Customer Reviews

Bonds: The Unbeaten Path to Secure Investment Growth (Bloomberg)

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A little background on myself. I have read over 200 books on investing. When I started investing back in 1979, I went 100% stocks. Back in 1979, the financial press was full of stories about retired people with bonds that were decimated by the high inflation of the late 1970's. Bonds were probably the worst investment back in that high inflationary environment. I stayed 100% stocks for 20 years, and then switched to 10% bonds in 1999. In late 2007, I switched to a 60:40 portfolio. I evaluated my need to take risk against my willingness to take risk...and settled on the time honored 60:40 portfolio of pension funds.

The authors of this book try to make the case for a 0:100 or all bond portfolio. They assert the 10% return of stocks is really 6-7% because of taxes, expenses, and bad timing.

Taxes reduce stock returns because of excessive trading by active mutual fund managers.

Expenses reduce stocks returns because of transaction costs and annual fees. Their assertion is 2% on large cap, 4% on small cap and foreign stock funds, and 10% on micro-cap and emerging markets.

Bad timing reduces the return of stocks because investors chase the winners and they buy high and sell low. The Dalbar studies have shown for years that most investors do not really get the market return of stocks. The authors cite the fact that the S&P 500 returned 12.8% from 1983-2003..while the average investor only got 6.3%. The author cites a Dalbar study where the market returned 12% and investors really got 4%.

The authors claim that a 100% bond portfolio solves all the issues that lower the return of stocks. They assert bonds are low cost if you buy them at their initial offering. They assert low fees if you hold the bonds to maturity. There is also no risk of bad timing if you hold the bonds until maturity. They also assert a laddered bond portfolio protects against rising interest rates (which I assume they also mean rising inflation). Tax free municipal bonds can also reduce taxes.

The authors also assert that future returns will not be 10% because this historic return is based upon higher dividend payout than we have today. Dividend yields used to be 5%, but in recent years have been about 1.8%. A recent Business Week article said about 40% of the total return of stocks from 1926-2008 was from dividends.

The authors asset that the longer you hold stocks, the higher the risk. Asset bubbles take a while to build, but eventually a Bear market arrives and wipes out the gains. But Bear markets are a part of investing.......we have had about 13 of them since WWII....or 1 Bear market ever 5 years on average.

I really thought the authors made a lame argument when they said that retirees can run out of money in retirement if they withdraw 10% per year and they have a Bear market early in retirement. The authors must not be aware of Bengen and the Trinity studies. Bengen demonstrated back in 1994 that 4% is about the maximum safe withdrawal rate in retirement......not 10%.

In my opinion, the authors could have made the case that from 2000 until 2008....investors should have tilted their portfolios more towards bonds than stocks. Because of the build-up of prices (PE ratio) in the 80s and 90s, history tells us future returns will be lower. The 1980's and 1990's were the glory years of stock returns.....with the S&P 500 with dividends reinvested returning compound growth rates of 18%.

After 2000, John Bogle and William Bernstein both predicted single digit returns about 6-7% nominal for stocks. Bernstein argued that if stocks return 6-7%, then investors should tilt more towards bonds because the extra risk of stocks is not going to compensate you with higher returns. John Bogle has been consistently advocating that investors should hold their age in bonds (age 70 equals 70% bonds). Neither Bernstein nor Bogle ever advocated 100% bonds.

With the S&P 500 now at 873, the dividend yield is up to 2.86%. The PE ratio is down from 23.6 in Nov 2007 to 16.5 in Nov 2008 (trailing PE). Stocks are now relatively cheap and I predict both Bernstein and Bogle will raise their predicted future returns of stocks.

In my mind, the authors failed to address the biggest issue with bonds......their failure to deal with inflation. A laddered bond portfolio doesn't really deal with an unexpected increase in inflation. Only a small fraction of the portfolio comes due each year and can be reinvested at a higher interest rate. The balance of the portfolio loses value with unexpected inflation.

Both Bengen's 1994 seminal study and the Trinity study showed that retirees can withdraw a maximum of an inflation adjusted 4% from their portfolio each year using 50% to 60% stock portfolios. I have run Monte Carlo simulations and have duplicated their results. What you find when you run Monte Carlo is that low stock portfolios (or high bond portfolios) don't deal with inflation.....and high stock portfolios are too volatile and you risk the chance of outliving your money. There is a sweet spot in the middle (maybe 40:60 to 70:30) which does the best.

