Health: There are No Limits

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“Once you pass the age of fifty, exercise is no longer optional. You have to exercise or get old.” ~ Dr. Henry S. Lodge. M.S., Younger Next Year, pg. 113.

People tend not to exercise because they are tired at the end of the day, But, in reality, people are tired at the end of the day not because they get to much exercise of physical exertion, explains Dr. Henry S. Lodge. M.D., leading NY internist and Columbia Medical School Professor. Instead, people are tired at the end of the day because they do not get enough exercise and as a result, they are not fit.

People are mentally, emotionally and physically drained and exhausted from being sedentary, states Dr. Lodge. Study after steady demonstrates that productivity increases and an individual functions better each day when they are fit. In short, time spent exercising and getting fit is life enhancing and extending.

So, make daily exercise a habit or routine like taking a shower or brushing your teeth. In short, your body craves the body’s chemical reaction resulting from exercise and movement.  So it’s important for you to “Do Something Everyday”.

Start exercising at a level that matches your current level of fitness, Dr. Lodge urges. Start out a level that is hard enough to make you sweat like walking at a brisk pace for twenty to thirty minutes. But, before you get started, check with your medical doctor.

Getting and staying fit is wonderful if you’re healthy, but it’s essential and life saving if you’re not healthy. Your life will improve dramatically once you commit to the habit of regular exercise.

Your long term endurance exercise goal should be to do long and slow aerobic exercise for three hours or more at 60% to 65% of maximum heart rate for three hours without getting exhausted.  You should be able to do something like an all morning bike ride for three hours or more well into your sixties, seventies, eighties and nineties.  You should make a real commitment to do something like that at least once a month

If you can get to the level of three hours or more of endurance exercise and stay there, life will be good, says Chris Crowley, New York Times bestselling co-author of “Younger Next Year”. Crowley recommends that you:

  1. Exercise six days a week for at least 30 minutes for the rest of your life.
  2. Do serious aerobic exercise four days a week for the rest of your life.
  3. Do serious strength training, with weights or body weight, two days a week for the rest of your life.
  4. Eat healthy foods and drink plenty of water. Quit eating crappy food like refined sugar, refined carbs and processed foods.
  5. Maintain close relationships and social connections.
  6. Get adequate sleep and reduce stress.
  7. Have an attitude of gratitude.  Always be grateful.

“Open heart surgery is hugely popular these days, apparently because so many guys prefer it to learning about aerobic exercise and working out.” ~ Chris Crowley, Younger Next Year, pg. 116.

Crowley believes that it’s possible that Americans, as a society, “can be radically healthier, more energetic, more fit, more optimistic and effective by making modest, behavioral changes. Putting off 70% of today’s aging is a simple matter: Move a lot more!…quit eating crap!…connect with others!, he emphasizes.” The combination of sedentary lifestyle  and the crappy food we eat is wrecking Americans lives and ruining the economy. The nation spends “20% of our national income on health care”. Half of the amount spent on healthcare could be saved “because 50% of our bad health is simply the result of the ridiculous way we eat and live.”

Final thoughts…staying deeply connected with and caring about family and friends and others are essential for healthy aging and longevity. Staying in touch… caring… is hugely important.

References:

  1. Chris Crowley and Henry S. Lodge, M.D., Younger Next Year, Workman Publishing, 2nd Edition, New York, December 24, 2019.
  2. https://www.youngernextyear.com/bios/

“Younger Next Year: Live Strong, Fit, Sexy, and Smart―Until You’re 80 and Beyond” – According to authors Chris Crowley and Dr. Henry S. Lodge, M.D., men 50 or older can become functionally younger every year for the next five to ten years, and continue to live like fifty-year-olds until well into their eighties. To enjoy life and be stronger, healthier, and more alert. To stave off 70% of the normal decay associated with aging (weakness, sore joints, apathy), and to eliminate over 50% of all illness and potential injuries.

U.S. Banking Systemic Risks

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“This isn’t the start of a banking crisis,. It’s markets waking up to the fastest rake-hike cycle since the 1980s — and the growing risk of recession.” – John Authers and Isabelle Tanlee

The Federal Reserve’s monetary actions have been a financial and economic rollercoaster for America.  They have printed trillions of $US dollars, insisted that inflation was transitory, suddenly raised federal fund interest rates, and created conditions that precipitated an economic crash. Banks, real estate, and highly leveraged businesses are all facing tough times ahead.

