutual funds that have loads.
• If building your own portfolio of individual bonds, restrict purchases to the primary (new issue) market. This is especially true of municipal and corporate bonds. If, however, you have access to the secondary market through a fee-only advisor or separate account manager who can buy at or near wholesale prices, the secondary market may provide more attractive alternatives.
• Since the prudent strategy is to be a buy-and-hold-to-maturity investor, it is not necessary to "pay up" for liquidity (all else being equal, the more liquid the asset, the lower the yield). Thus investors who plan on holding to maturity should at least consider buying less-liquid securities (e.g., issues from smaller municipalities that do not frequently come to market) for some portion of the portfolio—as long as the credit rating is AAA or AA. Less-liquid securities should not, however, constitute the bulk of your portfolio. The reasons are that there may be unanticipated calls on your capital and there may be opportunities to harvest tax losses. Selling less-liquid securities is likely to result in having to accept large markdowns.
• Review your IPS on an annual basis as well as whenever the assumptions you made about your ability, willingness, and need to take risk have changed.
• Write and sign an investment policy statement (IPS) that defines your objective, risk tolerance, investment strategy, and eligible securities (i.e., maximum maturity and minimum credit rating).
• Purchase assets from the highest investment grades, generally avoiding instruments with a rating below AA.
• Avoid securities with complex features, as they are products generally meant to be sold (by brokers), not bought (by investors).
• Avoid trying to outperform the market either by trying to guess the direction of interest rates or by trying to identify securities that have been somehow mis-priced by the market. There is simply no credible evidence that investors, either individuals or institutions, are likely to succeed in this effort. As Peter Bernstein points out: "The essence of investment theory is that being smart is not a sufficient condition for being rich." The winning strategy is to be a buy-and-hold investor.
• Purchase assets with maturities that are short to intermediate in term, avoiding long-term bonds. If the main objective of the fixed-income allocation is to reduce overall portfolio risk, then maturities should be restricted to the short end of the curve (maximum of two to three years). If the goal is to generate greater cash flow or to manage reinvestment risk, then maturities can be stretched to the intermediate part of the curve (five to ten years, depending on the location of the "sweet spot").
• The longer the maturity, the greater the correlation of the fixed-income assets with the equity assets in the portfolio. Thus, while you reduce reinvestment risk when you extend maturity, you increase the price risk of the fixed-income assets and you also increase the risk of the overall portfolio.
• The historical evidence for taxable bonds is that, on average, investors have not been rewarded for extending maturities beyond five years (remember that for municipal bonds the yield curve is typically steeper).
• The best predictor of future yield curves is today's yield curve. Thus investors are likely to achieve the highest return by extending maturity until the point where the yield curve is no longer upward sloping.
• While extending maturities as long as the yield curve is positively sloped is likely to produce the greatest return, investors accept more risk by doing so. Thus it seems prudent to establish a rule of thumb that requires a minimum incremental yield for each additional year of maturity as compensation for the incremental risk. For taxable investments a suggested hurdle is twenty basis points per annum, and for municipal bonds a suggested hurdle is fifteen basis points. However, if the yield curve is very flat, or even negatively sloped, this rule of thumb will lead to the creation of a portfolio that is very short-term in nature. The result will be a portfolio with little price risk, but with great reinvestment risk. Thus investors using the laddered approach might want to add a second requirement of having a minimum and maximum weighted-average maturity for the ladder. For example, the minimum weighted-average maturity might be three years and the maximum might be five years.
• Avoid the purchase of hybrid securities.
• If using mutual funds (or ETFs) to gain access to the fixed-income market, invest in only very low cost, passively managed vehicles. The same advice applies to selecting separate account managers. Avoid mutual funds that have loads.
• If building your own portfolio of individual bonds, restrict purchases to the primary (new issue) market. This is especially true of municipal and corporate bonds. If, however, you have access to the secondary market through a fee-only advisor or separate account manager who can buy at or near wholesale prices, the secondary market may provide more attractive alternatives.
• Since the prudent strategy is to be a buy-and-hold-to-maturity investor, it is not necessary to "pay up" for liquidity (all else being equal, the more liquid the asset, the lower the yield). Thus investors who plan on holding to maturity should at least consider buying less-liquid securities (e.g., issues from smaller municipalities that do not frequently come to market) for some portion of the portfolio—as long as the credit rating is AAA or AA. Less-liquid securities should not, however, constitute the bulk of your portfolio. The reasons are that there may be unanticipated calls on your capital and there may be opportunities to harvest tax losses. Selling less-liquid securities is likely to result in having to accept large markdowns.
