October 01, 2023
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Today’s Suze School is a lesson about the different types of bonds you can invest in and which ones make the most sense for your financial future.
Suze: October 1st 2023. Welcome everybody to the Women and Money podcast. As well as everybody smart enough to listen, Suze O here and a few things before we have Suze school today, which will be on Bonds. So get out your little Suze notebooks there. Number one, I just want to send my condolences to Dianne Feinstein's family.
Suze: Diane passed away a few days ago. I just want to say what an incredibly strong, courageous and brilliant woman she was, oh my God. Remember I spent most of my life in California. She was the mayor when I was there. I'll never forget November 27th, 1978
Suze: when she stepped in to be mayor. Because why Mayor Mosconi and Harvey Milk were assassinated. And that was just an incredible time for her life as well as everybody that lived in San Francisco. And I watched her come into her power and oh my God,
Suze: we will miss you very, very much, my friend. Also, I just want to quickly say something here as well since I'm talking about
Suze: people passing. Diane passing. Is that yes, yes, Jimmy Buffett. I know passed away a little bit ago. And you're wondering why KT and I haven't talked about it to tell you the truth. KT can't get through it without crying. We tried.
Suze: She's, she's not ready to talk about it yet and the loss for us is really on me. You can't even measure the loss for us. So we're not ready. KT especially isn't ready to talk about it yet. But she will one day. His daughter, Savannah will be coming to the island shortly and we will have the great honor of helping her get through this hard time
Suze: and possibly spreading his ashes wherever he wanted them to be spread some of them anyway. But
Suze: it was a hard one. It was a really, really hard one and we knew that he was gonna be passing shortly. We had talked to him via Savannah because he had lost his voice at this time through a facetime call that he had wanted Savannah to make where essentially we said goodbye.
Suze: And the message to us was you are to go to Europe. You are to have a great time and you are to have KT because I don't really drink, have KT drink a whole bottle of wine just for me.
Suze: You know, we just didn't want to leave, but we were told by him via Savannah that we should. So maybe that's enough and we won't talk about it anymore again. But it's a loss. That's beyond what I can even talk about. All right.
Suze: So that's out of the way there because a lot of you have been wondering about it next is
Suze: I cannot believe that they actually got their act together and they did a proposal. It was passed and the government was not shut down. Can somebody just ask them to stop waiting for the last moment? Because it is just so crazy that all of us should be wondering what's gonna happen, what's gonna happen just because they push it till the very last moment.
Suze: But with that said, one more little announcement, Alliant has raised their interest rate on their 12 month certificate of deposit to 5.25%.
Suze: So for those of you who have accounts at Alliant, you might want to take advantage of that up to you. Also, I have to say we have had a tremendous response to the ultimate opportunity savings account for kids and teens. So if you are interested, if you are a parent and you want your kids to start learning how to save money and get the biggest bang for their buck,
Suze: all you have to do is go to my alliant dot com and you will see three things there if you don't already have an ultimate opportunity, savings account for yourself. As a parent, you need to have one first. That's where you put in $100 a month,
Suze: every month for 12 months. In the 12th month afterwards, you will get $100 plus currently 3.10%. When you figure that out altogether, it's a double digit return on your money. And if you have one, then your kid could have one where they put in $100 a month and after 12 months they get $100. So, so many of you had asked for that because it's such an incredible deal.
Suze: Now, it's available for you. So check it out at my alliant dot com. Now, remember everybody, this opportunity is only good till December 31st of this year. So you best get on it right now.
Suze: Ok. Are we ready to start Suze School? I hope so.
Suze: Listen to me, everybody. There are a few topics that have confused many of you. One happens to be an inherited retirement account and how does it really work? Ok. I get that because it's complicated. The five year rule for Roth retirement accounts, I get it because it's complicated.
Suze: But the other one that has confused you are bonds and the 30 year bond versus a s ix month bond versus an ETF and a bond fund versus, you know, individual bond. You're so confused about it. So I told you I would do a brief primer on bonds today. I do just want to talk about something that I haven't talked about in terms of bonds.
