All About Bonds

Investing

This blog post is all about bonds. If you’d rather watch my YouTube video on the subject, here it is:

I was trying to decide how much of my investment portfolio should contain bonds. So I decided to do a bunch of research into bonds, and here’s what I found. Sorry this isn’t the video about my portfolio, like I promised last time, but I needed to do this research, so I thought I’d share it with you.

You know what a loan is, right? You lend a person money, and they pay you interest for a certain term of time if you’re lucky, and at the end of the loan, they give you back the principal. A bond is a legally binding form of such a loan between governments or corporations and you. You buy a bond, they pay you interest over the course of a number of years, and then at the end they give you your money back. The government or corporation wants to borrow some money, and they can do it from you!

There are two kinds of bonds – corporate bonds and government bonds. Government bonds can be federal, or municipal. Bonds from lower levels of government are riskier than federal bonds because those levels of government can default on their loans and can’t just print money to pay their debts. US Treasuries are bonds from the federal government. 

Not only can municipal governments default on their loans, but corporations can also get into trouble and not be able to pay you back. Buying a bond from a stable and profitable company is a much safer investment than buying from a fly-by-night startup. So bonds have different ratings.

There are companies out there that rate bonds. In the US there are three primary bond rating agencies: Standard & Poor’s Global Ratings, Moody’s, and Fitch Ratings. Each has their own rating system, but they’re similar. For example, Standard & Poor and Fitch both rate their bonds AAA, AA, A, BBB, BB, B, CCC, CC, C, and D. The best is an AAA rating. Safer bonds generally have lower interest rates than riskier bonds. You want investment grade bonds, which are the ones that are less risky – BBB and up. And you want to stay away from high yield or junk bonds – the ones with really poor ratings – BB and lower.

Primary issue bonds are ones you buy directly from the issuer through a broker or directly from the government. Secondary issue bonds are those that you buy from someone who already owns the bond.

Investment grade bonds are a lot safer than buying a stock. For this reason, people like putting bonds in their portfolio to both add diversity and safety.

It’s possible to buy bonds that have already been issued. But it’s unlikely that you’ll buy it at face value. Here’s why. Say a 10 year bond was issued with a 5% yield or interest rate. But the next day, interest rates go down to 1%. New bonds would have to be issued at the 1% rate. So now that 5% bond looks really good, doesn’t it? If you had to choose between the 1% bond and the 5% bond, you’d choose the 5% bond. So the person selling it to you can up the price a little, and as long as they don’t raise it TOO much, you’d still be willing to pay.

But buying bonds directly is safe – especially if you buy US Treasury bonds. You get regular interest payments and principal returned at maturity.

If you want to buy individual bonds you have to buy them from the government or over the counter from a bond broker. A bond broker is someone who deals with buying and selling bonds.

Benefits of bonds:

  1. Less risky than stocks.
  2. Diversification – not just stocks.
  3. Income from interest.

Bad about bonds:

  1. Lower returns than stocks.

But say you don’t want to buy individual bonds, and don’t want to wait years for them to mature, only to buy more bonds, etc. Also, you want more diversity in your bonds.

This is where a bond fund comes in. You can buy a basket full of bonds, either in a bond mutual fund or a bond ETF. I don’t like mutual funds, so we’ll just talk about ETF’s here, but the concepts are the same.

A bond ETF is a basket of a bunch bonds. This provides diversification. If one of the bonds goes into default, it’s just one of many many bonds in the fund, and will have minimal impact. And you can buy shares in that ETF on the stock market, which is very easy to do. Just contact your broker and ask them to do it, or do it through your broker’s website or using your brokerage account app on your phone. Bonds usually have denominations of $1000 or $5000 or more, but shares in an ETF usually cost much less than that, so it’s also easier to get started. You don’t need to buy individual bonds yourself – the ETF people do.

