New book argues in favor of an all-bond portfolio

It may be heresy for most financial advisers, but in their new book “Bonds: The Unbeaten Path to Secure Investment Growth” (Bloomberg Press), authors Stan and Hildy Richelson advocate an all-bond portfolio.
SEP 10, 2007
By  Bloomberg
It may be heresy for most financial advisers, but in their new book “Bonds: The Unbeaten Path to Secure Investment Growth” (Bloomberg Press), authors Stan and Hildy Richelson advocate an all-bond portfolio. “Historically, stocks have outperformed bonds by approximately 10% to 5%,” said Mr. Richelson, a registered financial adviser and associate for Scarsdale Investment Group Ltd. in Blue Bell, Pa., where Ms. Richelson, who is his wife, serves as president. “So for the traditional adviser, recommending stocks seems to be a no-brainer.” But conventional wisdom about stocks is deeply flawed, Mr. Richelson said. “You have to make three adjustments,” he said. “First, taxes take away 15% to 50% of your gains on stock. Second, transaction costs and expenses reduce your returns another 2% to 10%, if you buy and sell stocks or stock funds, Mr. Richelson said. “And third, while it’s true that equities have a higher return than bonds historically, individuals tend to get in and out of stocks at the wrong time, so their returns don’t necessarily match the market,” he said. Skepticism abounds Advisers, however, remain skeptical. “I’m a little bit alarmed at this,” said Octave Francis III, chief executive of New Orleans-based FFC Capital Management and its parent company, Francis Financial Group LLC. “Statistics show that if you’re 100% invested in bonds, you’ll experience volatility equal to that of a portfolio mixed with stocks and bonds,” he said. “You still have standard deviation.” Such objections to an all-bond portfolio aren’t uncommon, but Mr. Richelson dismissed them. “Volatility with respect to safe bonds is meaningless,” he said. “Bonds come due, and stocks don’t. It makes no sense to discuss if a bond price goes up or down if you’re going to hold on to it until it matures,” Mr. Richelson said. Lee Slater, a certified financial planner and president of New York-based Lee Slater and Associates, noted that investors who hold a long-term bond may, in fact, have to sell the bond before it comes due. “Prices can fluctuate significantly over a period of time,” he said. “If you have to get out at a point in time before maturity that you can’t control, you can take a serious loss.” Mr. Francis and others also point to modern portfolio theory’s espousal of the benefits of diversity when investing. “A mixed portfolio will have the same variation and risk, but the returns will be substantively higher,” he said.
The argument for a diversified portfolio weighted toward stocks, Mr. Richelson contends, rests on the premise that an investment in stocks will match historical returns. “I just don’t see the basis for that,” he said. The book also argues that it is a “myth” that bonds are for income and stocks are for growth. “Bonds provide income and growth,” Mr. Richelson said. “If you take the income a bond generates and reinvest it in more bonds, you get growth. If you purchase a $1,000 zero-coupon bond for $500, the bond will return $1,000 on its due date; the additional $500 represents growth through compound interest,” Mr. Richelson said. ‘Plain vanilla’ offerings He also stressed the safety of “plain vanilla” bonds, such as AAA-rated municipal bonds or blue-chip corporate bonds, especially during volatile markets. Although Ellis Liddell, president of Southfield. Mich.-based ELE Wealth Management LLC, said he is sympathetic to Mr. and Ms. Richelson’s case, he said the current instability of the market, as well as “unknown factors” that may lie ahead, have caused him to re-evaluate his traditional views. “I hesitate to say anyplace is a safe haven — even bonds,” he said.

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