Should You Buy Bonds Now… Or Wait?

Here’s an income reality slap for all us gray hairs.

Back in July of 1991 (my first year as a broker), the 10-year Treasury was yielding more than 8%. It’s 3% now.

Back then, I was recommending Maryland tax-free bonds with coupons of as much as 7% for all my retired clients.

A 7% tax-free bond back then was the equivalent of 10% taxable in the 31% tax bracket. Most of my folks were in the 28% or 31% brackets.

You had to earn 10% in stocks or other taxable investments after taxes to equal the money you’d put in your pocket from these bonds. That was – and still is – a lot of money!

At the time, I was doing 30 to 40 workshops per year with retirees at all kinds of retirement venues, from retirement association lunches to senior center presentations. At every one, I would talk about how safe these bonds were (there had never been a default in Maryland tax-free bonds) and how much real money the bonds would put in their pockets. I’d also talk about how the bonds fit retirees’ risk profiles perfectly and how the bonds’ safety made them a good buy even if someone wasn’t in the higher tax brackets.

And the response from 98% of all the people I spoke to in the 10 years I was doing these workshops was a resounding, “I’m waiting for rates to go higher.”

Almost everyone at the time sat on the sidelines because they were convinced we were going back to the higher rates we saw in the ’80s. And all of them, as we now know, were dead wrong. Market timers – which is what rate and market guessers are – are always wrong.

And nothing has changed.

The response I hear now about bonds is the same as it was back in the ’90s: “Rates are going to move up, and I’m sitting on my cash waiting for higher payouts.”

Folks, I don’t know where payouts are going, but I do know that no one (the so-called experts included) has been right about rates or the bond market for the past 10 years. Not even close.

I also know that sitting on too much cash is a guaranteed losing proposition. Market guessing and sitting on the sidelines has never worked.

Take a look at how much you’re losing on your cash after taxes and inflation. Yes, even the low inflation rates we have had for years have been slowly sucking the life out of your nest egg.

And taxes, well, we all know what they do for us.

Are rates ever going back to double digits or even to the 8% returns of the early ’90s? I doubt it, but I don’t know. But in my experience, waiting for potentially higher returns has never equaled the real returns you would have realized if you had put your money to work earlier.

Get a better crystal ball or put your money to work! The sidelines are “nowheresville.”

Good investing,

Steve