Author Topic: If I sell my corporate bonds, what do I replace them with?  (Read 9350 times)

joer1212

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If I sell my corporate bonds, what do I replace them with?
« on: February 15, 2013, 02:10:12 PM »
My financial adviser called me today and said I should sell my 5 corporate bonds (84k face value). He said I am above par on nearly all of them, and I would reap a nice profit. But, if I just hold on to them, they will lose value if and when interest rates rise, so I don't want to miss this rare opportunity.
The problem is that I max out my Roth IRA every year with the interest payments from these bonds. The money gets deposited straight into my checking account, which then gets electronically transferred to my Vanguard Roth IRA in January of every year.
If I sell my bonds, where can I invest my money so that I can have the same setup as I do now?
My financial adviser said that I can purchase corporate bonds again to replace the ones I sold, since I could get them significantly below par. Would this make sense?
I was considering purchasing a Vanguard Lifestrategy or Vanguard Target date fund, instead, which would be held outside of my retirement accounts.
Would this work? Would I get penalized for taking my returns instead of reinvesting them? Would they be more tax efficient than holding corporate bonds? Any other suggestions?


*I bought all these corporate bonds below par.

*I bought my first corporate bond in 2010, and my last one last year.

I own:
-Goldman Sachs (GS); YTM 6.935%; maturity date, Feb 15, 2034 (Cusip 38143VAA7)
-Selective Insurance Group (SIGI) YTM 7.45%; maturity date, Nov 11, 2035 (Cusip 816300AG2)
-Sara Lee (SLE) YTM 6.725%; maturity date, Nov 1, 2032 (Cusip 803111AM5)
-Tenneco Packaging (formerly "Pactiv Corp"- PTV) YTM 8.7%; maturity date, Apr 15, 2035 (Cusip 880394AE1)
-Genworth Financial (GNW) YTM 7.831%; maturity date Sep 24, 2021 (Cusip 37247DAP1)

*I would make a profit on all these bonds except Tenneco Packaging. I would lose about $700 from the price I paid for it. However, my financial adviser said this would be good for taxes, as it would partially offset the capital gains from the sale of the other bonds (tax harvesting).

FYI: I live in Brooklyn, New york, and I already max out my 401k and 457b every year.
« Last Edit: February 16, 2013, 11:48:49 AM by joer1212 »

Another Reader

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #1 on: February 15, 2013, 03:34:29 PM »
What's the remaining term of each of the bonds?  Those sound like some pretty good yields.  You only lose money on a bond if interest rates rise and you sell the bond.  If you hold the bond to maturity, you get the principal back, plus those nice interest payments.

Sounds like your financial advisor may be trying to generate commissions more than he/she is trying to give you good advice.

joer1212

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #2 on: February 16, 2013, 12:36:32 AM »
What's the remaining term of each of the bonds?  Those sound like some pretty good yields.  You only lose money on a bond if interest rates rise and you sell the bond.  If you hold the bond to maturity, you get the principal back, plus those nice interest payments.

Sounds like your financial advisor may be trying to generate commissions more than he/she is trying to give you good advice.


-Goldman Sachs (GS); YTM 6.935%; maturity date, Feb 15, 2034 (Cusip 38143VAA7)
-Selective Insurance Group (SIGI) YTM 7.45%; maturity date, Nov 11, 2035 (Cusip 816300AG2)
-Sara Lee (SLE) YTM 6.725%; maturity date, Nov 1, 2032 (Cusip 803111AM5)
-Tenneco Packaging (formerly "Pactiv Corp"- PTV) YTM 8.7%; maturity date, Apr 15, 2035 (Cusip 880394AE1)
-Genworth Financial (GNW) YTM 7.831%; maturity date Sep 24, 2021 (Cusip 37247DAP1)

Also, another reason I wouldn't mind getting rid of them is because they're all borderline junk bonds (BBB-; and my Tenneco bond, which I have 30k in, has dropped to B-). I'm really starting to worry about defaults, especially on the Tenneco.
« Last Edit: February 16, 2013, 11:52:40 AM by joer1212 »

KingCoin

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #3 on: February 16, 2013, 10:39:29 AM »
It's tough to comment on these bonds without knowing the specific issues (some CUSIPS would be helpful). Variables like where the bond lies in the capital structure as well as call provisions matter quite a bit.

