Earning 5% Interest Without Those Pesky “Paper” Losses.

Natalie Pace in Powerscourt, Ireland. Photo by: Marie Commiskey.

Earning 5% Interest Without Those Pesky “Paper” Losses.
Are you earning nothing in your savings or checking account? Did you realize you could earn $40,000-$50,000 pretty safely on $1 million each year, or $10,000-$12,500 on $250,000? These steady gains can make the difference in our budget, and can contribute to a better FICO score and tomorrow.
 
It’s tricky, but doable. Why is it tricky? If we don’t know what the risks are, including:
 
·      “Paper” losses on bonds,
·      Liquidity fees in money market funds,
·      Surrender and hidden fees in annuities (that are not FDIC-insured),
·      Early withdrawal penalties on Certificates of Deposit,
·      Gap downs and emergency dividend cuts, and,
·      FDIC loopholes on brokerage accounts,
 
we could end up losing money. Since the “safe” side of our wealth plan is supposed to protect our principal, reaching for yield in a tricky landscape can be perilous to our fiscal health. So, what is a good plan?  
 
Here are the things will cover in this blog.
 
Why Would Anyone Purchase a Long-Term Bond?
Bond Funds
Mortgage-Backed Securities
Junk Bonds
Managed Plans
Duration Risk
Liquidity risk
Credit Risk
Paper Losses
 
More information on each point is listed below. You can also get vital details in my:
 
·      Free videoconference on YouTube.com/NataliePace or podcast on NataliePace.Substack.com.
·      Bonds & What’s Safe Master Class on Oct. 26, 2024. (Prerequisite: Financial Freedom Retreat.)
·      If you’d like an unbiased 2nd opinion on your current wealth plan, email [email protected] for pricing and information.
 
Why Would Anyone Purchase a Long-Term Bond?
Asked someone who had long-term bonds in her managed plan (and didn’t realize it).
 
After seeing the negative yield curve, where long-term bonds are paying a lower interest rate than short-term, one of my coaching clients asked why anyone would ever buy a 30- or 40-year bond, when they are getting paid more for a 1-year bond. Why take on the risk that you don’t get your money back for almost half of our entire lives?
 

U.S. Treasury par yield rates. Source: Treasury.gov.

That same client held long-term bonds in her own managed plan – mostly in the bond funds that she owned (almost all of which had lost value). Yes, we are the people who buy those long-term bonds, and sometimes even junk bonds, often without realizing it. Whether it is in our managed portfolio, our retirement plan, or in our bond funds, most of us are exposed to duration, liquidity, and credit risk, and paper losses, while also getting a lower yield than the shorter term (and safer) bonds.
 
The first rule of safe investing in a Debt World is to know what we own. We also want to keep the terms short and the credit worthiness high. Holding a bond to term to make up losses doesn’t always make sense, particularly if the term is decades away. (Avoiding those losses in the first place with proper due diligence, instead of blind faith that someone else is doing this for us, is an important determent strategy.) With $35 trillion in public debt and over $99 trillion in total debt and loans in the U.S., it would be smart to adhere to Will Rogers adage: “I’m more concerned with the return of my money than the return on my money.

Bond Funds
Many bond funds hold mortgage-backed securities, junk bonds and long-term bonds, even those that claim to be “investment grade.” This helps to explain why so many bond funds have lost value over the past few years. You might be told that these are “unrealized” or “paper” losses. However, as you can see in the charts below, long-term government bonds lost 26% in 2022 and only clawed back about 3% in 2023. Even though interest rates are a tailwind for the bond market, credit, duration and liquidity risks remain elevated.

Mortgage-Backed Securities
Some mortgage-backed securities are collateralized by office properties – yes, those half empty office buildings that we know have been a problem for community banks, like New York State Bank and the failed Silicon Valley, Signature and First Republic Banks. Many investment grade bond funds have mortgage-backed securities in them. Oftentimes we’re getting paid 4% or less for taking on the risk of losing some principal.
 
According to the April 2024 Financial Stability Report, the market for commercial mortgage-backed securities (CMBS) collateralized by office properties tightened in term of financing terms and weakened in liquidity, as “collateral quality has weakened and demand for funding has increased.” Many companies are downsizing their office footprint, as a hybrid work week and work-from-home remain popular with the labor force. The CRE industry is one of the areas of greatest concern for Wall Street, banks, brokerages, insurance companies, pension providers and any other entity that loans long-term.
 
https://www.federalreserve.gov/publications/April-2024-financial-stability-report-leverage-in-the-financial-sector.htm
 
Junk Bonds
Even investment grade bond funds can have up to 20% of bonds that are below investment grade in them. Since over half of the S&P500 is at or near speculative status, junk bonds are a rampant problem. When a company is downgraded from investment grade to speculative (junk), the value of the existing bonds sinks and liquidity tightens (we’ll have to take a haircut on price to sell the bond). So, the trick is to avoid heavily indebted, slow growth companies and governments. Sadly, in 2024, that included knowing the credit rating of a lot of banks, insurance companies, brokerages, fund companies, fintechs, and other companies that are entrusted with our financial future.  

 
Managed Plans
Managed plans are highly likely to have long-term bonds in them, even if we’ve asked for a conservative portfolio. Since bonds are thought of as the “safe” side, we might end up with a lot of bonds that lost even more than stocks did in 2022.
 
We have to know how to read our brokerage statements, rather than just rely upon the assurances of our broker-salesman. I’ve seen a lot of people who were told that they are earning 5-7% yields on their bonds, without being advised that many of our holdings have lost 10 to 20% in principal, taking the overall earnings down to 2% or less, and sometimes even negative. The truth is printed on the brokerage statements. So we must read them, and understand what the information is revealing about our true return (or loss) on investment.
 