US banking system as a whole is solid, but that does not mean that every regional and community bank is strong. Some banks are sitting on big unrealized losses on loans and securities. They don’t appear on the balance sheet because loans and securities are held at book value and not marked to market (or current market) value.

Banks of regional and community bank customers have been withdrawing money from these smaller regional banks and moving their funds to perceived safe alternatives such as larger banks and/or investing in money markets and Treasury Bonds.

Yet, President Biden administration’s actions of implicitly guaranteeing all deposits have not eliminated completely the threat to the financial system. Due to the volatility in U.S. Treasury bond yields after the the prior protracted period of leverage-enabling policy, the most vulnerable currently are those vulnerable to both interest rate and credit risk.

Contagion risk and the systemic threat can be easily contained by careful balance sheet management and avoiding more policy mistakes.  However, it is believed that customers may leave smaller regional banks for larger ones as they associate the former with risk in the wake of Silicon Valley Bank’s failure. The flow of deposits will be a key measure of the public’s confidence in regional banks over the next few weeks. We also expect to see more flows into money market funds from bank accounts as investors seek to not only earn higher yields but also move some money away from the banking system as a whole, in the short term.

Creating a banking system where all uninsured deposits (greater than $250K) become fully insured through the FDIC or taxpayers also poses systemic risks.

References:

  1. https://www.lazardassetmanagement.com/us/en_us/references/banking-update/commentary

Required Minimum Distribution (RMD)

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Retirement savers squirrel away money into tax deferred retirement accounts for decades, and with the power of compounding, these accounts can provide their owners with bountiful nest eggs for their later years. But eventually the Internal Revenue Service (IRS) is ready for those mature savers to start taking out some of their nest egg’s yield and give its share through taxes.

As you near your 70s, you need to be prepared for when required minimum distributions from your retirement accounts kick in. “The RMD is something the government plans for us — on their schedule, not yours,” said Maggi Keating, CFP®, a financial planner at FBBCapital Partners.

Many savers have amassed hefty pretax retirement account balances, and RMDs are calculated off those balances. RMDs could spike you into a higher tax bracket as they add to your ordinary taxable income, which may already include retirement pay, such as a pension, and Social Security, among other sources of retirement income. Plus, if you fail to take out the right amount, you can incur a penalty from the IRS.

“It’s really expensive to not be aware of them,” said Tim Steffen, CPA/PFS, CFP®, director of tax planning for Baird, a wealth management firm.

Understanding the rules for RMDs not only helps you avoid trouble with the IRS, but that knowledge can also present strategic opportunities to make the most of your nest egg, and in some cases, even keep your tax tab to the IRS in check.

The federal government raised the starting age for RMDs to age 72 from age 70½, and the new SECURE Act 2.0 law further raises the age original owners of retirement accounts must begin taking RMDs.

No matter the starting age, for your first RMD only, you get an option to delay taking it. You can take the first RMD by the end of the year in which you reach RMD age. Or you can wait to take it until April 1 of the year following that birthday (that April 1st is known as your required beginning date, or RBD).

To calculate each RMD, divide the account balance as of Dec. 31 of the previous year by an IRS distribution period factor (found in life expectancy tables in IRS Publication 590-B) based on the age you will turn on your birthday in the current year.

Let’s say you turned age 72 in 2022 and your IRA was worth $1 million at the end of December 2021. You consulted Table III (Uniform Lifetime), and divided your prior year account balance by 27.4 — the factor for age 72. Your first RMD would have been $36,496, regardless of whether you took it in 2022 or chose to delay it until April 1, 2023.

Your second RMD would use the account value as of Dec. 31, 2022, and the distribution period factor for age 73, which is 26.5. Say your IRA grew back to $1 million by year-end 2022. Your second RMD would be $37,736. (Even with SECURE Act 2.0, people who turned 72 in 2022 still must take their first RMD by April 1, 2023.)

You’ll want to see if spreading those two RMDs over two years is more advantageous for you, instead of taking the total of the RMDs in one tax year, or vice versa. If your income will be lower in the second year, doubling up might not be an issue.

Note that you can always take more money out than the RMD, but don’t take less. If your RMD is $30,000, but you only take out $10,000, for instance, you would be subject to a penalty of a percentage of $20,000 you didn’t take. The new SECURE Act 2.0 law reduces the penalty from 50% to 25%. That penalty goes down to 10% if you correct the failure to take an RMD in a timely manner.