More important than a bond's coupon is the "yield to maturity" of these bonds. This tells you your return if you hold the bond to maturity by taking into account both the coupon and the principal depreciation/appreciation.

Beyond tax issues, whether a bond is trading below par, at par, or above par is largely irrelevant, and certainly not justification for buying or selling (there are some exceptions to this rule vis-a-vis draw down to bankruptcy recovery, but probably not worth worrying about in this case). There are AT&T bonds for instance that people happily buy at 50% over par value ($150 vs $100 par). It would be one thing if your adviser hated the asset class and wanted you tow switch to equities, but rolling into below par bonds seems like a bid to generate some commissions. How is this guy getting compensated? Is there a standard commission for bond trades or is he going to pick you off for a few points?

If you sell your bonds at a profit, you pay capital gains. So if you bought them at 100 and sell them at 110, you'll pay taxes on the 10pts. If you let them mature at 100, you won't have to pay any capital gains taxes, but you will pay taxes on the interest. However, if you're rolling all the interest into a tax free account, then you'll prefer to hold the higher price bonds to maturity rather than selling them and triggering a tax event that you otherwise would avoid. If you do decide to sell, you should take the loss on the Reynolds bonds to offset your gains. Optimizing your tax situation might be a conversation you want to have with your accountant, as there are undoubtedly going to be a lot of moving pieces.

This is not to say you should hold these bonds. Both credit spreads and interest rates are very tight at the moment, so it's definitely an iffy asset class exposed to both rising rates and deteriorating credit quality. You'll just have to make a decision about how corporate bonds fit into your overall portfolio.


joer1212

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #4 on: February 16, 2013, 11:39:13 AM »
It's tough to comment on these bonds without knowing the specific issues (some CUSIPS would be helpful). Variables like where the bond lies in the capital structure as well as call provisions matter quite a bit.

More important than a bond's coupon is the "yield to maturity" of these bonds. This tells you your return if you hold the bond to maturity by taking into account both the coupon and the principal depreciation/appreciation.

Beyond tax issues, whether a bond is trading below par, at par, or above par is largely irrelevant, and certainly not justification for buying or selling (there are some exceptions to this rule vis-a-vis draw down to bankruptcy recovery, but probably not worth worrying about in this case). There are AT&T bonds for instance that people happily buy at 50% over par value ($150 vs $100 par). It would be one thing if your adviser hated the asset class and wanted you tow switch to equities, but rolling into below par bonds seems like a bid to generate some commissions. How is this guy getting compensated? Is there a standard commission for bond trades or is he going to pick you off for a few points?

If you sell your bonds at a profit, you pay capital gains. So if you bought them at 100 and sell them at 110, you'll pay taxes on the 10pts. If you let them mature at 100, you won't have to pay any capital gains taxes, but you will pay taxes on the interest. However, if you're rolling all the interest into a tax free account, then you'll prefer to hold the higher price bonds to maturity rather than selling them and triggering a tax event that you otherwise would avoid. If you do decide to sell, you should take the loss on the Reynolds bonds to offset your gains. Optimizing your tax situation might be a conversation you want to have with your accountant, as there are undoubtedly going to be a lot of moving pieces.

This is not to say you should hold these bonds. Both credit spreads and interest rates are very tight at the moment, so it's definitely an iffy asset class exposed to both rising rates and deteriorating credit quality. You'll just have to make a decision about how corporate bonds fit into your overall portfolio.

Goldman Sachs (GS); YTM 6.935%; maturity date, Feb 15, 2034 (Cusip 38143VAA7)
 
Selective Insurance Group (SIGI) YTM 7.45%; maturity date, Nov 11, 2035 (Cusip 816300AG2)

Sara Lee (SLE) YTM 6.725%; maturity date, Nov 1, 2032 (Cusip 803111AM5)

Tenneco Packaging (formerly "Pactiv Corp"- PTV) YTM 8.7%; maturity date, Apr 15, 2035 (Cusip 880394AE1)

Genworth Financial (GNW) YTM 7.831%; maturity date Sep 24, 2021 (Cusip 37247DAP1)

I'm wondering if I am being adequately compensated for the risks I'm taking. After all, I have put many eggs in individual company baskets, when I could be getting similar returns (with far less risk) investing in a diversified portfolio of index funds.
« Last Edit: February 16, 2013, 12:08:58 PM by joer1212 »