The owners of the bond ETF will constantly be cashing in bonds as they mature and will buy new bonds. They will also typically pay you a dividend, which comes from interest from bond payments or from selling of bonds themselves. While a bond ETF is not guaranteed to give you a dividend, it’s still very likely. Check the ETF’s payment history online to see what their payments are like. Another risk with bond funds is that they do not guarantee the return of principal. If you buy a US Treasury bond, the government will guarantee you your interest payments and return of principal when the bond comes due. A bond fund, however, may go up and down in price, and when you decide to sell, the price may be lower than at the time you bought it.

Bond etfs are more liquid than buying or selling bonds directly with dealers. Just go to your broker and buy and sell at will.

So, now you know about bonds.

What I’m personally trying to determine right now is how to rearrange my portfolio to follow a real strategy. Up until now, I’ve just tried purchasing funds that looked attractive. But I want to start following a strategy.

So that means I need to come up with a strategy, which partially means determining how much of my portfolio will be in bonds. I haven’t come up with an answer yet.

In case you want a place to start, here are the names of some bond funds that I know of. But it’s just a small list to get you started:

iShares Core U.S. Aggregate Bond ETF (AGG)

BMO Long Corporate Bond Index ETF (ZLC.TO)

Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)

Don’t Buy Stocks! Except …

Investing

This blog post is about buying individual stocks. If you’d rather watch the video instead, here it is:

I made two purchases recently and I thought they were rather interesting. One was some stock, and the other purchase was a fridge. I put a whole lot of thought into the fridge – a lot of research and measuring and making sure I had the right fridge type and the right make. (An LG with french doors.) As to the stock I bought, well I thought it’d be cool to get into this bitcoin thing so I bought a company – HIVE – that makes bitcoins.

Now which do you think I put more research into? The fridge or the stock purchase? Well, the answer is the fridge! I recently gave some stock buying tips and I didn’t even use any of them for making this decision! It was a spur of the moment kind of thing. And I think that’s a problem – I think lots of people when they buy stocks, they don’t put as much thought into it. Stocks appreciate in value and do you well in the future, to be counted on in retirement. But sometimes we give more though to purchases that last just a few years versus purchases that should help you retire!

I’ll tell you later why I think it might have been okay in this case. But in general maybe I should have learned even more about HIVE before buying in. Like using some of those stock buying tips I recently researched. And there’s a whole lot more to it than that as well. For what it’s worth, I am not a financial advisor so I have to tell you that you need to do your own research and don’t just be trusting me. I’m trying my best, but I’m not expert.

Anyway, say you become an expert: you go to financial school for years, you watch videos, you study books, you learn from mentors. You’re an expert in the field finance and the stock market. Now that you’re an expert, what’s you’re track record going to be like? Hopefully the stock portfolio you put together will beat the market because if it doesn’t, you might as well just buy a market ETF instead – no need to buy stocks yourself. (An ETF is a portfolio of other stocks or funds that usually tracks some kind of index, like the S&P 500.) So all these people that are out there that are experts in the field of buying stock – how well do they do? Well it’s been shown, and you can do research online, that even the experts over the long term don’t beat the market. Over 80% of experts couldn’t beat the market over the long term. Actually there’s a great video on YouTube by Ben Felix about why it’s so hard to beat the market – I highly recommend you look it up. It’s called “Why it’s So Hard to Beat the Market.”

If it’s so hard to beat the market, the question then becomes why do you think that you can beat the market? Because I bought that HIVE stock a little while ago and somebody actually sold it to me. That means that they didn’t want the stock that I did want. So what makes me smarter than that guy? Anytime you do any purchase you can ask yourself: what do you know that the guy who’s selling it doesn’t? So you have to wonder if it’s really worth buying individual stocks. Should I buy individual stocks in my portfolio? The short answer for me is “no”. If you want your portfolio to do well – to beat the market – you’re playing a loser’s game.

Don’t take my word for it. But first, you need to know what and ETF is. An ETF is an exchange traded fund – it’s just a basket of stocks, bonds, or other ETFs and you can buy on the stock market. An typically tracks the an index of some kind. The most popular ones track the S&P 500, or the whole market, or some other big index like the Nasdaq. Now that you know this, here is a quote by Warren Buffett – a pretty famous investor who’s done really well for himself. He says a “low cost index fund is the most sensible equity investment for the great majority of investors.” Another well-regarded investor is Peter Lynch, and he says that “most investors would be better off in an index fund.”

