Author Rick Van Ness, an engineer and businessman by training who is now a retired executive on a mission to increase financial literacy, recently published his second book, Why Bother With Bonds and has sent me several copies to give away to you good readers. Rick is a far better man than I, as his entire enterprise, unlike this website, is completely not for profit. In fact, he was giving the Kindle version away for a few days the week before Thanksgiving. All the money he makes from his books and videos he plows back into the mission. You may recall that I reviewed his first book, Common Sense Investing, on the blog and added it to my recommended list. I will also add this one to the list.
A Bond Primer
This is one of three great books out there on bond investing. The first, my introduction to the subject, is Annette Thau's The Bond Book. The issue with Thau's book is that it is unlikely that very many doctors will ever get through it, since it clocks in at 400 dense pages. The second is Larry Swedroe's The Only Guide to a Winning Bond Strategy You'll Ever Need, which is quite a bit more readable, and only 272 pages. I also like that Swedroe not only teaches you about bonds, but also gives his opinions about which bonds you should invest in. Why Bother With Bonds? clocks in at a mere 156 pages, and is ILLUSTRATED with Carl Richard's famous napkin sketches. To make it even better, despite the title, only the first 100-120 pages are about bonds, so if you're just looking for a primer on bond investing, you can stop right there. I don't think a book on bond investing should be among the first books you read. I generally recommend your first three books include one on personal finance, a broad book on investing such as Van Ness's first book, and one on behavioral finance. But a bond book would be worthwhile as your fifth or sixth read in your ongoing quest for continuing financial education.
Combined with Random Boglehead Wisdom
The second section of Van Ness's book has little to nothing to do with bonds. To be honest, it probably doesn't even belong in the same book as the first book. It's almost like Rick just wants to help the reader so much that he just throws in all kinds of (admittedly useful) semi-related topics at the end. In many ways, Rick functions as the spokesman of the Bogleheads, and his books distill the basics of the forum's collective wisdom on these topics. The book is even dedicated to “The Bogleheads.” For someone who has been on that forum for years, I understand exactly what he's talking about with each little topic, even when at times he doesn't explain it well. For someone without that experience, I worry that much of what Rick writes in his books, and particularly in this section of this book, goes flying right by. That's my first of eight minor criticisms of the book.
Why Bother With Bonds?
The second criticism is that I didn't feel like he spent enough time addressing the question inherent in the title of the book. His answer to the question: Why Bother with Bonds? boils down to “because stocks are volatile.” He dedicates just 12 pages to that question in the book, but it mostly comes down to the same thing. He should have more readily acknowledged the very good argument against holding assets that are currently highly likely to underperform inflation, especially after-tax and expenses. I also think he should have included the following reasons more explicitly in his list of arguments for including bonds in a balanced portfolio:
- Bonds might outperform stocks over your investment horizon
- Bonds (TIPS and I Bonds), unlike most investments, can provide guaranteed inflation protection
- Bonds (particularly TIPS) can be laddered to provide a guaranteed (real) amount of money at a guaranteed time
- The bond market is far larger than the stock market
- Bonds (munis) can provide tax-free returns
- Bonds (savings bonds) can be used as an extra educational savings account (not for high earners)
I expected to see all these, and a few receive a mention elsewhere in the book, but not in the section titled Why Bother With Bonds?
Rick is a true acolyte of the Larry Swedroe school of bond investing. Basically, that means short-term, high quality bonds only, with all risk being taken on the equity side. There are good arguments for that school of thought. But there are also good arguments against it, and Rick does his readers a disservice to not point them out, whether he agrees with them or not.
He also seems to be a believer in the “free-lunch” theory of bond investing. He explains it like this:
The overall net result [of investing in stocks and bonds] is to get more return for the same amount of volatility, or risk.
While adding bonds to a portfolio certainly lowers risk, and perhaps improves risk-adjusted returns, I've never seen data that it actually increases returns, and that includes the chart Rick used in the same chapter showing a higher return for a 100% stock portfolio compared to an 80% stock portfolio. In my view, a free lunch is something like the G fund- bond yields for money market risk. Adding bonds to a portfolio isn't a free lunch, the decreased volatility comes at the price of lower returns.
No Credit Risk With Treasuries?
Van Ness also makes the common and perhaps forgivable error of assuming US treasuries have no credit risk. Has it really been that long since our last threatened government shutdown (less than 2 years ago?) Not to mention when the US actually did default on its bonds in 1979. Sure, they carry less credit risk than munis, corporates, and certainly Peer to Peer Loans (surprisingly not mentioned in the book at all, along with EE bonds) but not zero risk.