KingCoin

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #5 on: February 16, 2013, 12:21:00 PM »
Goldman Sachs (GS); YTM 6.935%; maturity date, Feb 15, 2034 (Cusip 38143VAA7)
Selective Insurance Group (SIGI) YTM 7.45%; maturity date, Nov 11, 2035 (Cusip 816300AG2)
Sara Lee (SLE) YTM 6.725%; maturity date, Nov 1, 2032 (Cusip 803111AM5)
Tenneco Packaging (formerly "Pactiv Corp"- PTV) YTM 8.7%; maturity date, Apr 15, 2035 (Cusip 880394AE1)
Genworth Financial (GNW) YTM 7.831%; maturity date Sep 24, 2021 (Cusip 37247DAP1)

I think your data is off. I'm seeing (on interactive brokers cross checked with morningstar):
GS                  Price $102.5          YTM 6.1%
SIGI                Price $110            YTM 5.9%
SLE (HSH)       Price $107.2         YTM 5.5%
PTV (REYNOL) Price $93              YTM 9.27%
GNW               Price $118.65       YTM 4.8%

The Pactiv bond is the only one that's on the dicey side (which should come as no surprise given the comparatively high yield). Management has a history of levering up. As for the others, they carry your standard interest rate risk. Also, financial names can of course go from great to horrible pretty quickly, so they're not exactly sleep-at-night bonds.

KingCoin

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #6 on: February 16, 2013, 12:28:25 PM »
To address the question in the title, you can always replace them with a corporate bond ETF like LQD (investment grade) or HYG (high yield), or some blend of the two. There are plenty of vanguard bond funds as well. There's probably little point in owning a small handful of individual bonds.

That's assuming you want to stick with corporate bonds.

joer1212

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #7 on: February 16, 2013, 12:38:42 PM »
Goldman Sachs (GS); YTM 6.935%; maturity date, Feb 15, 2034 (Cusip 38143VAA7)
Selective Insurance Group (SIGI) YTM 7.45%; maturity date, Nov 11, 2035 (Cusip 816300AG2)
Sara Lee (SLE) YTM 6.725%; maturity date, Nov 1, 2032 (Cusip 803111AM5)
Tenneco Packaging (formerly "Pactiv Corp"- PTV) YTM 8.7%; maturity date, Apr 15, 2035 (Cusip 880394AE1)
Genworth Financial (GNW) YTM 7.831%; maturity date Sep 24, 2021 (Cusip 37247DAP1)

I think your data is off. I'm seeing (on interactive brokers cross checked with morningstar):
GS                  Price $102.5          YTM 6.1%
SIGI                Price $110            YTM 5.9%
SLE (HSH)       Price $107.2         YTM 5.5%
PTV (REYNOL) Price $93              YTM 9.27%
GNW               Price $118.65       YTM 4.8%

The Pactiv bond is the only one that's on the dicey side (which should come as no surprise given the comparatively high yield). Management has a history of levering up. As for the others, they carry your standard interest rate risk. Also, financial names can of course go from great to horrible pretty quickly, so they're not exactly sleep-at-night bonds.

No, even my quarterly statements confirm my numbers. I certainly would not have purchased anything under 6% yield. That was one of my criteria. Maybe you're thinking of different issues?
What do you mean by "levering up"?

KingCoin

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #8 on: February 16, 2013, 01:06:53 PM »
You may be confusing past performance with current yield to maturity.

Just because you purchased something with north of a 6% yield, doesn't mean that it still has a 6% yield. For instance, let's say you bought a par bond with a 6% coupon and a 10 year maturity. Due to market conditions, that bond rises to a price of $109. Now the bond has a roughly 5% yield to maturity (intuitively, you now have to pay more for that stream of 6% coupons, so the yield must be less - much like paying $100k for a house with $6k/yr rent will have a higher yield than paying $109k for a house with $6k/yr rent). Quarterly statements will tell you what the bond has paid you in the past (probably in coupons and price appreciation), but Yield to Maturity tells you what the bond will pay you in the future if you hold it to maturity (and the company doesn't default). Take the GS bond as an example. The coupon is 6.345%. If it was trading at par, the YTM would be 6.345%. Because the price is above par, the yield must be lower than 6.345% (in this case 6.1%).