Be sure to check where April 1 falls on the calendar. Steffen warns that this deadline may not extend if the date falls on a weekend or holiday, like the regular federal tax return deadline of April 15 does. In 2023, the federal tax deadline shifts to April 18 for most federal taxpayers. “But April 1 in 2023 is a Saturday, and it’s unclear if you would get an extension to April 3,” Steffen said. “It’s best to plan early and not push the deadline.”

Distribution Rules
Original owners of retirement accounts are subject to RMDs from traditional IRAs and employer-sponsored retirement accounts, such as Thrift Savings Plans and traditional 401(k)s. RMDs also apply to Roth TSPs and Roth 401(k)s, although that will go away in 2024 as a result of the SECURE Act 2.0 law. For traditional tax-deferred retirement accounts, you’ll owe ordinary income tax on the RMD.

Roth IRAs do not have RMDs for original owners; the money can sit in that account growing tax free for as long as you like. Another wrinkle: If you hold multiple traditional IRAs, you need to calculate the RMD amount for each one, but you can take the total amount out of just one IRA. If you hold multiple employer-sponsored retirement accounts, you need to calculate and take an RMD out of each account.

You can opt to take your RMD in a series of installments. Some people like to take monthly or quarterly withdrawals; others like to take the RMD out all at once. You can choose to take it all out early in the year, or later in the year. But don’t wait until the last minute — consider taking your full RMD no later than early December to allow time for any custodian hiccups.

Smart RMD Moves

Delving further into the rules may give you opportunities to maximize your nest egg. The following moves can help take the sting out of RMDs.

  • Continue working. More Americans are working longer these days, and it’s not uncommon for seventysomethings to be in the workforce. If you are still working past RMD age and are not a 5% owner of the company, you can push off RMDs from your current employer-sponsored retirement account until the year you fully retire. But Steffen notes you need to work the whole year. Let’s say you retired in early January 2023 at the age of 75. You had delayed RMDs from your employer plan because you were working. But even though you missed your original start date based on age, you still have the option to delay your first RMD from the employer plan until April 1 following the year you stopped working. So while that first RMD is for 2023, you could wait until April 1, 2024, to take it. But be aware that working doesn’t push off your RMDs from traditional IRAs. You must start taking those once you hit the age threshold, regardless of employment. There is a workaround, though: If your current employer allows you to roll traditional IRA money into your employer-sponsored retirement account, you can roll in the money to avoid RMDs until you retire.
  • Give to charity. If you are charitably inclined, a qualified charitable distribution, or QCD, may be a good fi t for you — and it can cut your tax bill, too. Starting at age 70½, an IRA owner can give up to $100,000 a year directly to charity from their IRA. The QCD amount is not taxable, even for taxpayers who take the standard deduction. If you no longer itemize, QCDs can be a great way to give to charity and still get a tax break. Once you hit your RMD age, there’s an even bigger bang for the buck. A QCD can do double duty as your RMD. So instead of having taxable RMD income, the QCD will satisfy your RMD free of tax. “It is not considered income at all,” said Keating. Just be sure to take a QCD first, because once you are subject to RMDs, the first dollars that come out of your account each year are considered to be part of your RMD until the full amount is taken. So if your RMD is $30,000, make sure you do a QCD before you take that full amount out; you could do a QCD of $30,000, for instance, and satisfy your RMD all at once, or do a QCD of, say, $10,000 and then take out the remaining $20,000 to satisfy the rest of your RMD. If you take out your full RMD first, you can still do a QCD, but it won’t pull double duty as your RMD.
  • Do an in-kind transfer. Even when the market is down, typically you must still take your RMD. But if you like the investments in your retirement account and don’t need the cash to live on, ask your account custodian to transfer shares “in kind” to a taxable brokerage account in an amount that is equivalent to your RMD amount. You still pay ordinary income tax on your RMD, but moving the shares to a taxable brokerage account gives them the opportunity to grow when the market bounces back. Your basis in the shares will be their value on the date of transfer. After shares are transferred in kind, be sure that the closing price of the trade equaled or exceeded your RMD. If not, transfer more shares or cash from your retirement account to fully meet your RMD amount for the year.
  • Avoid paying twice. If you stashed nondeductible contributions into your IRA, you can get a tax break when money is withdrawn. Ideally, you kept good track of your nondeductible contributions on Form 8606 over the years, which documents the basis. “It’s entirely up to the taxpayer to track what is tax-free,” Steffen said. When you distribute money from the retirement account, you can use the pro rata rule so you don’t pay tax on those nondeductible contributions twice. For instance, let’s say $50,000 of a $500,000 IRA are nondeductible contributions, or 10%. If your RMD is about $20,000, $2,000 — 10% of the RMD — would be tax free, and you would pay ordinary income tax on the remaining 90%. Every year, you recalculate the amount of nondeductible contributions left and apply the new percentage to your distribution. Be aware that if you hold multiple traditional IRAs, you must figure out the ratio of all your nondeductible contributions to your IRA balances in total.]
  • Factor in your spouse’s age. Minding the gap can pay off when it comes to RMDs and younger spouses. If you are hitting RMD age but your spouse is more than 10 years younger and the sole beneficiary, you are eligible to take out less since your spouse has a longer life expectancy. In this situation, the account owner can use Table II (Joint Life and Last Survivor Expectancy) in IRS Publication 590-B to calculate the RMD. Let’s say you turn 74 in 2023, and your spouse turns 62. Using both of your ages in 2023 when consulting Table II, you find the factor to divide your account balance is 27.0. For a $1 million IRA, your RMD would be $37,037. If you had to use the factor based on only your own age, your RMD would be about $2,179 higher.
  • Consider a Roth conversion. One thing you can’t do with an RMD is convert it to a Roth — the IRS doesn’t allow it. But after you take your RMD, you can convert any or all of the remainder of your traditional retirement account to a Roth IRA. Keep in mind that a Roth conversion will add to your taxable income for that year. But any money converted to the Roth would no longer be subject to RMDs for the original owner of the account, and a partial conversion reduces the amount left in the traditional IRA — a reduced balance lowers future RMDs.