Suze: And that happens to be that
Suze: there are four major types of bonds. They're more than that. But these are the four types of bonds that most people know about corporate bonds. And a corporate bond is your Suze notebook out? Ok. And a corporate bond is a bond that is issued by a corporation to fund their business. And corporate bonds usually pay a higher interest rate
Suze: then possibly a treasury bond. Why is that? Because there's greater risk in a corporate bond not paying your money back to you than a treasury bill bond or no. So just remember that and corporate bonds can become even more and more dangerous right now because interest rates are high
Suze: and as their loans that they have out
Suze: to fund their businesses come due and now they have to refinance them at a possible higher interest rate than what they were at. The corporations can get in trouble. If you also look at the number of bankruptcies happening now within the corporate world,
Suze: they are on the rise. So if you're gonna do corporate bonds, you best know what you are doing. The next category of bonds are municipal bonds and municipal bonds are generally federally tax free always, but they're also state tax free if you happen to buy a municipal bond issued by the state that you live in,
Suze: if you happen to live in a state like Florida where there are no state income taxes. I for instance, could buy a municipal bond from any state and the interest rate would be federally and state tax free.
Suze: However, if I lived in the state of California, which has a very high state income tax and I happened to buy a New York municipal bomb. I would still have it federally tax free, but I would owe taxes to the state of California on it.
Suze: Municipal bonds are issued to fund state and local government things that they do such as schools, road hospitals, toll bridges, things like that.
Suze: Now, many of you for some reason have been writing me about, I can get a utility municipal bond for, I forget what percent you say. And da da da da do you, what do you think I should do that? Whatever. Listen,
Suze: you really have to know what you're doing when it comes to municipal bonds. You have to know that the state that is issuing that municipal bond
Suze: has a great financial outlook for themselves. Not many states do, you best be careful with it? So, I don't have a problem with you doing municipal bonds,
Suze: but you need to be in a high income tax bracket to make them really worth your while.
Suze: And again, you better know a lot about the municipality that you are purchasing that municipal bond from for me. And I'm in a really high tax bracket.
Suze: I bought a whole lot of municipal bonds all the way back in 2006 when the actual yield on them was 6% back then five and 6%. And I still have those bonds.
Suze: But I also did a lot of research on the municipality before I purchased it. So just be careful interest rates on municipal bonds today are not that high. So I know a lot of people say, hey, you can get 3.5% on a municipal bond tax free and maybe that's equivalent to 6% or 7% taxable.
Suze: I don't know. I'd rather know that I had a bond that was backed by the full faith and credit of the US government
Suze: then take a chance on something that I didn't know a lot about. That's just my comment on that. But if you're knowledgeable, if you have somebody who's knowledgeable, whatever, ok. But now you know about municipal bonds and my opinion on them, the next type of bonds are government bonds and those bonds are issued to fund government spending
Suze: the next type and the type that we are going to focus on today, which are really the only kind of bonds that I want you all to be buying are treasuries and treasuries are used to fund the national debt. And as I just said, they are considered the safest of all bonds because they are backed by the full faith and credit of the United States government. However,
Suze: we a while ago weren't quite sure about that because of the state of our government and their economic situation. But given, compared to all the other bonds, they are still the safest. Now,
Suze: I just said we're gonna concentrate on in this Suze School on treasuries. But I did a master class on Treasury Bills Bonds and Notes on May 29th 2022.
Suze: So if you don't know about them, I want you to go back and listen to that podcast. I did another podcast on 30 year Treasury Bonds just recently on August 6th, 2023. So for those of you who don't know about them, go back and listen to those two podcasts because I'm not gonna be repeating things that I've already done.
Suze: The big question at hand is what do I want you to be doing with your money as you know, this is a podcast that mainly caters to those that are 50, 60, 70, 80 years of age. And normally one would say, oh, as you get older, you should have more of your money conservative and in bonds.
Suze: And I just wanna say that I don't believe in that. You don't invest in my opinion according to age you invest according to what's happening in the economy. So what is happening in the economy
Suze: as days go by? Like I said a little bit ago about corporations,
Suze: we're seeing more and more people claim bankruptcy, more and more corporations going out of business. We're seeing the real estate market starting to change. We're seeing that as of today, you have so many people whose student loans happen to be due and payable now and half of them aren't going to pay it. They're just decided they're just not going to do it.
Suze: And we have an environment where the market goes up, the market goes down and where many, many pension funds rather than investing in the market, they've decided why not just do something that's safe and secure. And let's see where the economy goes. So many of them are putting their money into bonds, probably treasury bonds.
Suze: Now, I've been telling all of you since we don't know for sure what's gonna happen. Although if I were to project what I think it's going to happen is I do think Jay Powell, chairman of the Fed might raise interest rates again one more time, another quarter of a percent, but that's not gonna do anything one way or the other truthfully.
Suze: And that over time, somewhere in 2024 because of what's happening in the economy and the economy slowing down. And possibly, I still think we have a possibility of recession in 2024. That's just my belief and all we may then see interest rates slowly, slowly start to come down,
Suze: however, we don't know for sure.