• Review your IPS on an annual basis as well as whenever the assumptions you made about your ability, willingness, and need to take risk have changed.
May 22, 2021
Some great takeaways from this one! I enjoyed the discussion regarding primary market offerings vs secondary market offerings, including liquidity, transparency on pricing, and seller markup. I did not realize that the TreasuryDirect program was available for individual investors who may not want to go into the secondary markets or purchase through a brokerage or investment bank. Great resource to know about.
Additionally, Larry did a great job discussing systematic vs unsystematic risk in regards to equities vs fixed income investments. Given that there is little unsystematic risk (especially in AAA Gov't fixed income securities), the importance of diversification is rendered somewhat null. This opens the door for simplistic and effective approaches for investors who will use fixed income strategies as a means to reduce Beta in their portfolio rather than a means for future cash flows that outperform the inflation rate.
And final note, tax considerations and implications are presented in a clear manner and provide much food for thought when implementing a tax-advantaged plan.
Additionally, Larry did a great job discussing systematic vs unsystematic risk in regards to equities vs fixed income investments. Given that there is little unsystematic risk (especially in AAA Gov't fixed income securities), the importance of diversification is rendered somewhat null. This opens the door for simplistic and effective approaches for investors who will use fixed income strategies as a means to reduce Beta in their portfolio rather than a means for future cash flows that outperform the inflation rate.
And final note, tax considerations and implications are presented in a clear manner and provide much food for thought when implementing a tax-advantaged plan.
October 25, 2020
A lot of bond advice in a small package from an experienced advisor. I can now claim to understand the world of fixed income a little better.
Much of the book focuses on how not to get ripped off if you buy bonds with less quality (or liquidity) than US treasuries. What I don't understand, however, is why an investor would want to buy such bonds. The author seems to believe that the additional risks that bondholders take when they buy bonds of lower qualities have not been well rewarded. The author then explains what you should do if you want to buy these bonds. But if they have not been well rewarded, why spend so much time explaining how to choose these bonds? There's something I'm not getting here. If you want risk, buy equities.
Much of the book focuses on how not to get ripped off if you buy bonds with less quality (or liquidity) than US treasuries. What I don't understand, however, is why an investor would want to buy such bonds. The author seems to believe that the additional risks that bondholders take when they buy bonds of lower qualities have not been well rewarded. The author then explains what you should do if you want to buy these bonds. But if they have not been well rewarded, why spend so much time explaining how to choose these bonds? There's something I'm not getting here. If you want risk, buy equities.
October 9, 2023
Book’s fine for beginners, albeit a bit on the wordy side. While competent, would not recommend: I think the “bonds for dummies” book that I reviewed earlier offers the same information in a much better way.
maybe-to-read
August 31, 2021Not only teaches you about bonds, but also gives his opinions about which bonds you should invest in.
January 15, 2025
This book is well worth your time and attention. It is dated but provides great basic advice on and insights to investing in fixed income.
February 16, 2017
One common refrain you hear in investing is not to buy anything that you don't understand. Well, I bought some ETF bond funds with fixed maturity. I thought I understood them, but as time went on I started to have some doubts, so I bought this book. Who knew bond investing was so complicated! I'm more confused now than when I started. I'm not sure it's a problem with the book. The author not only has to cover a bewilderingly large array of bond products, but has to describe them for a wildly diverse audience. Sadly for me, he doesn't discuss at all the product that I bought, perhaps because products like it didn't exist when the book was written (2006).
September 17, 2010
I really like all of Swedroe's books and I learned a lot about bonds in this book. I wonder if Mr. Swedroe would have changed anything if he were to right it now after the meltdown in the markets. To his credit he predicted problems with mortgage backed securities and some investment products that were made to be sold not to be investments. I wish he gave specific examples about putting together a bond portfolio depending on risk, age, etc. I thought the end of the book could have used a better summary but overall I feel like it was a good education.
August 31, 2007
I can't say that I fully understand bonds and bond funds, but this book has gotten me closer than any other texts or online research has been able to do. It distilled information that I'd feared before into clear explanations and examples. Oh and it was pretty darn entertaining and well written considering the topic.
January 14, 2012
Really enjoyed this book. Very good coverage of the diverse options in fixed income with rational reasoning behind why you might want to consider an investment or why you might want to stay away. Helped rationalize our investment portfolio's allocation.
October 7, 2008
All of Swedroe's books are excellent.
May 11, 2020
Gave a very basic review of bonds. Strategies are laid out clearly. Not likely read again but would recommend.
Displaying 1 - 12 of 12 reviews