References:

  1. https://www.moaa.org/content/publications-and-media/news-articles/2023-news-articles/finance/understanding-the-abcs-of-rmds/

Bank Bailouts

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“Bailouts incentivize and encourage the financial behavior that makes bailouts necessary.” ~ Holman W. Jenkins, Jr.

The fundamental business model of banking is that the bank accepts money from bank depositors and invest almost all of it. A certain amount of depositors’ money, called reserve requirement, must be kept for redeeming customer accounts and customer withdraws. The remaining deposits gets loaned out, often in long-term illiquid loans  and assets.

If customers want to withdraw amounts greater then the reserves, typically refer to as “ run on a bank”, a bank has two options:

  • Raise money by selling investments at a profit or loss
  • Raise enough money to bridge its cash needs by selling equity in the bank itself hurting shareholders.

Going forward, your bank deposits are implicitly safe from bank failures, but your bank deposits aren’t safe from inflation due to lost of purchasing power, writes Holman W.Jenkins in  WSJ Opinion piece. In essence, the investment risks that large sophisticated uninsured depositors take were shifted to bank shareholders and U.S. taxpayers by the federal government.

Effectively, the FDIC $250K bank deposit insurance limit guarantee is now uncapped. By implicitly guaranteeing all bank deposits, the government’s policy will actually incentivized banks to take even more riskier investment bets with depositers’ cash to garner outsize returns. In short, uninsured deposits were a source of market deposits discipline.

Moral hazard refers to the situation that arises when an individual or bank have the chance to take advantage of a financial deal or situation, knowing that all the risks and fallout will land on another party. It means that one party is open to the option – and therefore the temptation – of taking advantage of another party.

Moral Hazard

In this case, the secondary party, the tax payers, are the ones that suffers all the consequences of any financial risks taken in a moral hazard situation, leaving the first party free to do as they please, without fear of responsibility. They are able to ignore all moral implications and act in a way that is most beneficial to them.

The government’s actions to implicitly guarantee bank deposits does not actually eliminate the risks of additional bank runs or failures, it only transfers the risk and subsequent obligations to the FDIC and ultimately the U.S. taxpayers. It also encourages financial moral hazard, the taking of extraordinary investment risk with bank assets, by bank chief executives.

Source: Holman W. Jenkins, Jr., “Joe Biden’s $19 Trillion Monday”, The Wall Street Journal, March 15, 2023

Types of Bonds

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Bonds can play a vital role in your investment or retirement portfolio. Bonds yield income, are often considered less risky than stocks and can help diversify your portfolio.  ~ BlackRock

Bonds – also known as fixed income instruments – are used by governments or companies to raise capital by borrowing from investors. Bonds are typically issued to raise funds for specific projects. In return, the bond issuer promises to pay back the investment, with interest, over a certain period of time.