As a fan of index funds, I could argue that using low cost index stock funds and staying the course should outperform an all bond portfolio. Vanguard has rock bottom expense ratios on the order of 0.18% on their S&P 500 fund. Taxes are extremely low on stock index funds because there is relatively low turnover compared to actively managed funds. A 60:40 portfolio comprised of 40% total US stock market, 20% total foreign stock market, 20% total US bond fund, and 20% TIPS is a very robust portfolio.

The author's recommendation of a 100% bond portfolio only makes sense if you are an investor who chases the winners and you achieve low stock returns per the Dalbar study. I guess in this situation you might be as well off using an all bond portfolio.

I would suggest you learn more about index fund investing by reading some of the books below. I'm sticking with my 60:40 portfolio. I don't think a 100% bond portfolio is the way to go because I know how to stay the course through the Bear markets that occur about every 5 years........and I don't think a 100% bond portfolio deals well with inflation.

In this age of full disclosure, it can be noted that I am the author and publisher of the book INDEX MUTUAL FUNDS: HOW TO SIMPLIFY YOUR LIFE AND BEAT THE PROS. This book is an introduction to the concept of index funds is and is sold on Amazon. I am also a contributing author to the book THE BOGLEHEADS GUIDE TO RETIREMENT PLANNING available from Amazon with an estimated release date of October 2009. I have also written 21 short stories on investing which are also available on Amazon.

If you want practical ideas on long term passive investing, read some of the books below:


The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing

The Richelsons have provided a readable introduction to investing in bonds, with meaty sections on basics and categories. It is current, being a 2007 edition that is "expanded and updated"--and renamed--from their 2002 book. I found it comparable in scope to, if a little simpler than, Esme Faerber's 2001 book "Fundamentals of the Bond Market", which I already have dog-eared thoroughly.

So far, so good, but unfortunately the book promises much more than it delivers. From the beginning onwards, reference is frequently made to "the All-Bond Portfolio" as a strategic investment approach that is preferable to the more-commonly advised stock-bond mix. But the book lacks detailed portfolio examples to explain and prove that claim. Indeed, there is no quantitative guidance except for five thinly-detailed case studies. Say I'm a retiree interested in how I would (or if I could!) create an all-bond portfolio to provide income of a specific amount for a specific time; there is no help here. Except for discussion of TIPS and I-Bonds as bond categories, the crucial issue of fixed-income returns versus inflation is not covered. TIPS protect against inflation, but how big a part of my all-bond portfolio must they be? One strongly-advocated strategy is buying and holding bonds to maturity to minimize market risk rather than trading in the secondary bond market.

It would not be sufficient for the Richelsons to wave off the above objections as details beyond the scope of the book, because the book proposes the all-bond portfolio as a strategic solution, not merely as a concept. (Even Burton Malkiel's famous "A Random Walk Down Wall Street", which has a far wider scope, gives specific percentages for types of bonds in its pie charts.) So, if you are looking at introductory bond-investment books, keep this one on your comparison list, but don't expect it to define your investment strategy.

The authors have written an excellent book on bonds which I highly recommend. The trouble with bonds is that their investment value can not be separated from the fate of the currency they are denominated in. If we buy one bond, we buy in fact a legal claim for the payment of $1000 at some future date. It is almost certain that these 1000 future Dollars will have a smaller purchasing power than the 1000 Dollars spent today. Nobody will invest into bonds if the money returned in the future is worth less than the money spent today to buy these bonds. To compensate for this loss of value due to inflation, bonds pay interest every year at a certain rate (depending on prevailing market rates and on the credit rating of the bond issuer). In times of declining inflation rates (as it happened during the past 25 years from 1982-2005), bonds are excellent investments due to the fact that the interest paid is well above the prevailing inflation rate. The big question is whether this benign inflation climate will continue to hold in the future. It is the only major weakness of the book under review that the authors do not address this question properly. Personally, I believe that the next 25 years will be very hostile to bond investments. That belief is based on the following observation. The total amount of all financial assets (bonds, stocks, derivatives etc) is growing at an exponential rate. These financial assets are claims on future products and services. As the present credit crisis shows, we already reached the stage where the real economy can not produce enough real goods and services in order to match the growth of financial assets. This crisis will only grow larger in the future, partly due to constraints on the availability of resources (peak oil for instance). To close the growing gap between the size of the financial world and the size of the real economy, inflation will be used in order to lower the value of the basic accounting unit, the Dollar. If this analysis is correct, then bonds will turn out to be very poor (not to say disastrous) investments in the future.

To sum up, this excellent book should have been written and published 25 years earlier, at the beginning of the great bond bull market which started in 1982. Investing into bonds is much more dangerous today than it was in 1982.

