Certain things are guaranteed in life, like death and taxes. I want to add another certainty to that list: bonds mature at par.
Many investors are unaware that they can sell bonds before maturity and secure a profit today. However, because some financial advisors prefer to show unrealized gains on their clients’ statements, they will elect to avoid a conversation about selling these bonds.
It is remarkable to me how many financial advisors are punting and not making the call to their clients, when they are assured to look like heroes. As a result of their inactivity, I am focusing this writing on one specific subject.
Due to the slow economy over the past three years, interest rates have dropped to historically low levels. When rates drop, prices on interest-rate-sensitive bonds rise. This is why investors currently see large unrealized gains from bonds on their statements. Conversely, when interest rates rise, bond prices drop. If interest rates start creeping higher (which they have begun to do), investors will start to see their unrealized gains evaporate.
Most bonds are currently selling between 104 and 110 (just look at your statement). As the maturity date gets closer, the value of these bonds will drop. That is a guarantee -- they all mature at 100.
What should you do? Ask your financial advisor to do a simple yield-to-maturity calculation for you, today. You will be surprised that when you add the interest payments that you get annually from the bonds, and subtract the certain drop in price from the lofty level they have risen to, most of your bonds will have an expected total return to maturity between 0.5% and 1.5% annually.
I recently calculated that there is well over $20 billion of profits embedded in interest-rate- sensitive bonds today. Want to help the economy? Sell your interest-rate-sensitive bonds immediately and take the profit.
Ed Butowsky is an internationally recognized wealth manager. His upcoming book titled "Are You Committing Financial Suicide?" is expected to be released this spring.