So the question is: should you buy ETF’s or should you be buying stocks? I think that for my retirement an index fund is the way to go. Actually, I am buying more than one index fund in order to diversify. Three to seven index funds, or four to six, depending on who you listen to. I’m trying to figure out the best set of index funds to buy. I already own lots of ETFs but I’m thinking about paring it down because I made decisions that might not have been optimal, so to speak. So I will also be selling some of my stocks. I already sold recently to buy ETFs with. And I’m deciding which ETFs I should buy.

I decided I am not going to buy large amounts of stock anymore. I’m only gonna buy small amounts of stock. A while ago I bought Tesla (TSLA) because my son he really likes Tesla cars. So now we can say that we own a part of Tesla. And guys how many shares I bought? One! 😛 (It has since split). It was a fun purchase, but because I don’t have a crystal ball I decided one share was enough. I also bought a few shares of Shopify, a great Canadian company, because they’re a local firm and a friend of mine started working there. Coincidentally they’re doing really well too. One of my biggest individual stock purchases was AT&T. Some guy on the internet was suggesting them, and he seemed to really know his stuff, so I bought some AT&T stock. Right now it’s down 30%. So yeah… there’s that. That taught me the lessons of a) don’t trust random dudes on the internet – do your own research. And b) individual stocks are always a gamble. One guy on my TikTok channel said speculative investments shouldn’t be more than 1% of your portfolio. Makes good sense to me.

Beating the Stock Market! Here are Some Stock Picking Tips

Investing

So you want to buy some investments? You hear that investing is a good idea? So how are you going to invest?

If you want to see this article in video form instead, here it is:

Maybe you just pick a name out of a hat – you go in here and pick a name and like Berkshire Hathaway. Or maybe some Tesla! Or Apple, or Coca-Cola or Proctor & Gamble.

Maybe you’re looking online and you see you see headlines like this one I found: “Four of the Cheapest Stocks to Buy Right Now”. Sounds good because you always want to buy low and sell high, right? Or what about this one: “One Dividend Aristocrat Set to Soar and One You Should Ignore”. Okay – I want the one that will soar, right? I don’t want to have the one that I should ignore. So maybe I should buy that one that’s gonna soar. (By the way, a dividend aristocrat is a company that pays dividends pretty regularly and is a very stable company so you can count on. That’s kind of what they’re supposed to be at least, because you never know for sure.) What about this headline: “This Stock Could be One of the Biggest Winners in a Post-Pandemic World.” Sounds good, right, because we all know pandemic is going to end sooner or later.

So is this what you’re going to do? Follow advice you see online about stocks you need to buy and get into? Or are you going to do a little bit of research first? Or are you not going to buy stocks at all? It’s up to you of course. But I did some research and have some tips for you today for how to pick stocks and I’m gonna be going through some of them with you right now.

But I have to tell you even these tips are not everything. They’re just scratching the surface. There’s so much that you should learn! I did a bunch of research and about how to buy a stock and I came up with these tips as some of them and then after I had all these tips together I saw a video on the Learn to Invest YouTube channel called “Eight Steps to Research a Company to Invest In” and they had a whole bunch more tips that were not even on the list that I put together. Like, one of them was to buy a book by people close to Warren Buffet about how he interprets financial statements. Because if you’re gonna really research a stock you need to look into the financial statements from a company. Great tip! And there were many more. So don’t take this list as definitive. It’s just a starting point.

Let’s get into it.

One of the first things you need to realize is that you need to take into account your what you want your portfolio to achieve. Do you want it to grow really quickly? Do you want it to be as stable as possible? Or do you want it to provide retirement income? What about having your investments be as safe as possible? You need to think about what you want your portfolio to achieve and then make sure you buy a stock that falls into that strategy. It’s no good buying a highly volatile penny stock if your investment aim is stability and wealth preservation. So you want a stock that fits.