I have been an equity investor all my life and have pretty much bought the common wisdom that equities outperform bonds over the long term; that is until I came across Stan and Hildy Richelson's book: Bonds, the Unbeaten Path To Secure Investment Growth. Finally, someone made the case for buying bonds as the core investment strategy. It made me stop and ask harder questions about my real risk in holding such a large percentage of equities and by the way I don't think I ever timed a market top or bottom in my life. As I became more intrigued with their premise I was glad to see that the book also gave me access to getting a better grasp on the physics of how bonds actually work . I'm an independent sort of guy when it comes to investing and haven't done half bad but I think I've been shortchanging myself on the bond front. Kudos to the authors for pointing this out.

As a seasoned bond investor who has successfully followed many of the principles outlined in this book, I found the book to make a powerful case for avoiding the pitfalls of stock market investing altogether. The first few chapters, especially, highlight how investors have been lulled into expecting unrealistic long-term stock market returns and how adhering to market myths (e.g., stock market risk decreases over time) can lead to disasterous results, or at least loss of peace of mind. Despite what the financial press would have us believe about the imperatives of stock market investing, the Richelsons successfully refute that supposed requirement for achieving investing 'success.'

One of the big take-away messages from this book is that bond investing is not as exciting nor potentially quite as profitable as stock market investing, but the results can be much more predictable and investment losses can be minimized or virtually eliminated when very high quality bonds are held to maturity. Considering the record of bonds versus stocks over the past decade, the markets certainly have confirmed the authors' thesis.

Another big take-away message is that a person can learn to assemble and manage his/her own bond portfolio; it don't have to require professional help. The Richelsons do a great job pointing out that investing in bond funds is not the same as buy-and-hold bond investing; the financial industry does a good job of confusing people about this -- to their advantage.

I would have liked the book to give more treatment to the valuable role of stable value funds for 401(k)'s, 403(b)'s, etc. as alternatives to stock and bond funds; this would have saved people lots of pain in the current market turmoil. I would have also liked them to make their case better for investing in TIPS; after all, TIPS are essentially a bet against the Federal Reserve's ability to control inflation rates over at least several years. And the book does not make a big enough issue of how investing in TIPS entails reinvestment risk, unlike zero-coupon bonds. It would have also been helpful for the book to pay more attention to profiting from positive-sloping yield curves by 'riding down' the short end of the yield curve (e.g., selling Treasury bonds fairly close to their maturity dates, once their yields have dropped, and replacing them with higher-yielding longer-term issues); this is a common strategy used by professionals. Finally, I found some of the information in the book in need of updating (e.g., the ratings of municipal bond insurers and a discussion of their real significance now for bond investors).

Overall, this is an incredibly resourceful book once readers can let go of the myth that stocks are the only way to build wealth or to deal with inflation. In a sense, to follow the all-bond approach that the Richelsons suggest requires a strong sense of independence, an ability to see past conventional wisdom, and an ability to ignore much of the promotional chatter that lures people into stock investing.

I wrote this post a few years ago (for the first edition). I've came back to say that, with time passing, I'm even more grateful for what I learned from the Richelsons. Amidst the continued gyrations of the stock market, I feel calm and solid with the bond investment decisions we made. Our media makes us feel that the stock market is the only option. It's not. The stock market is a bad play if it's not what you are good at, or want to think about night and day. Life's too short. Bonds are not just about investment decisions but about enjoying life rather than being yanked around by the bi-polar DJIA.

The Richelsons are rare diamonds: smart, down to earth and ethical.
* * *
I have struggled for years to feel in control of my investments. In the first 20 pages of their book, not only do the Richelson's substantiate my nagging feelings of insecurity and frustration around stock market investing, but they provide a straightforward and achievable path out of the stock market and into something comprehendible, financially rewarding and secure - through bonds.

Over the years I have diligently read books about stocks and investing. I've consulted various advisors. I managed to find a good enough broker. Nonetheless, I always end up with an investment "plan" that feels shaky and confusing. It seems that everyone else out there "gets" the stock market, what's wrong with me?

Well, it turns out there's nothing wrong with me. It's not simply that I'm not a financial whiz (which I'm not, and will never be - just like so many other investors). It's that the stock market is not what it's cracked up to be by all those brokers, analysts and pundits. (And neither are most of those brokers, analysts and pundits what they're cracked up to be either.)

The Richelson's bring much needed clarity to fundamental investment issues. Best of all, after reading this book I know for the first time in my life that I am on the road to financial security and freedom. It's great to have discovered that there is an escape route from chronic financial mystification!

