What is Bond Duration?

What is Bond Duration?

What is Duration? It is important to understand that duration is a way of measuring how much bond prices are likely to change if and when interest rates move. In more technical terms, duration is measurement of interest rate risk. 

The key point to remember is that rates and prices move in opposite directions. 

When interest rates rise, the prices of bonds fall, and vice versa. The higher the bond’s duration, the more its price will fall as interest rates rise. If interest rates are expected to fall during the time the bond is held, a longer duration bond would be appealing because its price would increase more than comparable bonds with shorter durations. As a general rule (with equal credit quality) the shorter the bond’s duration, the less volatile it will be. 

For example, a bond with a one-year duration, would only lose 1% in value if rates were to rise by 1%. In contrast, a bond with a duration of 10 years would lose 10% if rates were to rise by 1%. Conversely, if rates fell by 1%, bonds with longer duration would gain more while those with shorter durations would gain less. 

Why is Measuring Duration Helpful?

Because every bond and bond fund has a duration, those numbers can be a useful tool that you and a financial professional can use to compare bonds and bond funds as you construct and adjust your investment portfolio. 

This is particularly important when interest rates are expected to rise or fall, as it may provide opportunities to invest or reasons to be concerned. 

Interest Rates Are Rising. What Does That Mean For Me?

As we indicated before, rising rates mean that long duration bonds are set up to take higher losses than short duration bonds. For your own portfolio, you should also examine what type of bonds in each of your funds. 

Duration is one piece of the puzzle, but credit quality also is a factor in bond performance. 

Lower quality bonds generally pay higher interest rates but are also more susceptible to default or can recognize higher volatility. As an investor, you can rely on active managers to manage duration and/or credit quality, or you may choose to use index funds to get exposure to bonds. Should you choose to utilize index funds you should perform a deep dive into the portfolio statistics of the bonds including a view of the duration, credit quality, and type of the bonds. 

Why Should I Care?

For most investors, bonds are a safe haven investment. Interest rates have been falling for a long time and only recently have been on the rise. Losing money in bonds is a foreign concept to many investors, which has caused many to take a closer look at what they own inside their funds. Ask yourself why you hold bonds and how you prefer to manage the risk in a rising rate environment. Work with a trusted professional to make sure you have the right amount of exposure for your financial situation.

-Clint Walkner

Constructing a Financial Services Team

Constructing a Financial Services Team

For the entire summer of 2018, we have had a front row seat to the road construction outside of our windows. And while we have said our fair share regarding the traffic backups and navigation difficulties, we are excited to have the finished product be a significantly improved thoroughfare for our neighborhood.  

Watching the crews work on a day-to-day basis has also taught me a great deal about the similarities of construction crews and financial planning firms. The precise coordination and communication required to ensure that the work is completed safely and correctly was quite impressive.  At any given time, there were a handful of massive pieces of machinery working simultaneously, in the same space, within a step or two of each other. The operators, each with their own set of skills and expertise, would work with verbal cues and hand gestures to move jagged concrete pieces the size of a smart car. What does any of this have to do with a financial planning firm, you ask?  

We feel a well-built financial planning firm should operate in a similar way. Having multiple people with the exact same skill set will only lead to groupthink and overlap. We determine who excels in different areas and divide tasks accordingly.  Clint does the majority of trading and portfolio construction. I handle big picture operations including banking and accounting. Jon is an expert in business development and Mitch’s engineering background makes him perfectly suited for day-to-day operations. We all have knowledge and proficiency regarding investment product and financial planning. The utilization of each specific skill set allows us to give the best experience to our clients.

While none of the Walkner Condon team is equipped to operate a backhoe or an earth mover, we do have skill sets that are honed for financial planning.  We are humbled by our clients’ commitment to our firm and continue to look for ways to improve the experience. It is also not lost on us the amount of planning and patience required to get to the finished product. As the trucks continue to roll outside of the office, progress is being made but the project is far from complete. We have learned that the same level of patience is required to see a financial plan from start to finish.          

Nate Condon

How Much Are You ACTUALLY Spending?