You could, as your adviser suggests, sell the bond at $109 and buy a par bond that also yields 5%. It's not clear why you would want to do this though unless there's an obvious tax advantage. You could alternately sell your 5% bond and buy a 6% bond at par, but that bond will either be higher risk or have a longer maturity (no free lunch here). Q

Levering up means the company has issued more and more debt to make acquisitions, pay owners etc. This is often good for equity holders, but almost always bad for debt holders.

For what it's worth, I've traded billions of $ worth of corporate bonds.

joer1212

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #9 on: February 16, 2013, 01:30:49 PM »
You may be confusing past performance with current yield to maturity.

Just because you purchased something with north of a 6% yield, doesn't mean that it still has a 6% yield. For instance, let's say you bought a par bond with a 6% coupon and a 10 year maturity. Due to market conditions, that bond rises to a price of $109. Now the bond has a roughly 5% yield to maturity (intuitively, you now have to pay more for that stream of 6% coupons, so the yield must be less - much like paying $100k for a house with $6k/yr rent will have a higher yield than paying $109k for a house with $6k/yr rent). Quarterly statements will tell you what the bond has paid you in the past (probably in coupons and price appreciation), but Yield to Maturity tells you what the bond will pay you in the future if you hold it to maturity (and the company doesn't default). Take the GS bond as an example. The coupon is 6.345%. If it was trading at par, the YTM would be 6.345%. Because the price is above par, the yield must be lower than 6.345% (in this case 6.1%).

You could, as your adviser suggests, sell the bond at $109 and buy a par bond that also yields 5%. It's not clear why you would want to do this though unless there's an obvious tax advantage. You could alternately sell your 5% bond and buy a 6% bond at par, but that bond will either be higher risk or have a longer maturity (no free lunch here). Q

Levering up means the company has issued more and more debt to make acquisitions, pay owners etc. This is often good for equity holders, but almost always bad for debt holders.

For what it's worth, I've traded billions of $ worth of corporate bonds.

I thought the YTM referred to how much yield I would get for a bond that I purchased at a certain price and held it to maturity.
As an example, if I purchased a $100 10-year bond for $50, and it paid 5% interest, my YTM would be 10%, regardless of price fluctuations during the time I'm holding it. 
Maybe I'm technically wrong, but would the YTM change for me at all if I hold the bond until the maturity date in this scenario?
I'm thinking that the YTM would be different only for a new purchaser of my bond who gets it at a different price.
So, if that new purchaser got the same bond I'm holding at par value, ($100) his YTM would be 5%, but this would not affect me in any way.
Please correct me if I'm wrong in anything I said. I'm probably missing something very obvious. You certainly are in a position to educate me about this, given that you are/were a professional bond trader.
« Last Edit: February 16, 2013, 01:33:23 PM by joer1212 »

KingCoin

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #10 on: February 16, 2013, 01:48:03 PM »
So, if that new purchaser got the same bond I'm holding at par value, ($100) his YTM would be 5%, but this would not affect me in any way.

You're not far off in your understanding, but because you're holding the bond at $109, you're essentially no different than the guy who is stepping in and buying them at $109 and achieving a 5% YTM.

You are correct that over the life of the bond you will achieve a 6% return regardless of the price fluctuations (provided the company doesn't default). However, because you achieved more than a 6% return during the initial period of ownership due to a price increase (that extra $9 of price appreciation on top of your 6% coupons) you will have to "take your medicine" with a lower yield over the remaining period of ownership. Roughly speaking, if you've achieved an average of 7% return, you'll subsequently realize a 5% return so that it averages to 6% over the life of the bond. Right now you're in the equivalent of the 5% stage of bond ownership.

If you're not happy with the YTM's associated with the current prices, you should sell the bonds (just don't expect to do much better in other bonds on a risk adjusted basis). 

joer1212

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #11 on: February 16, 2013, 02:20:10 PM »
So, if that new purchaser got the same bond I'm holding at par value, ($100) his YTM would be 5%, but this would not affect me in any way.

You're not far off in your understanding, but because you're holding the bond at $109, you're essentially no different than the guy who is stepping in and buying them at $109 and achieving a 5% YTM.

