Investment Newsletter for the end of July, 2017

The market continued to be nice to you this month. I am likely going to rebalance again within the next few days or so. Selling various stock categories and buying more short-term bonds (in mutual fund format). The market has increased so much that the stock allocations are over target and fixed (bond) allocations are below target. As a result, you are exposed to more risk than we agreed. The rebalancing reduces your risk.

But why short-term bonds?

Bonds are very much not risk free. A bond has a coupon (your income amount), a maturity amount, a maturity date, and a price on the market. The income, maturity amounts, and dates are fixed. I will receive $500 per half year and a payoff of $15,000 on December 31, 2022. Notice that I did not mention interest rate. That rate is determined by the market. The bond issuer has no control over that number. The market also has complete control over the price of the bond.

For example, ignoring maturity amounts/dates, a bond paying $1,000 per year when general interest rates are 3% is going to be worth $33,333. $1,000 divided by $33,333 is 3%. You may have paid much more or much less than $33,333. Maybe you bought the bond when interest rates were at 5%. You paid, therefore, $20,000 ($1,000 divided by $20,000 is 5%). You lucky soul, you have a $13,333 profit from interest rate fluctuations. Of course, you could have bought the bond when interest rates were at 1%. You paid $100,000 for a bond now worth $33,333. I will pay for your next cocktail, you probably will need it.

My point here is that interest rates can cause drastic changes in bond prices. But not all bond prices. Remember In the last paragraph, I ignored maturity amounts/dates. That assumption is wrong. Maturity information matters. If the maturity amount is $10,000 and it pays off tomorrow, today’s price will be darn close to $10,000 regardless of interest rate. There will be almost no fluctuation. If it matures instead in ten years, the maturity information is of little importance. Only interest rate matters. Pricing is a discounted cash flow calculation for those who are interested. Distant cash flows matter less than closer flows.

I rebalance in and out of short term bonds so as to avoid the risk of bonds. Short term in my mind is no more than one to two years. If you want the risk, I would rather have the risk in stocks than bonds. The reward is greater. I rebalance to reduce risk.

An additional factor is the extraordinarily low interest rates right now. When interest rates go up, bond prices come down. Of course, the opposite is also true, when interest rates go down, bond prices go up. Obviously, we do not know the future of interest rates. But what do you think is more likely? Are rates likely to go up or likely to go down? Me too.



Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

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