Duration Risk
Broker-salesman will try to minimize our concerns about duration risk by telling us that we get our money back. However, the longer the period of time that a company or government has to pay us back, the more risk we’re taking on, especially if there is a lot of debt, combined with slow revenue growth and a decline in profitability.
 
I’ve already mentioned that over half of the S&P500 is at or near junk bond status. I reviewed a conservative portfolio for a client who had a junk bond rated BB (speculative) with a duration of 40 years. This particular client will not be alive in 40 years. The company had almost declared bankruptcy in 2022. Revenue was down -35% year over year. The bond was showing paper losses and unloading it to someone else could mean discounting the asset even further. It’s important to avoid this scenario. However, if we find ourselves immersed in it, then it’s equally important to develop an exit strategy and a game plan that doesn’t put us in harm’s way again!
 
Liquidity risk
I’m going to stay with the example above because when we own a 40-year junk bond in a company that is on the ropes, who is going to want to buy it from us? When we own a bond that nobody wants to buy off of us, the only way we get rid of it is by putting it up for sale and taking a loss on it. Not a paper loss. A real one. There are all kinds of reasons why we might want access to our own money over a 40-year period, from a better investment opportunity to a dire need to pay certain bills.
 
What is the risk that the company will declare bankruptcy in the not-so-distant future before our term ends? What are the odds that we’ll get paid back less than what we invested? It’s better to ask these questions and receive sober answers before we own the bond.
 
A few years ago, Warren Buffett said that bonds should come with warning labels. In the wake of the Great Recession, MF Global placed a big bet on Greek bonds that they believed would be bailed out by the European Union. The country was bailed out, but the package included forcing existing bondholders to take a huge haircut on their investment. That was one of the reasons why a company with over $42 billion in assets, run by a former Goldman Sachs CEO and Governor of New Jersey, declared bankruptcy in 2011.   
 
Credit Risk
It’s been a year since Fitch downgraded the USA from AAA to AA+ (on August 1, 2023). S&P Global did it on August 5, 2011. Below are the countries that still have a AAA rating.

Credit risk is a real concern in our Debt World. We all have to be mindful of the fine print, understand the credit ratings, limit the credit, duration and the liquidity risk, and never reach for yield. Some banks do automatic rollovers from a decent yielding CD into one that yields almost nothing. So, things are very tricky today.
 
Paper Losses
Paper losses can create a lot of harm to our wealth plan in the near and mid-term, even if we do get the money back eventually (which is not guaranteed). There is a concern that we will have to wait decades to get our money back, while enduring a stressful, challenging interim period. Paper losses reduce our FICO score, limit our access to our own money, and can have other meaningful, significant, and negative impacts.
 
The bank failures of 2023 had a lot to do with paper losses on bond portfolios, which then spread into a contagion of a run on the bank. The Federal Reserve created a Bank Term Funding Program to basically make it so that banks did not have to declare their paper losses. That program no longer makes loans as of March 11, 2024. The terms were for one year so it looks like we may not see or feel the full ramification from the wind down of this program until March 2025 – just a few months after the U.S. will encounter another Debt Ceiling debacle in Congress.  
 
Bottom Line
We can earn almost 5% on the safe side, but it is tricky. It’s a good idea to keep the terms short, and the credit worthiness high of our fixed income holdings. We need to read the fine print and understand the hidden fees, loopholes, risk, and federal insurance levels. It’s a good idea to have rolling maturity dates, which will give us ongoing access to our money. It’s important to not just have blind faith that our wealth is protected, even if we’ve asked for a conservative portfolio. We must be the boss of our money.



Join us at our online Oct. 18-20, 2024 Financial Freedom Retreat and our Bond/What's Safe Master Class Oct. 26, 2024. Learn how to:

* Invest in hot industries, such as Nvidia and artificial intelligence,
* Hedge against a weaker dollar,
* Invest and compound your gains,
* Green your retirement plan,
* Easy and efficacious nest egg strategies,
* Get hot and diversified (including in artificial intelligence and EVs),
* Evaluate stocks,
* Keep an age-appropriate amount safe, and,
* Know what's safe in a Debt World.

You'll even discover how to save thousands annually with smarter big-ticket choices. Yes, it's a complete money makeover. 
​
Email [email protected] to register. Learn the 15+ things you'll master and read testimonials in the flyer on the home page at NataliePace.com. Register with friends and family to receive the best price. ​

"Ten minutes into the first day I was already much smarter about investing than I ever thought I would be in my life and I knew I was in exactly the right place at this retreat. I am amazed at how EASY and FUN it is to make my money work for me and those I love. I think this kind of information should be compulsory in schools. I wish I'd learned this sooner." CM

If you’d like an unbiased 2nd opinion on your current wealth plan, email [email protected] for pricing and information.

Join us for our Online Oct. 18-20, 2024 Financial Freedom Retreat. Email [email protected] or call 310-430-2397 to learn more. Register with friends and family to receive the best price. Click for testimonials, pricing, hours & details.

Join us for our Restormel Royal Immersive Adventure Retreat. March 7-14, 2025. Email [email protected] to learn more. Click for testimonials, pricing, hours & details. There is very limited availability. Register by August 15, 2024 to ensure that you get the exact room you want. (There may not be an opportunity to register after August 15, 2024.) This retreat includes an all-access pass to all of our online training for a full year for two, and three 50-minute private, prosperity coaching sessions. Much more affordable than you might think. Email [email protected] to learn more.

Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money and the 2nd edition of Put Your Money Where Your Heart Is are the most recent releases of these books. Follow her on Instagram. 
​​​​​
Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.​

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Check out Natalie Pace's Substack podcast on Apple and Spotify.
Watch videoconferences and webinars on Youtube.

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Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.  

Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.