Suze: So what I have been doing with my own money. And I am asking you to possibly think about doing this with a portion of your money as well. You have to decide what percentage that is. Is I still think it is wise to be investing in the three and six month treasury bill,
Suze: which is short term treasury bill or CD if the CD is paying as much as the treasury bills.
Suze: So a three and six month treasury bill, so that every three or six months your money comes due. And then at that time, you're able to see what are the two year notes paying the 10 year notes pay the 20 year bond paying, the 30 year bond paying when it comes to treasuries
Suze: As I am recording this, the rates on a three month treasury is about 5.471%. 6 month is at 5.5%. 2 year is at about 5%. 5 year is at 4.6%. The 10 year is at 4.5%
Suze: and the 30 year now is at 4.7%. When I started talking about starting to go a little bit long term and dollar cost average into a 30 year treasury bond or a 10 year treasury note. If you feel more comfortable with that.
Suze: The reason that I wanted you to do that is I have a belief that it is probable that the 10 year treasury note and the 30 year treasury bond or 20 year will go to about 5% maybe even a little bit higher.
Suze: But because I don't know for sure,
Suze: I started too and this is what I meant by dollar cost averaging because that seems to have confused you is that to put small amounts of money into a 30 year bond.
Suze: Then as I saw interest rates go up a little bit more, I put even more into a 30 year bond but still a very relatively small amount given that I think they're going to 5% but I don't know for sure.
Suze: Then they went up again to like 4.5%. And I put in again, a small amount of money
Suze: at 4.7%. I put in again a small amount of money and I'll keep doing that
Suze: until it gets to about 5% or more. And maybe at that time I'll start putting in larger sums of money just depends what's happening in the economy at the same time. However, and I'm calling this the dumbbell approach and not that you're a dumbbell, but you know, you have weights on both sides and all of a dumbbell when you're lifting weights, larger amounts of money. For me
Suze: that I want to take advantage of are in three and six month treasury bills and, or a treasury money market account where I am getting the interest rates of about combined with everything about five and a quarter, 5.5%.
Suze: So I'm getting higher rates on short term as they mature. I'm then looking at what's happening and maybe that money goes back into another three month t bill. Or if interest rates are higher, maybe I'll take a little bit of that money and put it in the 30 year bond,
Suze: but little by little tiny amounts, if you have $10,000 to invest, I would be putting maybe 8000 of my $10,000 into three and six months.
Suze: And then you would put maybe $1000 in a 10 year note and another $1000 in a 30 year note or whatever combination of money amounts of money you feel comfortable with, but the majority of your money should be short term.
Suze: And then as they mature, I would look and see what the 10 year or the 20 or the 30 year bond is paying and I maybe would take 1000 or 2000 of that and put it into the 30 the rest into another three or six month. Are you getting the idea, small amounts of money? Because this is not going to happen overnight.
Suze: It's not going to be all of a sudden that interest rates are gonna skyrocket or the interest rates are gonna come down. It's going to be a long process. Again, I am not doing this to hold the long term maturities until they mature because what you need to understand is when interest rates go up, the value of bonds go down
Suze: and when interest rates go down, the value of bonds go up. So over time, if interest rates do start to go down,
Suze: and I feel like they have to start to go down to help corporations that need to refinance some of their debt and they can't do it at these high interest rates. And if they're stuck at these high interest rates, they may go bankrupt.
Suze: And if they go bankrupt or they have to close, that means people are out of jobs, which means less people are paying into the tax structure, which then affects the economy because less people have money to spend and then they have to adjust interest rates because of that as well. It's not all about inflation, believe it or not.
Suze: So that's the strategy. I hope you understand that. Why do I want you to do individual bonds versus an exchange traded fund and or a mutual fund,
Suze: individual bonds have a maturity date, you usually buy a bond at par, which is $1000. If you're buying it when it is first issued, when it matures, it matures at $1000. But between the time that you bought it and the time it matures it goes up and down in value according to what's happening with interest rates.
Suze: So if you want to sell that bond on the secondary market, you might get more than $1000 or you might get less than $1000 depending on interest rates. But if you hold it to maturity, you will get $1000 per bond back
Suze: backed by the full faith and credit of the US government. When you buy a bond fund, a bond fund is made up of many individual bonds,
Suze: but a bond fund, you own a share of that bond fund and it does not have a maturity date.
