007 Questions Physicians are Asking About Bonds

Bonds are supposed to be boring. In fact, best-selling author and former British intelligence officer Ian Fleming—the man behind British Secret Service Agent James Bond, code-named 007—thought “bond” was one of the most boring words in the English language.

In his 1962 interview with The New Yorker, Fleming said, “I wanted Bond to be an extremely dull, uninteresting man to whom things happened; I wanted him to be a blunt instrument ... when I was casting around for a name for my protagonist I thought by God, (James Bond) is the dullest name I ever heard.” He lifted the name from an American ornithologist named James Bond.

Ornithology, huh? Big yawn.

Now, I’m no bird watcher, but as a fee-only financial planner for physicians, I also manage more than $50 million dollars for about 40 families and a couple of pension plans, and I happen to believe that bonds are anything but boring.

I think bonds are fascinating, functional and fun, so I’m excited to share some questions clients have asked about them, along with my oh-so exciting answers:

  1. “What is a bond? I mean, how does it work?” A bond is nothing more than a loan. When you buy a bond, you’re basically making a loan to whoever issued the bond. So if you buy a US Treasury bond (the most common kind of bond here in the United States), then you’re making a loan to Uncle Sam. When you own the bond, you can collect interest from it, which is mostly how people make money in bonds.
  2. “Can I lose money in bonds?” Yes, you can. Most bonds are sensitive to changes in interest rates. When interest rates rise, bond prices drop, and vice versa.
  3. “If I can lose money in bonds, why would I want to own them?” Well, you can make money in bonds, too. When interest rates fall (as they have for several years now), bond prices rise. And regardless of the direction of interest rates, you can still gain interest by owning bonds or bond mutual funds.
  4. “What about the Bond Bubble?” Ah yes, the Bond Bubble. Pundits and soothsayers argue that bonds are doomed to lose money because interest rates are at historic lows and “interest rates have nowhere to go but up.” I wish the argument were this simple. It’s true that interest rates on US Treasury bonds are very low, and that these bonds are sensitive to interest rate changes. But it’s also true that you cannot predict the future, not even the future of interest rates. I mean, look at Japan: they've had super-low interest rates for decades now. Calling the future is a fool’s game."
  5. “So, should I dump all my US Treasuries?” If you ONLY own Treasuries, then maybe you should lighten up a tad. But before you go off and sell all your Treasuries, you have to remember that Treasuries are a special kind of bond because they are backed by the full faith and credit of the US government. This gives them a special status in the world, and they are seen by US investors and non-US investors alike as a “safe haven” during hard times. For instance, when all hell broke loose back in 2008, US Treasuries were just about the only kind of bond that actually gained value. This makes US Treasuries a good diversifier for an all-stock portfolio.
  6. “What kinds of bonds are there besides Treasuries?” Well, it’s a great big bond world out there. According to the Barclays Capital Global Aggregate Bond Index, there are about $32 trillion worth of debt outstanding from 12,000 issuers worldwide, making the global bond market twice as big as the global stock market. There are government bonds and corporate bonds; developed market bonds and emerging market bonds; high yield “junk” bonds and high quality “investment grade” bonds; short term, intermediate term and long term bonds; inflation-adjusted and “nominal” bonds, dollar-hedged and un-hedged foreign bond funds, and just to spice things up, there are floating rate bonds too. (If there is a Bond Bubble brewing, I find it hard to believe that it would impact every one of these at the same time.)
  7. “With so many choices, what kind of bonds should I own?” To thrill my compliance attorney and all the regulators who read my blog, I’ll say that you should consider your own personal financial situation, investment objectives and tolerance for risk before you invest in any bond or bond fund. But to address the question head on, I’ll tell you that diversification is a very, very good thing, and it might not be a bad idea to own a wide variety of bonds… a task made far easier these days by the proliferation of bond index funds from Vanguard and DFA.

Bonds may not be as gutsy as guns, as giddy as gadgets, or as glamorous as Bond's babes, but they’re an important part of a balanced investment strategy and they just might help your portfolio be stirred, not shaken, the next time it looks like the world is coming to an end.

Should physicians own gold?


"Should precious metals be a part of our portfolio?"


Everybody loves gold, including physicians. It's shiny, rare, and it seems like a good investment because it's kind of like money. But I do not recommend that physician families invest in gold.