You are correct that over the life of the bond you will achieve a 6% return regardless of the price fluctuations (provided the company doesn't default). However, because you achieved more than a 6% return during the initial period of ownership due to a price increase (that extra $9 of price appreciation on top of your 6% coupons) you will have to "take your medicine" with a lower yield over the remaining period of ownership. Roughly speaking, if you've achieved an average of 7% return, you'll subsequently realize a 5% return so that it averages to 6% over the life of the bond. Right now you're in the equivalent of the 5% stage of bond ownership.

If you're not happy with the YTM's associated with the current prices, you should sell the bonds (just don't expect to do much better in other bonds on a risk adjusted basis).

Thanks. I understand now.
I think, in the end, I may get rid of a couple of issues, such as the SLE and PTV. The SLE because it's the lowest yielding bond. The PTV, because it causes me to lose sleep.

KingCoin

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #12 on: February 16, 2013, 02:24:37 PM »
Makes sense. Pactiv bonds traded as low as $75, so you'd be getting out at a comparatively good level.

joer1212

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #13 on: February 16, 2013, 03:41:37 PM »
Makes sense. Pactiv bonds traded as low as $75, so you'd be getting out at a comparatively good level.

Not to beat a dead horse, but given that you are a professional, where do you recommend that I invest my money if I do decide to liquidate my bonds? Keep in mind that this money will not only be outside of a retirement account, but I will have to withdraw from it at least annually to fund my Roth IRA.
One thing I do know is that I want to be invested in low-cost broad funds that are moderately aggressive (maybe 70% stocks; 30% fixed).
Do you think one of the Vanguard Lifestyle or Target date funds would fit the bill for this?

KingCoin

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #14 on: February 16, 2013, 03:59:28 PM »
"Do you think one of the Vanguard Lifestyle or Target date funds would fit the bill for this?"

Probably. Since you already have a financial adviser (I'm not one), you might as well discuss with him to figure out something that fits with the rest of your portfolio and achieves your goals.

sheepstache

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #15 on: February 16, 2013, 05:11:03 PM »
Hold up, you can just put the interest from investments into a tax-deferred account to avoid paying taxes on them; you don't have to hold the investments themselves in the account?

Sorry for the thread highjack, seemed like you were mostly done, though :)

KingCoin

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #16 on: February 16, 2013, 05:38:55 PM »
Bond interest is considered and taxed as ordinary income. So why not? You'll still be subject to normal limits though.

Note: I'm not an accountant or otherwise qualified to have an opinion about anything.
« Last Edit: February 16, 2013, 05:52:31 PM by KingCoin »

TN_Steve

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #17 on: February 16, 2013, 06:02:12 PM »
Hold up, you can just put the interest from investments into a tax-deferred account to avoid paying taxes on them; you don't have to hold the investments themselves in the account?

Sorry for the thread highjack, seemed like you were mostly done, though :)

You can use the bond interest as your contribution money, assuming you have sufficient earned income to justify the deduction (or Roth contribution).  If you are putting it into a traditional IRA, money is fungible; thus, you can characterize it for your personal records as not being taxed on the ordinary income from the bond interest (but don't do this for the IRS, which requires earned income to be involved).    Just like when parents match (in whole or part) their kid's Roth contribution.  As long as its a gift, the kid can direct it right into the IRA, as long as s/he has sufficient income to support the contribution otherwise.

{N.B.  Like KingCoin (who expertly relieved me of any desire to respond to the original post!), I am not an advisor or accountant; I'm just enjoy studying this stuff.}

sheepstache

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #18 on: February 17, 2013, 06:39:57 PM »
Huh, sure I guess that makes sense.  So there's no reason to hold bonds themselves in the tax-advantaged account; the principal is just "taking up room" in the contribution year.  Unless at some point the rest of your income gets too high to contribute to an IRA, then I guess having them in the account itself would be good.

It's just funny because in the rankings of types of investments that make more sense in tax-advantaged accounts, bonds tend to come in first. 

I suppose bond funds are a bit different because the value of the share itself could go up and it seems, from some googling, that that would be a capital gain.  And therefore less important to shelter from taxes.  But if you knew you were going to be selling them (for living expenses) in (non-income-earning) retirement I guess you would need them to be in the account itself to avoid taxes.

