Personal Wealth Management / Expert Commentary
Ken Fisher on the Role of Bonds in Your Retirement Portfolio
Fisher Investments’ founder and Co-Chief Investment Officer Ken Fisher believes, instead of using bonds, there can be more efficient ways to generate retirement cashflow.
Title Screen Appears, “Ken Fisher on the role of Bonds in Your Retirement Portfolio”
A man appears on the screen wearing a light blue shirt and yellow tie, sitting in his office.
He begins to speak.
A banner identifies him as Ken Fisher, Executive Chairman and Co-Chief Investment Officer, Fisher Investments.
Ken Fisher doing hand gestures time to time explaining.
Ken Fisher: So, I'm often asked by normal investors how bonds can help maintain cash flow in retirement.
Well, the answer to how they do it is they do it badly.
That's how they do it.
Can you use bonds to generate cash flow? Yes.
Is there a better way to do it than to using bonds?
Yes, I'll come back to that in a moment.
Ken Fisher: But the reason people think cash flow bonds is because they have difficulty with self-control.
And the bond by its nature pays a certain amount per unit of time which is cash flow.
And they think of that as I got this amount for this period of time therefore that's what I can spend.
And since that's what I can spend I restrain myself to that spending level which provides self-discipline.
Ken Fisher: It's almost like, and very much is, like a lot of sort of dieting techniques relative to attempts at weight control.
The diet tells you what to eat because you have difficulty otherwise with self-control and maintaining the weight and
I don't really have a problem with that. Does that mean it's the best way to do it? No, it's actually better because bonds, unless they're inside a tax deferred or tax-free account are taxed unless it's a muni bond and the rates on all these are low, doesn't really allow you to control cash flow very well or generate much cash flow at all.
Ken Fisher: In fact, when you think of how low let's say, for example ten- or 30-year US treasury bond rates are, you don't get a lot of cash flow out of that. The better way to think about it is to manage your investments for long term return to calculate a reasonable and conservative long-term return and then in a tax efficient way which bonds aren't, withdraw principal on a steady basis.
This you could think of as a synthetic cash flow.
Ken Fisher: You're just simply taking out of your principal that amount on a regular basis. If you think of that so many people will tell you and they're wrong, I shouldn't spend my principal in the way you should think about
portfolio management and retirement investing.
It's really one big simple pot.
The makeup of the pot should be aimed at trying to have high return relative to risk over time and the input of a low return, low risk component for the purpose of anything other than volatility reduction which bonds are very effective at.
Ken Fisher: Bonds are very effective at reducing portfolio volatility because bonds aren't very volatile in the short term. And if you're trying to reduce your short-term portfolio volatility because some things like stocks or commodities are very, very volatile and people often have emotional difficulty handling that volatility the same way they do handling, if you will, in a diet dessert. Like me, with dessert, I eat one piece of cake, then I want to eat another piece of cake, then I want to eat another piece of cake and pretty soon I weigh 25 lbs more.
Ken Fisher: In that same control fashion. The feature of the volatility of stocks or commodities or many other things drives people crazy.
So, you introduce bonds to reduce portfolio volatility, but not to generate yield. The best way to generate yield is to synthetically
create it by calculating a very safe, conservative, long-term rate of return, taking out, in a tax
efficient way from your principal that amount of money on a regular basis and controlling it.
Ken Fisher: That isn't what you commonly hear from people, but that actually is the best way to proceed. It's all about control.
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