Certain types of bonds – corporate and government bonds – are rated by credit agencies to help determine the quality of those bonds. These ratings are used to help assess the likelihood that investors will be repaid. Typically, bond ratings are grouped into two major categories: investment grade (higher rated) and high yield (lower rated).

The three major types of bonds are corporate, municipal, and Treasury bonds:

  • Corporate bonds are debt instruments issued by a company to raise capital for initiatives like expansion, research and development. The interest you earn from corporate bonds is taxable. But corporate bonds usually offer higher yields than government or municipal bonds to offset this disadvantage.
  • Municipal bonds are issued by a city, town or state to raise money for public projects such as schools, roads and hospitals. Unlike corporate bonds, the interest you earn from municipal bonds is tax-free. There are two types of municipal bonds: general obligation and revenue.
    • Municipalities use general obligation bonds to fund projects that don’t produce income, such as playgrounds and parks. Because general obligation bonds are backed by the full faith and credit of the issuing municipality, the issuer can take whatever measures necessary to guarantee payments on the bonds, such as raising taxes. 
    • Revenue bonds, on the other hand, pay back investors with the income they’re expected to create. For example, if a state issues revenue bonds to finance a new highway, it would use the funds generated by tolls to pay bondholders. Both general obligation and revenue bonds are exempt from federal taxes, and local municipal bonds are often exempt from state and local taxes as well. Revenue bonds a good way to invest in a community while generating interest.
  • Treasury bonds (also known as T-bonds) are issued by the U.S. government. Since they’re backed by the full faith and credit of the U.S. government, treasury bonds are considered risk-free. But treasury bonds don’t yield interest rates as high as corporate bonds. While treasury bonds are subject to federal tax, they’re exempt from state and local taxes.
  • Bond funds are mutual funds that typically invest in a variety of bonds, such as corporate, municipal, Treasury, or junk bonds. Bond funds usually pay higher interest rates than bank accounts, money market accounts or certificates of deposit. For a low investment minimum ranging from a few hundred to a few thousand dollars, bond funds allow you to invest in a whole range of bonds, managed by professional money managers. When investing in bond funds, keep in mind:Bond funds usually include higher management fees and commissions
  • Junk bonds are a type of high-yield corporate bond that are rated below investment grade. While these bonds offer higher yields, junk bonds are named because of their higher default risk compared to investment grade bonds. Investors with a lower tolerance for risk may want to avoid investing in junk bonds.

Bonds are an investment approach focused on preservation of capital and the generation of income. It typically includes investments like government and corporate bonds. Fixed income can, such as bonds, offer a steady stream of income with less risk than stocks.

References:

  1. https://www.blackrock.com/us/individual/education/how-to-invest-in-bonds

Duration Risk…What Does It Mean

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Duration is a measure of the sensitivity of the price of a bond to a change in interest rates.  Interest rate changes can affect the value of a bank or financial institution’s fixed income (bond) holdings. How a bond or bond portfolio’s value is likely to be impacted by rising or falling interest rates is best measured by duration.  ~ PIMCO

Duration is a measurement of a bond’s interest rate risk that considers a bond’s maturity, yield, coupon and call features. These many factors are calculated into one number that measures how sensitive a bond’s value may be to interest rate changes.

Interest rates may change after you invest in a bond and interest rate changes have a significant impact on bond values. Say you invest in a bond at 5% interest. If interest rates increase by 1%, additional investors in the same bond will now demand a 6% rate of return. Because the bond interest payments are fixed each year, the market price of the bond will decrease to increase the rate of return from 5% to 6%.

The key point to understanding how interest rates and bond prices are related.  It’s important to remember that interest rates and bond prices move in opposite directions. When interest rates rise, prices of traditional bonds fall, and vice versa. So if you own a bond that is paying a 3% interest rate (in other words, yielding 3%) and rates rise, that 3% yield doesn’t look as attractive. It’s lost some appeal (and value) in the marketplace.

Duration is measured in years. Generally, the higher the duration of a bond or a bond fund (meaning the longer you need to wait for the payment of coupons and return of principal), the more its price will drop as interest rates rise.

Duration risk, also known as interest rate risk, is the possibility that changes in borrowing rates (i.e. interest rates) or the Federal Reserve fund rate may reduce or increase the market value of a fixed-income investment.

Generally, the higher a bond’s duration, the more its value will fall as interest rates rise, because when rates go up, bond values fall and vice versa.

If an investor expects interest rates to fall during the course of the time the bond is held, a bond with a longer duration would be appealing because the bond’s value would increase more than comparable bonds with shorter durations.