We expect more return from our personal investing than can be delivered. Because of this disconnect between expectations and reality, we are vulnerable to buying a bill of goods. We reject reality because reality is not to our liking.(Don't we listen to Warren Buffet?)

This book is about more than bonds. It is about reality.

It is about you and me and how we want to get by on the cheap. We want the good deal. We want the free lunch. We want the bargain. We want to get 2 and pay for 1. We want the out-sized return with no downside risk.

What Stan and Hildy Richelson are saying is what we do not want to hear: There are limits to what investing in any financial instrument can deliver. And, at the end of the day, bonds are not only cleaner than stocks but produce a more reliable, competitive return.

Look, what this book tells us is that some investments present a more honest picture of their upside and downside than others. Stan and Hildy believe bonds are safer, more transparent and compete favorably with other investments which are less transparent and reliable. That's all they're saying (which is a lot!). And I agree.

They are not saying bonds transcend the limits and inherent risks of investing. No. They are saying we have become conditioned to the lunacy of talk show pundits who dummy-down the complexities of navigating the treacherous waters of financial investing.

As much as broadening access to investment markets has been a boon to capitalists, it has not been a commensurate boon to naive 401(k) participants required to become sophisticated investors overnight in order to retire. Basically, broadening access has been a sham. It has been sold as a blessing to the producers of real value but really it has simply been a gimmick to substitute investing for saving. Popularizing stock investing and promoting individually directed investment choices (instead of offering guaranteed income from a pension) exploits workers. Freedom does not equal making your own investment choices when you are unsophisticated in sophisticated investments. Freedom does not equal transferring a known income in retirement to an unknown investment return.

Given the structural dysfunction in our system, this book adds a modicum of sanity. True, it does not relieve all the financial woe facing us today. However, it is a step in the right direction, it demythologizes investing. It presents a sane alternative for the few willing to transcend the noise and panic of the moment. I recommend it.

Having been in the financial field for almost 40 years, I am not a novice to investing and thought I possessed a clear understanding of the nuances of Bonds and the risk reward versus the Equity investments. However, this book has provided me with a new awareness that allows me to make much more informed choices after careful consideration of not only my goals and objectives, but also the true relationship of risk versus reward as it applies to Stocks versus Bonds.
It is clear from the outset of Chapter One the authors have intended this book to not only be a thorough explanation of Bonds but also to contribute to the well being of the investor through the use of the 100% "vanilla bond" strategy. They have debunked long held myths of investing and clearly explain that investing in Bonds is on a par with, and can even exceed, the return on investment versus Stocks over the short and long term.
A must read for investors at all economic levels.

" Hildy and Stan Richelson, principals of Scarsdale Investment Group, a successful bond advisory firm for individual investors, have produced a clearly written, comprehensive primer on bond investing: BONDS: The Unbeaten Path to Secure Investment Growth . Their book adheres to one of Warren Buffet's principal investment strategies: " when investing...do not lose money!!!". This excellent book does not deny the fact that SOME equity investments may produce better returns than bond investments. However , on the basis of " risk /reward " analysis, the book points out that one can get very decent returns on bonds if held to maturity without suffering the market risk to which equity investments are exposed. In fact , this book promotes the contrarian notion of a 100 percent bond portfolio. In his laudatory Forward to the book, John Brynjolfsson , Managing Director of Pimco, the extremely successful $600 Billion bond titan, supports the wisdom and logic of an all-bond portfolio.. If you buy this book and adhere to its principles, you will avoid the turbulence in the equity markets, sleep well at night, and provide for a secure retirement. This superb book is a MUST read ! "

I had high hopes when I purchased this book. It did not meet any of my expectations. There is a lot of technical talk about bonds and the bond market that most investors would find complex and/or boring. When it got down to the meat of the matter it fell way short. The subtitle of the book is "the unbeaten path to secure investment growth". I could find nothing in this book that remotely showed how an all bond portfolio grows over time. There was not one paragraph on any backtesting run on the recommended portfolios or any mention of after inflation rates of return that could be expected. The bond investment strategies mentioned are not original. Bond ladders and barbells have been around for decades if not longer. Moreover, like picking stocks, picking the right bonds requires just as much care and research. Yes, its true that in the end your money is returned to you if you invest in safe investment grade bonds,but your portflio will fluctuate in value just like a stock portfolio and your after tax/inflation return may actually lose you money.There is no free lunch in the bond market or any other financial investment for that matter. Particularly irritating to me was the section on when to buy and sell bonds. It is so complex only an experienced bond trader could effectively practice the strategies.