Older investors often shy away from long duration fixed income because of the maturity dates relative to their age. It may feel counterintuitive to buy a twenty or thirty year bond at the age of 60, 70, 80, or older.
But, that counterintuitive feeling exposes a contradiction. Most older individuals cherish safety and stability in their lives. We are often encouraged to buy into “stocks for the long run,” yet unlike bonds, stocks offer no definitive return on or of investment. On the opposite end of the investment spectrum, in order to mitigate stock risk many older Americans will allocate large sums of money to low yielding savings accounts or bank certificates of deposit. This results in what can be referred to as a “short term path to long term failure,” as these low yields may erode the purchasing power of an investment substantially over time.
Investments in long duration bonds provide a happy medium that includes the cherished safety and stability, while providing real returns through consistent cash flow. A $25,000 face value municipal bond with a 5% coupon coming due in 20 years will provide a $1,250 cash flow for 20 years. It is as simplistic as it sounds. There is no need to speculate on corporate earnings, market sentiment, or the direction of interest rates. When the maturity date comes, the municipality will redeem the bond and the face value will be returned to the investor or their heirs.
Investments and Mortality
It is possible that older Americans shy away from long duration bonds because of the idea of mortality. Buying a bond knowing that you may not live to see it mature can feel grim. Investors like to have control of their investments, and the idea of not being alive to see a bond come due compromises that feeling. Stocks and liquid savings vehicles avoid that emotional trigger by existing on endless, liquid, loops.
What we end up with when we choose stocks and short term savings vehicles is in fact simply an illusion of control, stability, and safety. By choosing these assets over a portfolio of individual bonds, you forfeit a predictable income and known return of your capital. Your returns are now subject to the status of corporate earnings, market sentiment, and volatile short term interest rates. There is no definitive way to predict how your portfolio will behave for you or your heirs.
With that, bonds provide our heirs a tremendous gift as well: Clarity. Whether your heirs are your children, distant cousins, or charity, a portfolio of individual bonds will make portfolio-succession much easier. The income payments will be predictable and the maturity dates definitive. They will appreciate the safety, stability, and simplicity of what was left to them.
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