As you might conclude, the shorter a bond’s duration, the less volatile it is likely to be. For example, a bond with a one-year duration would only lose 1% in value if rates were to rise by 1%. In contrast, a bond with a duration of 10 years would lose 10% if rates were to rise by that same 1%. Conversely, if rates fell by 1%, bonds with a longer duration would gain more while those with a shorter duration would gain less.

% Change in bond prices if rates spike 1%
Hypothetical illustration of the effects of duration, exclusively on bond prices

In summary, bond duration measures the interest rate risk. It is a measure of the change in bond prices due to a change in interest rate. Duration is measured in years. The higher the duration of the bond, the more will be the price drop as interest rates increase. This is because one needs to wait longer to get their coupon payments and principal amount back.

Bond duration is important as it helps in measuring the sensitivity of a bond’s price to interest rates. If the interest rates were to fall by 1% and bond duration is three years, then the price will increase by 3%. This knowledge will help you understand the effect on interest rate changes on the portfolio returns.

References:

  1. https://www.pimco.co.uk/en-gb/resources/education/understanding-duration 
  2. https://scripbox.com/mf/bond-duration/https://scripbox.com/mf/bond-duration/
  3. https://www.blackrock.com/us/individual/education/understanding-duration

Bond Investing

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When investing in bonds, it’s important to:

  1. Know when bonds mature. The maturity date is the date when your investment will be repaid to you. Before you commit your funds, know how long your investment will be tied up in the bond.
  2. Know the bond’s rating. A bond’s rating is an indication of how creditworthy it is. The lower the rating, the more risk there is that the bond will default – and you lose your investment. AAA is the highest rating (using the Standard & Poor’s rating system). Any bond with a rating of C or below is considered a low quality or junk bond and has the highest risk of default.
  3. Investigate the bond issuer’s track record. Knowing the background of a company can be helpful when deciding whether to invest in their bonds.
  4. Understand your tolerance for risk. Bonds with a lower credit rating typically offer a higher yield to compensate for higher levels of risk. Think carefully about your risk tolerance and avoid investing solely based on yield.
  5. Factor in macroeconomic risks. When interest rates rise, bonds lose value. Interest rate risk is the risk that rates will change before the bond reaches its maturity date. However, avoid trying to time the market; it’s difficult to predict how interest rates will move. Instead, focus on your long-term investment objectives. Rising inflation also poses risks for bonds.
  6. Support your broader investment objectives. Bonds should help diversify your portfolio and counterbalance your investment in stocks and other asset classes. To make sure your portfolio is balanced appropriately, you may want to consult an asset allocation calculator based on age.
  7. Read the prospectus carefully. If you’re investing in a bond fund, be sure to study the fees and analyze exactly what types of bonds are in the fund. The name of the fund may only tell part of the story; for example, sometimes government bond funds also include non-government bonds.
  8. Use a broker who specializes in bonds. If you’re purchasing individual bonds, choose a firm that knows the bond market. Use FINRA BrokerCheck to help find trustworthy professionals that can help you open a brokerage account.
  9. Learn about any fees and commissions. Your broker can help break down the fees associated with your investment.

What are the benefits of investing in bonds?

Bonds offer a host of advantages:

  • Capital preservation: Capital preservation means protecting the absolute value of your investment via assets that promise return of principal. Because bonds typically carry less risk than stocks, these assets can be a good choice for investors with less time to recoup losses.
  • Income generation: Bonds provide a fixed amount of income at regular intervals in the form of coupon payments.
  • Diversification: Investing in a balance of stocks, bonds and other asset classes can help you build a portfolio that seeks returns but is resilient through all market environments. Stocks and bonds typically have an inverse relationship, meaning that when the stock market is down, bonds become more appealing.
  • Risk management: Fixed income is broadly understood to carry lower risk than stocks. This is because fixed income assets are generally less sensitive to macroeconomic risks, such as economic downturns and geopolitical events.
  • Invest in a community: Municipal bonds allow you to give back to a community. While these bonds may not provide the higher yield of a corporate bond, they often are used to help build a hospital or school or that can improve the standard of living for many people.

What are the risks associated with investing in bonds?

