Some clients are surprised at how I look at critical financial decisions. But when I reframe them from the conventional way of looking at those decisions, I can get them to shift longstanding beliefs and make changes. Here are a few decisions and starting points from the client.

  1. Client: I don’t want bonds because they produce little income. Interest rates have to go up from our current all-time low.

Me: Real after-tax rates are nowhere near an all-time low. The purpose of fixed income has never been income.

I advise the client to “get real.” By this I mean that they should think in terms of inflation-adjusted after-tax returns since it is spending power that matters. In 1980, nominal rates were 12% which translated to earning $12,000 on a $100,000 bond. If a third went to taxes, that amount was closer to $8,000 or an 8% return. Clients sometimes remember those days fondly until I point out that inflation averaged 12.5% and they lost roughly 4.5% of their spending power. Rates are much better today than a few decades ago.

I remind them that the purpose of fixed income is to stabilize one’s portfolio and to keep up with inflation and taxes. When stocks tank, those boring high-quality bonds act as a shock absorber and allow one to rebalance to buy stocks while they’re on sale. As far as predicting intermediate-term rates goes, the top economists have called the direction of the 10-year Treasury bond correctly about 30% of the time over the past few decades. A coin flip would have been more accurate.

  1. Client: Why should I pay off my mortgage since my rate is only 3.5%, while my portfolio is doing better? After the tax-deduction, I’m only paying 2.5%.

Me: Because you don’t want to borrow money at 3.5% and lend it out at 2.26% (the annualized yield of the Vanguard Total Bond fund).