KingCoin

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #19 on: February 17, 2013, 08:17:46 PM »
So there's no reason to hold bonds themselves in the tax-advantaged account; the principal is just "taking up room" in the contribution year.

Bonds are, in fact, the best asset to hold in tax advantaged accounts, provided your marginal tax rate (which you will pay on bond interest) is higher than the capital gains and/or dividend tax rate. Bonds aren't taking up any more space than say equities or REITs or cash.


sheepstache

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #20 on: February 18, 2013, 06:58:23 AM »
Right, see that's what I understood, but given that the value of the bond doesn't go up and you can just stash the interest in there to save taxes, I don't see why you would buy the bond itself within the IRA.  I meant that it's taking up room in the sense that having the principal in the account doesn't seem to do you any good, whereas with REITs and equities the value of the shares themselves go up.  You'd rather get to your $5,500 total by putting in $5,000 of equities, leaving room for $500 or whatever in bond interest rather than wiping out a whole year putting in $5,500 worth of bonds.

Of course, you'd have to give up some amount of the contribution to that bond interest every year whereas if you put the bond itself in there you would be set.  But I was wondering why everyone wouldn't just put their profits from the investment into the account to maximize the advantage you could get out of the contribution limit.  That's another difference with REITs and equities is if you just hold them for a long time you might expect the total dividends and gains to sum up to a greater amount than the principal you invested, but you wouldn't expect that with bonds.  So why put $5,500 worth of bonds into the account when you can just put the interest in and get the same advantage, plus have room left over in your contribution limit.

Of course, I could be sleep deprived. 

KingCoin

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #21 on: February 18, 2013, 08:38:17 AM »
"Of course, you'd have to give up some amount of the contribution to that bond interest every year whereas if you put the bond itself in there you would be set."

Right. If you're currently below the max IRA contribution limit, then yes, you might as well hold bonds outside the IRA and contribute the interest. If you're currently maxing out the IRA, then the bond interest contribution is replacing your normal income contribution and you'll have more normal income getting taxed at a high rate.

Also, as far as I know, you can't contribute assets to an IRA, only cash (except in a rollover). At least, that's what I was told by my broker.

The argument against the notion that equity is snowballing, and you're eventually going to pay more taxes (even at a lower rate) than on bonds, is countered by the fact that your interest payments are going to be reinvested in your IRA, so your bond principal will be snowballing as well.

projekt

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #22 on: February 18, 2013, 04:12:49 PM »
What was your investment policy when you made these investments? They sound like they have very good yields for the asset class right now, so it's really a matter of analyzing the financials of the company to see if they are likely to be redeemed at maturity. I think most mustachians would be pretty happy with 7%YTM on their investments provided they are assured of the security of principal. Remember that we are talking about an equities market where 7% annual return for the next 10-20 years would be considered pretty good. Of course, you have to reinvest those coupons somewhere else, which you seem to be doing with your Roth. My feeling is, if I were in your shoes, I'd stand pat.

joer1212

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Re: If I sell my corporate bonds, what do I replace them with?
« Reply #23 on: February 19, 2013, 01:20:59 PM »
What was your investment policy when you made these investments? They sound like they have very good yields for the asset class right now, so it's really a matter of analyzing the financials of the company to see if they are likely to be redeemed at maturity. I think most mustachians would be pretty happy with 7%YTM on their investments provided they are assured of the security of principal. Remember that we are talking about an equities market where 7% annual return for the next 10-20 years would be considered pretty good. Of course, you have to reinvest those coupons somewhere else, which you seem to be doing with your Roth. My feeling is, if I were in your shoes, I'd stand pat.

I bought these bonds starting in 2010, at a time when I didn't know much about investing. I thought I was getting a free lunch with the yields these bonds were generating.
Back then, my goal was to accumulate 500k worth of corporate bonds, then retire and live off their interest.
As time went on, however, I did a lot of reading and realized that the best risk-adjusted investment for me is a well-diversified portfolio of broad-market, low-cost index funds.
That is my investment philosophy now, and I feel that the corporate bonds I hold now are not consistent with that philosophy.
I am particularly worried about one or more of these bonds defaulting, especially my Tenneco (Pactiv) bond, which was rated BBB when I bought it, but has since dropped to B-, which makes it a junk bond.
I have heard the 10-20 year market prediction before. How would anyone know that far into the future what the market will do?