As with any investment, buying bonds also entails risks:

  • Interest rate risk: When interest rates rise, bond prices fall, and the bonds that you currently hold can lose value. Interest rate movements are the major cause of price volatility in bond markets.
  • Inflation risk: Inflation is the rate at which the price of goods and services rises over time. If the rate of inflation outpaces the fixed amount of income a bond provides, the investor loses purchasing power.
  • Credit risk: Credit risk (also known as business risk or financial risk) is the possibility that an issuer could default on its debt obligation.
  • Liquidity risk: Liquidity risk is the possibility that an investor might wish to sell a bond but is unable to find a buyer.
  • Stocks tend to earn more money than bonds. In the period 1928-2010, stocks averaged a return of 11.3%; bonds returned on average 5.28%.
  • Bonds freeze your investment for a fixed period of time. For example, if you buy a 10-year-bond, you can’t redeem it for 10 years. This creates the potential for your initial investment to lose value. Stocks, on the other hand, can be sold at any time.

You can manage these risks by diversifying your investments within your portfolio.

References:

  1. https://www.blackrock.com/us/individual/education/how-to-invest-in-bonds

Mindset of Building Wealth

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Your mindset is a set of beliefs that shape how you make sense of the world and yourself. It influences how you think, feel, and behave in any given situation or circumstance. It means that what you believe about yourself impacts your success or failure or happiness or wealth.

Simply, your beliefs shape your mindset. Mindset is a collection of beliefs and thoughts. It is a way of thinking:

“Mindsets are those collection of beliefs and thoughts that make up the mental attitude, inclination, habit or disposition that predetermines a person’s interpretations and responses to events, circumstances and situations.”

According to Stanford psychologist and best selling author Dr. Carol Dweck, your beliefs play a pivotal role in what you want and whether you achieve it. Dweck has found that it is your mindset that plays a significant role in determining achievement and success.

Mindsets can influence how people behave in a wide range of situations in life. For example, as people encounter different situations, their mind triggers a specific mindset that then directly impacts their behavior in that situation.

Your mindset plays a critical role in how you cope with life’s challenges. With a positive growth  mindset, adults are more likely to persevere in the face of setbacks. Instead of throwing in the towel, adults with a positive growth mindset view it as an opportunity to learn and grow.

In short, your mindset not only impacts how you perceive the world around you, but also how you see and believe in yourself and your abilities.

Gratitude Mindset

It’s important to be grateful for everything you have in life. For having a roof over your head, a paying job, a family, a good supply of food and water. Simply, gratitude is the “affirmation of goodness”.

Gratitude is a super power! It has been scientifically proven to be good for your health, your well-being, your building wealth, and your relationships.

Psychology research has demonstrated that practicing gratitude is good for improving your health, your well-being, your building wealth, and your relationships.

We often forget to be thankful for what we have…have a mindset and attitude of gratitude.

If you can be grateful for what you have, you won’t take anything or anyone for granted in your life, and you’ll be wealthier and happier in the long run.

Your mindsets have a lot to do with self-confidence, self-esteem as well as self-development and the desire for self-improvement and being grateful.

References:

  1. https://sourcesofinsight.com/what-is-mindset/
  2. https://www.verywellmind.com/what-is-a-mindset-2795025
  3. https://wealthygorilla.com/15-different-types-mindsets-people/

Warren Buffett’s top 10 rules for success

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Billionaire investor Warren Buffett, “Oracle of Omaha, has a set of rules, principles and philosophies when it comes to making a decision, investing, managing the business and also building success in life. And his success principles can be summarized with the top 10 rules below.

“Don’t be afraid to give up the good to go for the great.” – John D. Rockefeller.