The High Expected Returns in Roth Error
Rick also passes along a misguided recommendation that I have written about before. He says, “Put [assets with the] highest expected growth in your Roth accounts because they are forever tax-free.” The truth is it doesn't matter if you tax-adjust your various accounts. Since most people don't (because it's a major hassle) what you're really doing is taking on more risk in hopes of probable higher return. That's okay, just realize what you're doing.
Tax-Protected vs Taxable
He also only partially addressed the decision of whether to put stocks or bonds in your taxable account. It isn't just about tax-efficiency. It's also about rate of return, since a larger tax-protected account is more valuable than a larger taxable account. The goal isn't to pay the least in taxes, it's to have the most left after paying them. However, this is admittedly a rather advanced, evolving, and difficult to understand topic. It might have been better to just leave it out of a book like this all together.
Repetitive and Disorganized
It is very hard for a self-published book author to criticize another one. Also, bear in mind that the copy I read was a proof copy, and certainly not the final product. However, this book is not nearly as polished or well-edited as the competitors. Several times, the full discussion of a particular topic seemed to be split into several different sections of the book. At times, it feels like Rick wants to help you so much he just starts throwing everything he knows about investing at you all at once. Doctors can appreciate the feeling of drinking from a fire hose from medical school. A reader who hasn't spent much time on Bogleheads.org may feel that way at times while reading the book.
At one point, the book referred to “Dr. Frugal's portfolio,” which I was excited to see, until I realized it wasn't anywhere in the book. When I published my book, I found it super valuable to have some very smart people read through it and brutally criticize it (and trust me when I say there was much to brutally criticize in the first few drafts.) I don't get the impression that Rick did the same thing, but wish he had, because it would have turned a very good book into an excellent one.
Strengths of the Book
That's it. I have nothing else to criticize in the entire volume and can strongly endorse 98% of it. One of the best parts is a graph of stock market performance that stops it in March 2009, hiding the rest of the chart. It really illustrates a strong argument for holding bonds when you realize that none of us knew for sure if stocks were going up or down from there. He also does a fantastic job illustrating the fact that you cannot escape interest rate risk simply by holding bonds to maturity. His explanation of duration, a critical investing concept, is the best I have ever seen.
He also utilizes a great teaching technique in the book- periodically giving quizzes, asking you to choose the true statement, such as this question:
Which of these is true?
(1) An interest rate increase can be good for investors
(2) A bond fund is just as risky as a stock fund
The charts and graphs and Richard's illustrations also add a great deal of variety and value to the book. I especially liked his graph comparing the glide path of the Vanguard Target Retirement funds to the “Age in bonds” and the “Age-10% in bonds” strategies. I also loved that he gives strong recommendations for how he thinks you should invest, even if I don't always agree with them. There is plenty of good, actionable information for the do-it-yourself investor in the book.
The Two Best Chapters
Two of my favorite parts of the book probably don't belong in there at all, but they're still great pieces of writing. The first is a random chapter about how a 1% fee is NOT small.
One percent may be small compared to 100%. But earning 5% and then giving away 1% as a fee is huge–it's one-fifth of your earnings, and some years, much more….Would you like to know the easiest way to increase your wealth by 33% in the next 30 years? You guessed it! Simply reduce your investment fees by one percent….The way to make this happen is to become keenly aware of the fees you are paying. The ways you become keenly aware are:
Constantly ask yourself, “How does this service provider get paid?”….
Convert all these fee percentages to actual dollars, then ask yourself whether you are getting good value….
Develop radar for recognizing conflicts of interest. Go ahead and ask how they get compensated for selling you particular products….
Notice that while I am an ardent do-it-yourselfer, I am NOT requiring this of any of you. Instead, I am proposing you simply get educated. Decide what services you might want, and don't pay for services you don't want or need.
My second favorite part (and Rick wrote me a note saying he knew I'd like it, and he was right) is a chapter showing that frugality is about intentionally spending on those things that will make you happy, rather than being cheap, stingy, miserly, or tightwad.
Frugal people know that money is something you trade life energy for and they prioritize how they use that valuable commodity. After all, is there any thing more vital to you than your life energy? Frugal people understand that they can get far more enjoyment from saving hard earned money and spending it carefully, than by working harder and longer to buy things we only marginally value.
He then demonstrates how a dollar saved is more than a dollar earned, it is actually the equivalent of 3.3 dollars earned, and probably more for a highly taxed individual like a physician.
In short, Rick has done investors a huge favor by compiling all this great information into one place. He isn't selling anything for his own personal profit, including this book. The book isn't perfect, but I certainly highly recommend you purchase and read it. It will be on my recommended reading list. I will give away three copies of the book randomly to those who comment on this post. The rest of you should
Have you read the book? What did you think? What do you think is the best book on bonds for investors to read? Just want a free book? Comment below!