Financial Focus – Diversity with Bonds, Even if Rates are Low

If you’ve needed a mortgage or another type of loan over the past several years, you’ve probably appreciated the historically low interest rates we’ve experienced. But if you’ve wanted to own fixed-rate investments, such as bonds, you might have been less pleased at the low-rate environment. Now, interest rates may be moving up somewhat, but even if they don’t hit the heights we saw in previous decades, you can still gain some key advantages from owning bonds.

One of the biggest benefits provided by bonds is their ability to help you diversify a stock portfolio. Stocks and bonds often move in different directions – in fact, the same economic or political forces that can be bad for stocks might be good for bonds, and vice versa. Consequently, if you own a reasonable percentage of bonds, you may not be as vulnerable to the impact of those inevitable downturns in the stock market. Keep in mind, though, that diversification can’t guarantee profits or protect you against losses.

Of course, the other major attribute of bonds is the regular income they provide through interest payments. Unless the issuer defaults – an event that’s generally unlikely, assuming you purchase quality, “investment-grade” bonds – you can count on receiving the same payments for the life of your bond. Then, once your bond matures, you’ll get back the original principal, again assuming the issuer doesn’t default. The ability to receive regular payments may help improve your cash flow and possibly help you avoid selling stocks to meet unexpected costs, such as an expensive car repair. And holding your bond until maturity can help you plan to meet specific goals; for example, if your child will be starting college in five years, you can buy a bond scheduled to mature at the same time, providing you with an influx of cash you can use for tuition and other school expenses.

Still, despite the benefits of diversification, steady income and the repayment of principal, you may find it hard to ignore the relatively low interest rates you’re seeing on your bonds. This is especially true if market rates rise, causing the value of your bonds to fall. (Investors won’t pay you the full price – that is, the face value – of your bonds when they can buy new ones issued at higher rates. So, if rates have risen and you want to sell your bonds before they mature, you’d have to offer them at a discount.)

One way of coping with interest-rate movements is to build a “ladder” of bonds of varying maturities. When your short-term bonds mature, you can reinvest the proceeds in newly issued bonds that may offer higher rates, while your longer-term bonds continue to pay you greater income. (Generally – but not always – longer-term bonds carry higher interest rates than short-term bonds.)

Even within this type of bond ladder, though, you will want to diversify your holdings among different types of bonds from different issuers. In any case, be sure to evaluate whether a bond ladder and the securities held within it are consistent with your investment objectives, risk tolerance and financial circumstances.

Don’t ignore bonds when constructing and maintaining your investment portfolio. No matter what interest rates are doing, you’ll find that bonds can play an important role in your portfolio.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

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Be an “environmentally friendly” investor

On April 22, we observe Earth Day, a worldwide event focusing on protecting the environment. As a citizen of this planet, you may want to take part in Earth Day activities. And as an investor, you can learn some valuable lessons from the environmental movement.

            Here are a few ideas to consider:

• “Recycle” proven strategies. Over the past few decades, we have discovered ways of bringing new life to objects we would have previously thrown away. When you invest, you also don’t need to discard things you’ve used before – such as proven investment strategies. For example, one tried-and-true technique is to simply purchase investments appropriate for your needs and risk tolerance, and then hold these investments until either your situation changes or the investments themselves are no longer the same as when you bought them. (To illustrate: You might have bought stock in a company whose products or services are not as competitive as they once were.)
• Avoid “toxic” investment moves. Since the first Earth Day in 1970, we have had some success in identifying and eliminating toxins in our air and water. You can also find – and avoid – “toxic” investment moves. One such move is chasing a “hot” stock. By the time you hear about this stock – from a friend, relative or even a television or internet commentator – it may already be cooling off. Even more importantly, it might not be suitable for your needs, either because it’s too risky or because you already own several similar stocks. “Hot” stocks aren’t so hot if they aren’t right for you.
• Reduce “excess” investments in your portfolio. Environmentalists stress the need for all of us to reduce our “footprint” on earth – that is, we can help improve the environment by owning less “stuff.” The same idea can also apply to investing. If you took a close look at your portfolio, you might find investments that you’ve held for years but whose purpose is no longer clear to you. Some may even be duplicates, or near-duplicates, of other investments. You might be able to improve your financial picture by getting rid of this “clutter.” By selling investments you no longer need, you could use the proceeds to purchase new investments that may be far more effective in helping you meet your objectives.
• Plant “seeds” of opportunity. Many Earth Day lesson plans for students emphasize the value of planting gardens and trees. As an investor, you, too, need to look for ways to plant “seeds” of opportunity so that you can eventually harvest the results. Specifically, look for those investments that, like trees, can grow and prosper over years and decades. Of course, growth-oriented investments carry investment risk, including the possible loss of principal. Yet, to achieve your long-term goals, such as a comfortable retirement, you will need some growth potential in your portfolio. You can reduce the level of risk by owning a mix of investments – including less aggressive vehicles, such as bonds – in your portfolio.