  1. Find Your Passion. Almost every successful person agrees that finding and following your passion is something important if you want to produce an amazing result in life. There is no guarantee that you will be able to find your passion in your first job, but you have to keep digging until you find it. Steve Jobs once gave a commencement speech at Stanford University and said: “Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.” The only way you can produce outstanding work is through passion. Without passion, you will do things with the half-hearted approach and there is no way you can become the best this way. Thus, find your passion, do what you love and you will be able to produce amazing success in life when you do.
  2. Hire Well. If you want to be a billionaire, there is no way you can go about it all by yourself, you need to have a great team. And to have a great team, you must learn to hire well. Always remember that you cannot succeed alone in this world. You need other people’s help to bring you the success you want. And your people will be your greatest assets. According to Buffett, he emphasizes on 3 qualities when he hires, and they are, integrity, intelligence, and energy. Buffett also said that out of those 3 qualities, integrity comes first. He also jokingly said that you do not want to hire someone who has no integrity but has a lot of intelligence and energy. Integrity comes first. Without integrity, other qualities do not matter much
  3. Don’t Care What Others Think. It is important not to care what others think. And this is extremely important because you do not want to take into consideration what other people have to say, because you will be influenced and will never be able to hold onto your investing principles. If you was to listen to what others said, he will become like most people, living an average life. When it comes to achieving the success you want and living your dreams, there will be people telling you that achieving what you want is impossible and simply suggest you get a real job. Never listen to the naysayer. You have to follow your heart and do what you think is right. Circle of Competence” is what he has used as a way to focus his investment on only operating in areas he knew best. The concept basically explains that every one of us has developed useful knowledge on certain areas, and what we need to do is to operate in these areas that we are good at. When you care too much about what others think and say about you, you will restrict your own freedom and it will prevent you from living your best life according to your own terms.
  4. Read, Read, Read – The more you read, the smarter you will get and the more knowledge you will gain. When you become more knowledgeable, you will be able to make a better decision that will lead you to the success you want. Highly successful people are great readers and you have to adopt the same habit. Commit to reading every single day. If you find that you are busy and do not have much time to read, start small and read for 15 minutes a day. If possible, go for more. Read at least an hour a day. You can wake up earlier and make time for reading or you can make good use of your commuting time for reading. You need to be a lifelong learner and when reality changes, you need to change and adjust you strategy.
  5. Have A Margin of Safety – The concept of “margin of safety” is easy to understand, and requires great discipline and patience.  Buffett uses the metaphor of driving across a bridge to explain this concept. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. You have a margin of safety of 20,000 pounds. And when it comes to investing, you will never buy a business worth $50 million for $60 million. You will buy the business worth $50 million at a price below that to ensure there is a margin of safety. This concept is essential in the principle of value investing. It helps investors make better and wiser decisions before jumping into buying a stock. When an opportunity is presented, evaluate using the margin of safety concept before you decide.
  6. Have A Competitive Advantage – Buffett said that capitalism is all about somebody coming in and trying to take the castle. And what you need for your castle is a moat to protect your castle from your enemies. In the business world, your business needs to have a durable competitive advantage to survive for the long term. Today, the competition is tough and people can copy exactly what you do and produce the same product and put you out of business. This is why having a competitive advantage to protect your business like a moat protecting a castle is important. Buffett said that he will invest in businesses that have a competitive advantage because he wants to make sure that the business will still be around after years down the road.
  7. Schedule Your Personality – Build your business around your personality. In order to succeed in what you do; you must find your pace and your sweet spot so that you will enjoy your work and perform at your best. Buffett loves reading and he chooses to read to improve his knowledge, and then he acts as the strategist and manages his business from backstage. He organizes his business according to his personality. If you love drinking a cup of coffee before you start your work, do it. Organize your workspace according to your own taste, that will make you more productive. The key is to play to your strength and personality so that you can become the best at what you do.
  8. Always Be Competing – Buffett believes that one of the most common business killers is complacency. When people fall into their comfort zone and fail to improve their competitiveness, their businesses will eventually fail or be taken over by the competitor. And to stay ahead of the game, you must always be competing. Every business has problems in every industry. The key to making a business thrive is its ability to compete and stand out from the rest. And this is why you invest in a business that continues to thrive because you are always competing. Therefore, never rest on your laurels, keep competing, keep improving and innovating in your business.
  9. Model Success – There is no way you can succeed alone in this world. If you want to achieve great success in life, you need others. and, you must model other successful people, or better yet, get yourself a mentor. Take a look in the sports industry, every outstanding and professional athlete has a coach. Tiger Woods has a coach. Michael Jordan has a coach. You need a coach to guide you on the journey to success. Your coach can also remind you of your goals and inspire you to do your best. In business, having a mentor is said to be one of the most important keys to success. Success leaves clues and what you need to do to produce a great result is to model the success of others. Learn and study from others, and then learn, grow and improve yourself to become better.
  10. Give Unconditional Love – Finally, the most powerful force in this world is unconditional love. And everyone who wants to achieve success in life gives unconditional love.
  11. Bonus: Power of Compounding – “The power of compounding your money inside a successful business for a long time is nearly unmatched in capitalism.”

The final rule for success by Warren Buffett has a lot to do with your personality and beliefs. Being a philanthropist, Buffett believes in helping society and giving back to the world. This could be the reason why he has been so successful. He is always looking to help and to give, rather than to take. When you operate in a giving and grateful mindset, you will put your customers first, and this is what makes a business enterprise thrive

Source:  https://www.thewisdompost.com/billionaires/warren-buffett/warren-buffetts-top-10-rules-success/1575