So you decided that maybe a company would be a good fit for your portfolio. What can you research about this company and it’s stock to see if it’s a worthwhile investment?

One of the more obvious and simple to explain ones is earnings growth. Is the company growing? Plain and simple. Are they making more money every year or not? You don’t want a company that’s not growing or that’s falling behind because in the long run that stock’s not going to do well. And you might want to compare it to its peers as well. Because if it’s growing at 2% per year and all its competitors are doing 12%, that’s a red flag. There may be a reason for it, but there’s more research to be done there.

There’s a couple ratios that you need to understand and here is one of the big ones: the price to earnings ratio, or PE ratio. Basically, you divide the stock price by the earnings per share (EPS) and that’s the ratio. If you don’t have the earnings per share, that’s just how much earnings the whole company made divided by the number of shares issued. So the price to earnings is you divide the stock price by EPS and then you get the price to earnings ratio. You should find the PE ratio for this company (it’s usually provided when you look up a stock with your broker) and compare it to other similar companies in the same industry and see if it’s a good PE ratio or not. Generally, PE ratios falls between 13 and 18. (Though I didn’t see exact consensus on this range in my research.) Anything below that range is considered cheap, and above that range is considered expensive. But you have to realize every industry is slightly different.

Dividends! Does your company pay dividends? Do you even care about dividends? Some people don’t care about dividends. Actually I watched a video explaining why people shouldn’t care so much about dividends. (Because there’s a huge group of people who call themselves dividend investors, who are constantly chasing the best dividend stocks.) When a company pays out dividends its stock price goes down commiserate with how much money it had to spend to pay its shareholders, because that money is no longer in the company and it is worth less. So at the end of the day it doesn’t matter if they pay out dividends or not, but some people really like dividends. And you might be one of them so take a look at a company’s dividend information. The most obvious thing to check is the yield. If a stock has a yield of 3% for example, and you buy $1000 worth of the stock, the company will pay you $30 every year. Another thing to watch for is the payout ratio. This is how much of the company’s earning go to paying dividends. A good ratio is in the 35% to 55% range. There are exceptions to that rule, and you have to know about that too. For example REITs are mandated by the government to give out a large amount of their profits so their payout ratios are going to be much bigger than 35% to 55% and that’s expected. (A REIT is a Real Estate Investment Trust, and a great way to get into real estate without actually buying properties yourself. Do some research into them!)

For the next one on my list I’ll keep it short and sweet. And it’s the company’s management. How well is the company managed? Does it have a good culture? Does it churn through CEO’s, or is it stable?

Next up is a company’s relative strength in its industry. First, is the company in a good industry or is it in a falling industry? For example, I wouldn’t want to be in newspapers right now but internet growth stocks might be a better thing to be into. You need to do that research. So even if the industry is a good one, you need to know if the company is strong within that industry. Just because it’s a good industry doesn’t mean that companies gonna be doing well within that industry. So check to see how well is it doing compared to its peers.

Stability. There’s two kinds of stability. One is the company’s stock price. Does the price vary wildly? Can you handle a wildy eratic stock price or do you want something that tracks the market better? The second kind of stability is in the company itself. This is related to the management of the company. Do lots of employees leave? How long has its CEO been the CEO, and what about the CEO before that? Does it keep changing its product line? Etc.

Let’s look at another ratio. It’s the debt to equity ratio. Generally it should be less than 0.3 and it is exactly what it sounds like: how much debt does the company have versus how much stuff it has. You know that on a personal level if you take on a huge debt that you can’t handle, that’s not a good idea. The same thing goes for a company. And again, you have to watch which industry it’s in because industries have higher ratios than others, just because of the way they’re structured.

So I’ve just given you a whole bunch of little tips about how to look at a stock but there’s more, like I said at the beginning. You need to do more research and to be frank I don’t even know if you should be buying stock and I’ll be getting into that in the next video. But if you do want to buy stock these are some tips for you to watch out for. But don’t take my word for it – I’m just some random guy sharing what I’ve learning. I’m not an expert. So watch out for my next article and video where I talk about the fact that maybe you don’t want to be buying stocks in the first place.