From the May 2007 issue of Investment Advisor • Subscribe!

Not Your Grandfather's Bonds

As droves of Americans get ready to ride the retirement wave, the preservation of their principal and the creation of a safe and secure income stream is becoming more critical than ever before. One of the best tools available to advisors? We think it's that much-ignored asset that can give investors and their advisors the protection and level of customization they need to create truly meaningful fixed income strategies--bonds.

Bonds today are a fundamental as well as a tactical tool that advisors can use to customize the needs of any investor or portfolio. Beyond income planning advantages, attractive bond features include principal protection, equity linking, index linking, adjustable rates, annually increasing coupons, tax planning, estate planning using bonds with survivor options (death puts), and the increasingly sophisticated use of bond laddering. By utilizing individual bonds instead of mutual funds, advisors will not only be able to carefully tailor their bond portfolios to fit investors' needs, they'll get the added benefit of eliminating the 1.5% to 2% annual fund charges and expenses.

Why now? We think the timing couldn't be better. Simply put, we believe that Federal Reserve Chairman Ben Bernanke will have to lower interest rates, and from the look of things, the sooner, the better. When that happens, bond prices will go up and yields will go down. Why? The current chaos in the sup-prime market is not an isolated meltdown, nor can it be self-contained given the history of aggressive U.S. mortgage lending over the past decade. Coupled with the fairly acute falloff in housing starts and resales and slower U.S. growth than anyone projected, the Fed will have little choice but to lower rates or risk widespread defaults and foreclosures. That's hardly the legacy Chairman Bernanke will start building. Nor is it a reality that the U.S. banking industry, its borrowers, or the rest of country can sustain, given the slowing growth in real GDP.

While none of us has a crystal ball, what we do know is that falling rates present investors and their advisors with significant opportunities to tailor bond strategies to fit their needs. For savvy investors, taking advantage of changing Fed policy may be a matter of taking a hard look at U.S. Treasury notes again.

Of course, there are a host of bond opportunities that exist beyond the macro-economic shift in interest rate policy. Depending on your clients' goals, tax situations, and risk tolerances, you can choose from a universe of bonds. Within each broad bond market sector you will find the added benefit of diversification that comes from different issuers, credit ratings, coupon rates, maturities, and yields. Using these options, you can create the balance of risk and reward that fit your clients' needs best. In addition, bonds will allow you to meet a variety of planning goals like preserving principal, generating income, managing tax liabilities, and balancing the risks of equity investments. Since bonds have a specific maturity date, and because bond mutual funds don't, you'll be able to use bonds to ensure that the money will be there at a future date when investors--especially your retiring clients--need it most.

Ken Polokoff, Derrick Shea

Newbridge Financial Services

Fort Lauderdale, Florida

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