Linden Thomas - How Bonds Work
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Linden Thomas & Company

How Bonds Work

Bonds are critical for generating income during retirement. Building a bond portfolio that creates strong net cash flow means you don’t have to rely as much on other assets for your living costs.
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The importance of bonds in a portfolio cannot be overstated.

How Bonds Work

While historically bonds haven’t outperformed equities, they really shouldn’t be compared as an equivalent. Equities should be viewed as investments for long-term growth, while bonds are investments for cashflow. History has shown that over time, bonds and equities complement each other. While one cord can be broken, two cords are not easily severed.

Bonds are loans investors make to issuers in return for interest. There are many types of bonds and they all work slightly differently, but the basic components are:

Face (Par) Value

The amount of money the issuer will pay at the maturity date.

Maturity Date

The date at which the issuer pays the Face Value back to investors.

Coupon

Interest payments made periodically to investors (usually every 6 months).

Price

The current price at which you can buy the bond.
These factors determine the yield, which is a measurement of your return on investment.
Read More In Depth About Bonds
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Why Hold Bonds in Your Portfolio?

Some investors may think that bonds are not needed prior to retirement because they don’t need income and are focused on maximizing the growth of their portfolio. The truth is that building a bond portfolio prior to retirement establishes three distinct advantages. First, diversification among inversely related asset classes (i.e. when stock prices go down, bond prices usually go up). This helps stabilize the portfolio by spreading risk. Second, building buying power. Third, creating positive cashflow during down-markets.

During retirement, bonds are critical for generating income. Building a bond portfolio that creates strong net cashflow means that you don’t have to rely as much on other assets for your costs of living. During retirement bonds should serve your cashflow needs, while equities often help protect you against long-term inflation.

Two Ways to Invest in Bonds

Investors can gain exposure to bonds in two ways. The first way is by purchasing shares of pooled retail bond funds. These funds are best suited to small investors who don’t have enough capital to build a diversified bond portfolio using individual bonds. The benefit is that the small investor can get access to a diversified portfolio with a relatively small amount of capital.

However, retail bond funds contain some disadvantages as well such as:

  1. Expense ratios: Bond funds charge a fee called an expense ratio to help cover their operating cost and make profit. This fee is not part of any fees your financial advisor may charge and many investors do not realize they are paying fund fees on top of their advisor fee.
  2. Trading Cost: Bond funds incur costs associated with buying and selling bonds, and these costs are passed on to investors and can add up to 1%-2% annually..
  3. Pricing Disadvantages: When investors buy into a bond fund, they are buying into a pre-existing portfolio of bonds that may have been attractive investments 5 or 10 years ago when the fund purchased them, but oftentimes no longer represent a good value to new investors today.
  4. Small Investor Herding Impact: In bond funds, all of the investors are pooled together and there is constant movement in and out of the fund. This creates the need for the fund managers to buy and sell frequently. During times of market volatility, this can cause the fund to incur substantially increased trading fees and spreads on trades.

The second way to invest in bonds is to buy them directly. This carries significant advantages over buying pooled bond funds but requires higher investment minimums in order to build a diversified portfolio. When buying bonds directly you have control over structuring cashflows, transparency into the holdings in your account, and elimination of herding impacts and expense ratios.

In the chart below you can see how removing the layers of fees found in pooled retail bond funds and have a dramatic impact on net yield. For affluent investors, this approach represents a substantial enhancement to the portfolio’s construction.

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If you’re an affluent investor with $2 million or more to invest, you may benefit from an Institutional Direct portfolio. Linden Thomas & Company tailored each client portfolio to meet the specific risk and income needs of each client. This is accomplished by building the client’s portfolio using individual stocks and bonds, giving you control, transparency, and tax efficiency, while removing the layers of hidden fees found in portfolios built by retail advisors using pooled mutual funds and ETFs.

Our Unique Approach:

Institutional Direct

After spending 20 years as one of the top investment advisors of several of Wall Street’s largest investment firms, the founder of Linden Thomas & Co. (Stephen Thomas) felt that Wall Street’s firms could not manage or deliver the results that clients were looking for.

Pioneered by Stephen Thomas, Institutional Direct cuts out the high hidden costs of retail while giving investors access to tailored portfolio management with an institutional approach.

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Stephen L. Thomas

How We Got Here:

5 reasons why affluent investors choose our institutional approach

  1. A team of professionals dedicated to tailoring each portfolio to the client’s needs.
  2. Avoids the high and hidden costs found with retail investment advisors and their products.
  3. Direct ownership of holdings gives investors transparency and control.
  4. Tailored equity portfolios built for uncertain times by focusing on companies with high earnings standards.
  5. Yield focused fixed income portfolios are tailored to clients' income needs, maximizing pre-retirement compounding, and post-retirement cash flow.

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Over a decade of being recognized as one of the top wealth managers in the nation.

With over 35 years of experience, Stephen L. Thomas and his team of industry leading professionals work together to build private portfolios through direct ownership of securities. They tailor the portfolio to the client's needs with a focus on efficiency, quality, and results. Because they build and manage each portfolio directly, they're able to avoid the high costs of retail advisors and the hidden costs and inefficiencies of pooled funds or model portfolios. Their mission is to build high-quality, comprehensive portfolios with an emphasis on long-term results and portfolio efficiency.
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*Linden Thomas does not directly or indirectly compensate third-party rating agencies to be considered for awards. Linden Thomas Recognitions were published on the award date displayed with awards holding accreditation from publishing agencies for 1 year.