How Much Are You ACTUALLY Spending?

I remember the first time I sat down to take a look at the amount that I was actually spending versus what I THOUGHT I was spending.  It was the first year of my marriage and we were not exactly hauling in a ton of income.  Cell phones were just coming out and gas prices were actually below $1.00/gal.  We did not have any children yet so we were trying to live off of a $150 food budget.  I think our monthly budget was around $1,200 and we were spending $1,400.  It doesn’t seem like a lot, but that is a difference of $2,400 a year and we decided to make cuts immediately in order to get our finances in order.  From that day forward, I have been using the same detailed Excel spreadsheet to plan for all of our financial expenditures and income projections.  Now that I am a financial planner, I was amazed to find out that only 1 in 3 households in the United States prepares a detailed household budget!

It can’t be stressed enough that the easiest path toward financial success is to spend less than you bring in.  It is easier said than done!  But with a few simple changes to your habits you can get control of your spending.  First off, there are several ways that you can track your spending.  Quicken is a software application that can help you categorize and track your spending.  I like to do it the old-fashioned way and reconcile my transactions at the end of each pay period to make sure that we not over-spending.  It also helps me to make sure that I am on top of all of the “extras” or “impulse buys” as my wife likes to call them!  I then go back into my Excel spreadsheet and adjust for any future expenses that I want to budget for as well as compare our budget to our actual expenses.  I have been doing this now for 17 years and I have yet to have a year where we ended up spending more than we brought in even though we now spend $1,000 a month to feed a family of six. (Side note: Clint is not as old school and prefers to recommend apps like Mint or YNAB over an Excel spreadsheet)

It has been said that “If you fail to plan, you plan to fail.”  Budgeting takes work and it takes looking on a deeper level at what and where you are spending your money.  Determining how much you spend can help you set limits and in many cases, take the stress of money away from having a fear of running out or living in debt.  There was a great Saturday Night Live skit with Steve Martin and Amy Poehler that has timeless advice in the form of a fictitious book titled “Don’t Buy Stuff You Can’t Afford.”  As they said in the skit, it is pretty simple.  The book is only one page long.  If you don’t have the money to buy something, you should not buy it!

Jonathon Jordan

 

The (Potentially) Changing Landscape of Retirement Savings

The (Potentially) Changing Landscape of Retirement Savings

Something that we often hear is that “retirement will be a thing of the past”, that “without a pension, it is impossible to obtain the income that I’ll need in retirement”, or “small businesses don’t have enough incentive to offer competitive retirement plans”. These are common concerns since the number of companies that offer pensions have declined and many people question the sustainability of Social Security. Concerns over Social Security are as high as ever, so Clint and I recently discussed the findings of the 2018 Social Security / Medicare Trustees Report in a recent Gimme Some Truth podcast. But Social Security could be an entirely separate blog post! I’m here to write about a bill that I have been following that might address some of these concerns around retirement.

I recently read an article, which I decided to share on LinkedIn, that is following a bill called the Retirement Enhancement and Savings Act (RESA). Invesco describes RESA as a “bipartisan retirement savings bill”. If the bill were to be signed into law, it’s current provisions would affect 401(k) plans, IRA contributions, and other savings vehicles. Here are some of the things that could potentially change [thank you to Anne Tergesen from the Wall Street Journal for reporting the latest on these proposed changes].

401(k) plans

Plan sponsors (employers) would be required to provide an estimate of the monthly income that a participant’s balance would provide if annuitized. The idea is for the employee to think more about the amount of income that they need in retirement. Knowing the amount of income one needs is typically easier to understand than the notion of “if I save $1,000,000 I should be able to maintain the lifestyle that I currently enjoy”.

Congress is also attempting to provide incentives for small businesses to offer retirement plans by increasing tax credits and loosening requirements for joining a Multiple Employer Plan (MEP). If these changes were adopted, the hope is that more small businesses would offer retirement savings plans and the average American would have access to another vehicle to save for their retirement.

