Broker Check

Monday Money Report

| March 06, 2023

Last week the markets were up, although not enough for a positive February.  Year to date, we are still improving, with the S&P up over 5%. We expect continued volatility, or swings in the market, for at least the first half of this year. Remember that your investments are measured in the number of shares you own, not what you can sell those shares for at this moment in time.

As interest rates continue to rise, many investors are looking at bonds again as a source of income. A bond is a debt instrument. Instead of selling more shares, or borrowing from a bank, publicly-traded companies issue bonds.  State or local governments or their agencies issue municipal bonds. Bonds are typically issued in $1,000 increments for a set period of time. Most pay a fixed rate of interest, which is why we refer to bonds as “fixed income.”

When retirements were not as long as they are today, many retirees held most of their investments in bonds, so they were living on a “fixed income” as they received interest payments from the bonds.

Bonds are seen as less risky than stocks, for several reasons. First, while the current value of a bond may fluctuate some, it’s generally not as big of a swing as stocks can be. Second, if you own individual bonds, and hold them to maturity, you receive your original investment, or what you loaned the company or government, back when the bond matures. If the company you loaned the money to goes through bankruptcy, bond holders are paid before stock holders, providing another layer of protection.

You can begin investing in bonds in a bond mutual fund.  For investors with a bit more money, you may want to consider a bond ladder.  For a ten-year ladder, you would invest $10,000 in bonds that mature in one year, $10,000 in bonds that mature in two years, and so on. In a year, when the first set of bonds mature, you invest that money in new 10-year bonds.

The shorter the duration of the bond, or the sooner the bond matures, the less the price will fluctuate. By having a series of bonds of different maturities, you can further reduce your short-term risk if you need to liquidate some assets. It also allows you to take advantage of rising interest rates, as you buy new bonds with a higher coupon, or interest payment.

Buying corporate bonds versus municipal bonds will impact your taxes, too.  Bonds issued by a municipality are not subject to federal income tax for the most part.  There are some things, including the alternative minimum tax and social security taxation, that are impacted by municipal bond interest income. But the interest is not directly subject to federal tax. If you hold bonds issued by a government in the state you live in, the state does not tax that interest income.

Because of this, municipal bonds pay less interest than corporate bonds. We calculate a tax-equivalent yield to see which is the better deal. The tax-equivalent yield is the interest rate the bond would need to pay to have the same net, or after-tax, income if the interest was subject to income tax.

It’s worth a conversation with your advisor and your CPA to plan location of assets, or what type of account you want to hold which type of investments.  Being tax-savvy can have a big impact at the end of the day, because it’s not what you earn, it’s what you keep.

Your action item this week is to consider an energy audit.  BGE offers audits and then rebates on recommended work.  There are also federal tax credits available.   

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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. 

The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.