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11/17 Bonds Case Study

We were happy to host our final case study of the semester this past Thursday with IronBridge Private Wealth! We had a great discussion about the role bonds play in financial planning as we navigated different hypothetical scenarios about the subject. Keep reading for a full recap along with the case studies we used.



Speaker and Company Backgrounds

  • Shane - founder of IronBridge

    • Went to Amherst College

    • Moved to South Florida and did consulting in traditional wealth management

    • Worked for New York Life for 2 years

    • Moved to Austin 10 years ago to work in fixed income

    • Got bored in that position and started IronBridge in 2016

  • IronBridge has 5 offices around the country

  • Adam - has worked for IronBridge for 2 years

    • Moved from Connecticut to Austin office 6 months ago

  • IronBridge is a fiduciary

Case Study 1: Inflation

  • I-bond - government issued bond

    • Interest rate changes every 6 months based on inflation

    • Must keep it invested for at least a year

    • These tend to be good investments for most people - generally regardless of age

  • Luisa could invest as much as $50,000 in I-bonds because the limit is applied per SSN (her, her husband, her three children)

  • Shane would first want to know about Luisa’s current cash flows to make sure that those are liquid enough - an I-bond will be relatively illiquid because it can’t be touched for a year

  • He suggests grouping your assets into 3 buckets

    • Preservation assets - ex. Cash, CDs

    • Normal investments - ex. Stocks, bonds

    • Tail distribution investments - ex. Venture capital

  • In a low inflation environment, I-bonds would only be purposeful if a person has the direct intention of hedging against inflation

Case Study 2: Short Term Bond Investments

  • Joshua appears to have some psychological propensities that might overexpose him to risk

  • Shane’s approach would be to learn about Joshua’s time horizons and ask him about how long he expects to keep the money in cash

Case Study 3: Junk Bonds

  • High yield bonds (more positive connotation for junk bonds) have a higher correlation to stock market than lower yield bonds

    • Difference between these and stock market is that these produce a consistent cash flow while the stock market likely won’t (unless you get dividends)

    • These can thus allow for cash flow diversification

  • Shane would ask Christa how much she understands the convertible nature of the bonds

    • If she doesn’t understand the convertible nature well but feels strongly about the company’s prospects, does she want to just buy the stock, or to purchase a call option?

  • Because this is a private offering, it’s important to keep in mind that it is illiquid

    • The bond market is like selling a car - people message each other via Bloomberg

  • The rule of thumb in a bond portfolio is to have 20%-25% of bonds be high yield bonds

    • This can vary depending on risk tolerance

  • If you think the economy is going to go into a recession, you would typically adjust to have less exposure to risky bonds

    • This would be because the quality of bond offerings would decrease - companies might be more desperate for capital and with other sources of funding dried up, poorer quality companies will be more likely to issue bonds

    • You would typically then add exposure to high yield bonds when you are coming out of a recession



 
 
 

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