Dear Mr. Berko:
I have been reading your column for more than 25 years. Back in February, I emailed you that at age 72, I had $517,000 in my company retirement plan, which I had to roll over into an individual retirement account. You recommended that I talk to a professional money manager, which I did, and she recommended a portfolio of dividend stocks that would give me a yield of 4.42 percent, or $22,000 after her annual 1 percent fees. I was also talking with a stockbroker friend I’ve known for 18 years. He recommended a portfolio of various corporate bonds that would have about the same yield. I decided to go with him because bonds are less risky than stocks and I know him pretty well. When I told the money manager of my decision, she was very nice and suggested that I tell my broker to put just half the money in bonds and put half in the dividend stocks she had recommended. My broker friend disagreed and put 100 percent in a diversified portfolio of 52 individual bonds. (The list is enclosed.) Today I’m down more than $48,000. I’m worried to death, but my broker friend said, “Don’t worry, because the income is safe.” My wife, who wanted the money manager, insisted that I write to you again for help. We need that $22,000 in income to live on, and I’m worried about our future.
H.S., Erie, Pa.
The nicest thing about the future is that it always starts tomorrow. Seeing as you’ve been reading my column all these years, you know I have been telling readers since January that bonds are a fool’s luxury. But once your horses have left the barn, it’s tough to get them back. You’ve got an idiot for a stockbroker. And that broker has a fool for a client, one who’s lucky to have a smart lady for a wife. Holy cow, 52 different odd lot issues of corporate bonds probably earned a $20,000 commission for that brokster. When he purchased your bond portfolio, 10-year Treasury notes were yielding 1.6 percent. Today they’re yielding 2.82 percent, while mortgage rates are up by more than 125 basis points. And most professionals believe that as the Federal Reserve pulls back its bond market support, the 10-year Treasury interest rate could exceed 4 percent, but that won’t happen till next year. Too bad it’s illegal to shoot broksters!
You have a choice: Stay the course and get murdered, or perk up your courage now and rescue yourself. Losses in most junk-quality long-term bonds have exceeded 15 percent, and losses in most modest-quality long-term bonds are as high as 10 percent. The bond sell-off in April, May and June provided a stark preview of what will happen as rates rise again. And they will, so plan on it. Last June and July, investors took more than $100 billion from fixed-income bond funds, and they’ll be taking out even more.
The money manager you spoke to in February will advise you without a fee. Be comfortable calling her, because we discussed a repair strategy that should ease your worries. She’ll suggest you sell your 41 individual long bonds and keep your 11 short bonds, which represent about 18 percent of your portfolio. They are worth $93,000, have a “duration” of eight years and provide $2,600 in interest income. The income is safe, and each of those 11 bonds will come due at full face value ($105,000) by 2021. She’ll suggest you invest (using your local broker friend) $276,000 of the $376,000 in sales proceeds in a portfolio of dividend growth issues yielding an average of 5.1 percent, or $14,000. She believes that their dividends will increase annually. Then she’ll have you put the remaining $100,000 in Duke Energy’s money market mutual fund at 1.41 percent and keep it there. So far, this will give you $18,000 in annual income, but you’re $4,000 short of the $22,000 you need. So she’ll suggest a reverse-annuity mortgage (RAM) on the home you bragged about in your previous email. The RAM will smartly pay you $850 a month, or $10,000 a year, in guaranteed, no-risk, tax-free income. You’ll now be marvelously ahead of the game.