Gold does not meet my definition of  "an investment" and even if it did, there aren't many good reasons to include it in a doctor's portfolio.

To me, an investment is a vehicle that has the potential to accrue value independent of the actions of its owner. Gold does not "accrue" value since it does not pay dividend, interest, or rent as a stock, bond or rental property might.

But should you invest in gold anyway by buying gold coins, gold bullion or an exchange-traded fund that owns gold? I mean, it seems like a good idea since people have owned it since the dawn of time, right?

There are a few reasons you might consider owning gold, so let's examine them one at a time.

1. "Gold is 'under-owned' by other investors."

OK, this one is easy. All gold is owned by somebody, somewhere... except for all the gold that no one has discovered yet. And if they discover more gold, that would actually increase the supply of gold and make a case for lower gold prices and an argument against owning gold for price appreciation. Enough said.

2. "Gold has a great track record."

It's true that gold has had a good run recently. For the 10-year period ending March 31, 2013, the annualized return for gold spot prices was 16.83%, compared to annualized total returns of 8.53% for US stocks (as measured by the S&P 500 Index), 10.19% for foreign stocks (a la the MSCI EAFE Index), 17.41% for emerging markets (the MSCI Emerging Markets Index), and 2.34% for other commodities (the S&P Goldman Sachs Commodity Index).

But what about the long term? If you were going to be a hard core gold owner, you would own the stuff for at least a generation, right? So let's look at gold's 40-year track record...


Opportunity      Benchmark Annualized Return*
US Stocks S&P 500 Index 10.18%
Foreign Stocks MSCI EAFE Index (gross div.) 9.05%
Commodities S&P Goldman Sachs Commodity Index 8.21%
US Bonds Five-Year US Treasury Notes 7.69%
Gold Gold Spot Price 7.63%
Cash One-Month US Treasury Bills 5.29%
Inflation Consumer Price Index 4.3%

*40-year period ending March 31, 2013

When you look at gold from a multi-decade perspective, it doesn't look so good. It's earned a return that slightly lags the return on short term bonds and it's been far more volatile.

Gold's track record looks less shiny when you peer farther back in history. In his book The Golden Constant, published in 1977, University of California, Berkeley Professor Roy Jastram examined the behavior of gold in England and America over a 400-year-plus period, and suggested that the long-run real return (return above inflation) of gold was close to zero.

So maybe it's been hot lately but that's certainly no reason to dump your money into it.

3. "Gold is a hedge against inflation."

Over the long haul, as Jastram found, this may be true. But gold prices seem to have run WAY ahead of inflation lately. Relative to the current inflation rate, gold prices are roughly double their long-run average since the 1975 inception of trading in gold futures. This suggests that a price of $800 per ounce is a suitable target when applying this metric. This means that the precious metal may be more than 75% over-valued, given it's current price near $1400 per ounce.

What's more likely? That there will be a global economic crisis that will drive gold prices even higher? Or that gold prices may already reflect the global economic crisis we're in right now?

Clearly, I don't believe gold belongs in your portfolio. But I can think of at least two other reasons why you might want to OWN gold (as opposed to investing in it):

1. Ground-level chaos: If you believe that there may be a crisis in your city/state/country that will cause paper money to become worthless, you might want to own enough gold that you can trade it for other things you need, thereby owning gold as part of your Emergency Fund. I don't think this is totally crazy but it does seem a little bit batty. If you do this, make sure you also buy a Louisville Slugger to defend your hoard.

2. Love: If you believe you have found the one and only love of your life, you might want to buy him or her a lovely gold wedding band to seal the deal when you tie the knot. That way,  everyone in the room will know your beloved bride or groom is now officially off the market.

That's the only reason I own gold.

What's your reason to own (or not own) gold?

(Legal Stuff: Barclays data, formerly Lehman Brothers, provided by Barclays Bank PLC. Stocks, Bonds, Bills and Inflation Yearbook. Chicago: Ibbotson Associates. MSCI data copyright MSCI 2013, all rights reserved. S&P data provided by Standard & Poor’s Index Services Group. London gold fix prices: London Bullion Market Association. Accessed April 24, 2013. Gold spot prices: Bloomberg returns from composite prices. Past performance is no guarantee of future results. You cannot invest directly in an index. Don't run with scissors.)