BY STEVEN LEWIS
The very first mention of James Bond came in a comic in 1953 written by Ian Fleming. It wasn’t too long after that comic book introduction that the character of James Bond expanded to the movie screen in 1962. The film “Mr. No” starred a young, strong, tall actor by the name of Sean Connery. The character of “Bond” caught on to such an extent that 21 films were produced. Amid these films, there would be five different actors who would succeed each other in portraying this famous James Bond character. This character has certainly brought endu ring excitement and adulation spanning over five decades.
The characteristics of James Bond moved me to look further into this Hollywood character. In what word, or words, would one use to describe this character? I turned to, yep, you guessed it, ChatGPT. Here are the words that popped up: charismatic, changing, skilled, resourceful, daring, fearless, stylish, sophisticated, loyal and enigmatic…. just to name a few.
Bond investing is clearly the opposite of these adjectives describing James Bond. However, there are a few in the list above that do ring true: Loyal (they will always be available), fearless (they’ve survived the test of time’s ups and downs, and sometimes enigmatic (bonds can be complicated to understand).
Let’s start with duration (loyal). The first recorded bond in history dates back to 2400 B.C. in Mesopotamia, now present-day Iraq. This bond guaranteed the payment of grain by the principal and the surety bond guaranteed reimbursement if the principal failed to make payment.
In 1693, a sovereign bond was created by the Kingdom of England (now known as the UK) to fund the war with France. Less than one hundred years later, the United States issued a sovereign treasury bond to finance the American Revolutionary War.
On February 1, 1935, President Franklin D. Roosevelt signed legislation that allowed the U.S. Department of the Treasury to sell a new type of security, the U.S. Savings Bond. One month later, the first Series A Savings Bond was issued.
To be precise, when using the word “duration” regarding bonds, one is not speaking about the history of the investment but, rather, how long the investor intends to hold onto the bond. One year, five years or 10+ years? The sole purpose of the bond is to retain the bond until its maturity date, and in return the investor receives what is called a dividend (or interest). If the investor holds onto the bond through its duration (expiration date), the investor receives their stated value back. Investors call this “yield-to-maturity” (YTM).
Bonds are either classified as “non-callable” or “callable.” What does that mean? It means the issuer (i.e., a corporation, municipality, and/or the government) cannot randomly terminate your bond (non-callable), or they can randomly terminate the bond (callable). What are the advantages of one or the other? Non-callable bonds are the most common and are very precise and exact as to their announced coupon and maturity date. Callable bonds, due to the possibility of the bond being terminated (although rare), can create some risk as this can compromise your intended or stated yield. However, callable bonds, in most cases, offer a higher (sometimes substantially higher) stated coupon (i.e., dividend), which is what drives many to these types of bonds. The higher the risk of a bond, the more potential there is for a better yield.
What is the main quality of bonds that makes them “fearless”? Let’s find out. If you invest in bonds, you probably do so for the interest income, also known as coupon payments (dividends/interest). You may expect the interest payments to continue until the bond reaches its maturity date. But if the bond is callable, those coupon payments could end sooner than you expected.
Now, for the sake of time, let’s get down to the basics and come to an understanding of how bonds can work in a portfolio.
Why would I want to consider a bond? Four simple reasons:
Diversification: This term is very loosely used in asset management because most advisors and consultants cannot legitimately define what the term means. But in the case of bonds, they are a great place to hold cash that is guaranteed to provide a forward path for the investment. Meaning, whether I desire to retain or spend the semi-annual paying dividend, my yield-to-maturity (YTM) can be pleasing to the eye.
Income Generation: So, maybe you want to spend your dividend. Great, because you’re in the right place. Here is a cool little fact: If you purchased a municipal bond from or within the state you reside, then you’re looking at a tax-free income (assuming your adjusted gross income is below the thresholds). Another neat thing is that if you’re considering an annuity for income, a bond may be a better choice. If you are okay with a 5% dividend annual payout, when the bond matures, your principle is retained. Whereas, with the annuity, (though may pay out for your life), your principle is compromised. In many cases, upon death, there will be nothing going to the beneficiaries.
Capital Preservation: As stated previously, if held to the maturity date, your principle is preserved. This preservation of capital is valuable for risk management.
Hedge against economic slowdowns: What if you held bonds during 2022? Nothing. What was concerning during that year is that many financial pundits were stating, “This is the worst time to buy bonds.” Wrong! To be frank, these pundits were really attempting to get investors to stay in the market to get paid. (I am being facetious). Not to be redundant, but if you retain your bond to maturity, you’re going to be fine. This specific reason clearly is fearless.
Finally, enigmatic. Bonds can be difficult to wrap our minds around. So, what are they? Well, one is buying debt on behalf of the issuer (i.e., a company, government or municipality) to raise money to spend money. When investors purchase stocks to make money, this dilutes the value of a company’s investments. Issuing bonds to this same investor can offset the outcome in the long run. Do not confuse this activity with a bond referendum on a ballot initiative. This is just a sexy way of increasing the residents’ property taxes to repay the debt on bonds when they are approved in a referendum.
In closing, given that the investment landscape is multi-faceted, bonds are an effective and fairly secure means to preserve, provide (income) and to push forward hard-earned dollars.
For further information about this type of investment, I would recommend you seek an individual licensed in securities and who utilizes such investments for you to obtain a clear and most likely objective perspective.
Investment Advisory services offered through Lewis and Associates Capital Advisors, LLC
This article is for informational purposes only.
