BOOK REVIEW: Bonds - The Unbeaten Path to Secure Investment Growth
by Hildy Richelson and Stan Richelson
In Bonds: The Unbeaten Path to Secure Investment Growth, authors Hildy and Stan Richelson make a strong case that an investment portfolio made up entirely of bonds can deliver superior risk-adjusted returns when compared to a typical portfolio made up mostly of common stocks. The Richelsons, a husband and wife team, have been preaching this gospel for many years. Hildy Richelson is President of Scarsdale Investment Group, Ltd., a registered investment adviser. Stan Richelson, formerly a Wall Street lawyer, is now a NAPFA-registered, fee-only financial adviser and life planning coach.
The book begins by trying to make the case that when you take taxes, transaction fees and poor timing decisions into account, bonds have clearly been a better investment than stocks. It argues that stock investors have to get two things right: when to buy and when to sell. With (short- to medium-maturity) bonds, investors need only make one correct decision: when to buy. Assuming that the bond does not default, their investment will be returned to them when the bond matures.
In my mind, the first part of the argument is not supported by the facts. The data from Ibbotson Associates, which is considered an expert on historical investment returns, clearly shows that stocks have outperformed bonds over the long-run. This is true, I believe, even after taxes are taken into account. The book skirts this fact, while making its arguments in favor of bonds. However, it is also true that the volatility of returns with stocks has been higher than bonds. Stocks have delivered superior returns, but also carry greater risk.
Nevertheless, many of the points made by the Richelsons in favor of bond investing are well taken. Although stocks have outperformed bonds over the long haul, there have been extended periods of time when bonds have delivered superior returns. Given the recent turmoil in the financial markets and the prospect of a weakening economy, perhaps now is one of those times.
Furthermore, bonds have indeed delivered more predictable returns with less downside risk. As a result, bonds have the potential at least to reduce investors' anxiety. For many people, that is a feature well worth considering, even at a potential cost of moderately lower investment returns.
Of course, as the Richelsons point out, there are risks associated with investing in bonds. Interest rate risk could reduce the value of your bonds, if interest rates rise. Those intending to hold the bonds to maturity need not worry about this, but anyone buying a bond could suffer a loss, if they have to sell before the bond matures, especially if the maturity of the bond is 10 years or greater.
Default risk is a concern of all investors. As we have learned over the past year, even those bonds carrying the highest credit ratings can suffer if the market perceives a higher risk of default. Given the complexities of the current environment, the risk of default cannot be taken lightly. The book, which was published in its second edition in 2007 before the height of the sub-prime mortgage mess and the associated credit contraction, more or less assumes that anything rated AA and above is riskless. Bond investors now recognize that nothing can be taken for granted. This makes the construction of a bond portfolio more challenging, but still doable. Bonds are clearly riskier today, but stocks are even more risky.
Liquidity risk is also evident in bond investing. Here, the Richelson's correctly point out that as long as investors intend to hold investments to maturity, they only need to concern themselves with liquidity on the purchase only. More importantly, since the vast majority of the bonds are traded over-the-counter, it is more difficult for investors to buy bonds than stocks. Still, the Richelsons offer a lot of practical advice for bond buyers from purchasing bonds online to choosing a broker.
After building a case for investing in bonds, the book provides some important basic information about all of the various categories of bonds, including U.S. Treasury securities, U.S. savings bonds, U.S. agency bonds, mortgage-backed securities, municipal bonds, corporate bonds and bond look-alikes, such as CDs. In my mind, it really shines in its descriptions of and insights into municipal bonds. This is probably not surprising since municipal bonds have long been a primary area of focus for individual investors and the Richelson's have advised bond buyers for many years. Descriptions of other categories mostly cover only the basics, so it is evident that potential bond investors will need to do more homework and many will probably want to work with a financial adviser in order to execute a bond strategy successfully.
The book also offers a lot of practical advice on investing in bond mutual funds. On balance, the Richelsons are not proponents of investing in bond funds, because these funds have no set maturity and thus subject the investor to market risk. In some areas, however, such as high yield bonds, which carry greater default risk, they believe that buying a bond fund makes more sense, because it provides greater diversification to the investor.
Although I found the book choppy at times and a slow read in spots, on balance it is well written. Its description of some of the history surrounding bond investments is quite interesting. As noted above, the book especially shines in its reviews of municipal bonds and the bond buying process.
As a result, I believe that Bonds: The Unbeaten Path to Secure Investment Growth should be required reading for anyone looking to devote more of their portfolios to fixed income investments. The book may not tell you everything that you need to know about bond investing, but it does offer some important insights and will help to expand your horizons. It should also serve as a valuable reference as you broaden your participation in the fixed income sector.
Stephen P. Percoco is the editor and publisher of Income Builder, a newsletter for individual investors.
Stephen P. Percoco
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