IRA contributions

RESA is proposing to eliminate the age (70 ½) at which a person can no longer contribute a deductible contribution to a Traditional IRA. People are generally living and working longer; this change would allow then to have the opportunity to reduce their taxable income and save for retirement past the current age limit for a Traditional IRA contribution.

Graduate students, which are abundant around Madison, WI, would be able to utilize their taxable stipend towards an IRA under the proposed changes.

New savings accounts

The bill proposed a “universal savings account” which would be less restrictive than retirement accounts such as an IRA. Tergesen reported that employers could be allowed to automatically enroll employees into emergency savings accounts. This auto-enrollment (note that employees would have the option to opt-out of the program) would encourage employees to protect themselves if they were dealing with an unexpected financial burden. This is commonly referred to as an “emergency fund”, and we encourage all of our clients to have one!

I’ll reiterate that this post is based on proposed changes. RESA is definitely something that I will be keeping an eye on because it could affect the way that people save for retirement and how businesses encourage their employees to do the same. 

Mitch DeWitt

Raising a Money Smart Child

Watch new father Mitch and father of four, Jonathon, to discuss their views on how to raise a money smart child. While teaching a child about money may seem like a daunting task, Mitch and Jonathon provide various ways to promote savings, develop positive habits and raise a child with high financial literacy.

 

My Four Year Journey: Saving Money by Using the Transfer Process

My Four Year Journey: Saving Money by Using the Transfer Process

My college experience was somewhat unconventional, I attended a two-year college before finished my college career at the University of Wisconsin – Madison. By utilizing the transfer program, I was able to complete college with no debt and a degree from a highly ranked university. I’d like to share with you more about my transition to four-year university, why I decided this path was the best choice for me and why it could potentially be a great path for you!

Whether you are facing college expenses for yourself or seeking to fund your child’s education, it’s no secret that seeking to minimize the overall liability is a universal goal. With the sticker price for a bachelor’s degree costing upwards of $100,000, higher education is clearly a significant expense. If there were a way to receive the same degree for less money, you would likely opt for that route, wouldn’t you? Well, if done properly, you could save thousands of dollars by first attending a community college, and that is exactly what I did!

Here in Madison, Madison Area Technical College has a program called the “liberal arts transfer”, this program provides a foundation for higher education, giving students exposure to several areas of study. They have even developed transfer contracts between certain four-year universities that guarantee acceptance as long as the contract requirements are met. This program has been developed for students to save money, live a more flexible lifestyle and have the ability to take courses while still working.

You do not begin to dive deep into your narrowed academic path until your junior year, and the first two years of a college education is overwhelmingly similar. As a freshman and sophomore you are completing the same elementary and elective courses to meet general requirements, whether you are at a two year college or a highly ranked four-year university. The difference being, the courses taken at the two-year college are significantly more affordable than those of a four-year university.  

This unconventional route generates more savings than simply expenses related to tuition and fees. Living expenses are also a significant expense associated with college that can be reduced through this path. While many four-year universities require a minimum of 2 years living on campus, attending a two year college eliminates this requirement and gives you additional flexibility to choose your living situation, and avoid the inflated living expenses that go along with living on campus. In my case, I was able to continue living with my family throughout my first two years, this minimized my living expenses significantly! While this situation may not always be an option, seeking more affordable housing that is not necessarily on campus is still a great and less expensive option than campus housing.

Here I am, a graduate with a bachelors of science from an accredited university for less financial obligation than if I would have attended it for all four-years. I was able to avoid taking out loans and growing my debt by simply lowering the overall expenses that I had through the transfer program. With the flexibility of courses, I was able to continue to work full time while also attending school full time. This, along with being able to stay at home and lower my personal living expenses, I was able to save a significant more money than the average college student. By making this decision, I received the same degree as my fellow classmates; I simply took a different path to get there.

 

Post Authored by Hanna Kaufman

Disclosure:Hanna is an unregistered intern with Walkner Condon Financial Advisors. As she is not registered as an investment advisor representative (IAR), this post is not to be construed as investment advice, nor should you act on this post without discussing your particular situation with a trusted financial advisor. Any questions on this post should be directed to our Chief Compliance Officer, Clint Walkner.