Each year, Earth Day comes and goes. But its messages have had a profound impact on generations of people interested in preserving our environment. And translating some of these lessons to the investment arena can have a powerful effect on your financial future.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Here’s how the tax reform plan could affect you

(BPT) – With the newly passed tax reform bill, the Tax Cuts and Jobs Act (TCJA), now is the time to start thinking about how this will affect you so that you can plan ahead for the outcomes you will start to feel in your paycheck as early as February 2018.

This tax reform affects virtually everyone; however, families, homeowners, residents of high-tax states, the medically uninsured and small businesses will be especially affected. Most taxpayers will experience changes that could reduce or increase their taxes owed. If you’re not sure how this may affect you, here is a summary of possibilities.

Families

Like most taxpayers, many families will be affected by the loss of personal and dependent exemptions of $4,050 per person. However, families with income under $200,000 ($400,000 for joint filers) will be eligible for an increased child tax credit of $2,000. Those with income over that amount may be eligible for a smaller credit. This, along with larger standard deductions, may or may not make up for the loss of the personal exemption. Families with dependents over the age of 16 may also qualify for a new family tax credit of $500 for each dependent who does not qualify for the child tax credit.

Homeowners and residents of high-tax states

Homeowners and residents of high-tax states like California, New York and New Jersey, who typically itemize because they have large expenses like real estate taxes and state and local income taxes, may not be able to get the full tax benefit for these expenses, which are capped at $10,000. Some may not find it worthwhile to itemize going forward. Itemizing deductions is only worthwhile if all expenses exceed the standard deduction.

Medically uninsured

Starting in 2019, there will no longer be a penalty for those without health insurance. The penalty, which had become more and more expensive since first implemented in 2014, will not apply to taxpayers without insurance in 2019. Taxpayers who did not have insurance for all of 2017 and do not expect to be insured in 2018 need to make sure to talk to a tax professional, who can help you identify if you qualify for a penalty exemption.

Small-business owners

Some of the largest changes in the tax reform legislation apply to businesses, both large and small. These changes may also affect some rental activities. Corporations will see their top tax rate reduced to 21 percent from the current top rate of 35 percent, starting in 2018. Pass-through entities (LLCs, partnerships and S corporations) and self-employed individuals will be able to deduct 20 percent of their business income, subject to some limits (based on the type of business and income) and phase-outs (based on the partner’s/shareholder’s total income).

Retirement

Under the current law, taxpayers can reconvert a Roth IRA into a traditional IRA. This allows taxpayers to avoid paying high tax bills on an amount of money that had fallen in value after the conversion. Now, taxpayers will no longer be able to reconvert a Roth IRA to a traditional IRA.

The bottom line is that with this new tax legislation, you’re still going to need to get your documents in order and file your taxes, as well as decide if you’re going to itemize and what deductions work for your personal situation. This year, it’s more important than ever to talk to a tax professional about how this affects you to ensure that your taxes are done right and that you have a clear understanding of how changes that take effect in 2018 will impact how you file in 2019.

To learn more about the tax reform, how it may affect you and what steps you can begin taking to reduce what you owe in 2018, visit www.hrblock.com or make an appointment with a tax professional.