Suze: So it goes up and down in value based on what interest rates are doing, but you are not
Suze: guaranteed to get your money back at a specific date. So many of you saw that happen in the long term bond funds that you had when interest rates started to go up, you watched the net asset value, that's what it's called, but it is priced at per share. The net asset value you saw it started to go down
Suze: and many of you were down 40%
Suze: but you couldn't say, oh, it's ok. I'm still getting my interest rate and I know in a few years I'll get back what I invested. You can't do that in an exchange traded fund or a bond fund. Also, you have to remember that in an individual bond, the interest rate is fixed for the life of the bond
Suze: in a bond mutual fund or ETF it is not fixed. So if you get in at a great rate, a great interest rate and interest rates do start to go down, then your interest rate will also start to go down in your bond fund or ETF. So I like individual bonds better. Number one, number two,
Suze: all bond funds usually have an expense ratio and that expense ratio goes to the portfolio manager who is buying and selling the bonds within that portfolio that comes off of your return. When you buy an individual bond, there is no expense ratio.
Suze: So for those of you writing me saying, well, should I buy TLT or should I buy this ETF or whatever I am talking about individual bonds, then you write me and you say, I don't know how to do it. Well, then just open up an account at any brokerage firm
Suze: and have them help you do it.
Suze: You don't have to always do everything on your own. Sometimes I know it's hard for you. So if you don't understand it and you don't know what to do, simply go to fidelity e trade, whatever it may be.
Suze: Get yourself somebody on the desk there when you call in, when you open up your account and they will help you do it. The next thing is what you need to know. A lot of you are really confused when it comes to you bought a bond on the secondary market
Suze: and you look at the coupon and it's only paying you 2.5% and you think that you absolutely made a mistake
Suze: on your investment. No, because remember when a bond is issued, it's issued at par,
Suze: the interest rate is always fixed. It's not like a stock where the dividend goes up or down. So if you bought a bond at $1000 a bond and it paid you 2% that would be $20 a year
Suze: when interest rates go up, the value of the bond has to go down because who would buy that bond from you to only get 2% or $20 a year
Suze: when a new bond maybe is paying you 4% or $40 a year. So the value has to go down and let's say it goes down to $500
Suze: right? It's still only paying you $20 a year,
Suze: but $20 a year
Suze: on $500 is 4%.
Suze: Did that make sense to you? So, even though your certificate or your paper may say you just bought a bond, but it's only paying you 2.3% or 3%.
Suze: Look at what that amount of money is in comparison to the amount of money that you paid for the bond.
Suze: I hope that made sense to you because a lot of you are so upset thinking that you bought the wrong bond.
Suze: But if you only paid $500 for that bond, it's paying $20 a year, that's a 4% return on your money. Plus
Suze: when the bond matures, you will get also $1000 a bond.
Suze: So all of that has to be taken into consideration. What will you get if you hold it till maturity?
Suze: And that's called the yield to maturity. And those are the things that you have to look at and talk to your finance person about when you are buying a bond on the secondary market. Now listen to me, everybody. The numbers that I just used in these examples are just for illustration purposes. It doesn't work exactly like that, but I just want you to understand the concept. OK?
Suze: Now, I know that a lot of you want to buy the bond when they're first issued, but sometimes that can be a little complicated. I don't have a problem on any level buying my bonds on a secondary market with my financial advisor.
Suze: So I hope that put that to rest a little bit so that a lot of you can stop worrying about, oh my God, you bought the wrong bond. Always figure out what your true yield is based on what you paid for the bond. Just that simple.
Suze: So I hope this cleared up certain things about why I want you to do individual bonds over bond funds or ETF s why you should not be freaking out if you bought a bond on the secondary market. And all of a sudden you see their coupon is only 2.5% or whatever.
Suze: Just remember what you paid for the bond and figure out what your true yield is. And if you intend to keep the bond until it matures, make sure you know what your yield to maturity will be. All right, everybody.
Suze: So I think that does it. I hope that made it clear what I want you to do, why I want you to do it. But small amounts of money for the 30 year or the 20 year. A lot of people, I just want to say, feel more comfortable doing the 10 year rather than the 30
Suze: because the 10 year has less risk in it because it's a shorter term and it will pay you essentially the same amount of money as the 30 year bond. So a lot of people think it's not worth going up for 30 years. Remember the longer the maturities when interest rates go down, the more the longer maturities go up in value. So you just have to weigh that
Suze: and decide what maturity are you comfortable with? All right. There you go. So until Thursday when Miss Travis joins us again, there's really only one thing that I want you to say every single day and it goes like this
Suze: today, wherever I go, I will create a more joyful, peaceful and loving world. And if you do that, I promise you you will be unstoppable.
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