Understanding Bonds and Their Role in Your Portfolio with Benjamin Bailey

This faith and finance podcast is underwritten in part by Praxis Mutual Funds. They are a leading faith-based family of mutual funds helping people integrate their finances with their values since 1994. With Praxis, your investments can make a difference for you and the world around you. Learn more at Praxismutualfunds.com. Bonds are considered safe investments but also a bit boring.

Is that really true though? I'm Rob West. In the investing world, it seems all the drama, for good or ill, is in the stock market. It's up, it's down, you get the picture. However, bonds have an interesting story as well and Benjamin Bailey is here to tell us about it. And then it's on to your calls at 800-525-7000.

That's 800-525-7000. This is faith and finance, biblical wisdom for your financial decisions. Well, we always look forward to having our friend Benjamin Bailey on the program. He's vice president of investments and senior fixed income manager at Praxis Mutual Funds and underwriter of this program. Benjamin, it's great to have you back. Rob, it's great to be on the show again with you.

Thanks, Benjamin. Well, since we're giving bonds a bit of a makeover today, why don't we start at the beginning? Would you define what a bond is for our listeners and perhaps how it's different from stocks?

Yeah. So a stock or equity is a share or piece of a company. So when someone buys a stock and say Verizon or Lowe's, they own a small portion of that company and then most people expect price appreciation from that, where bonds are different in that than like a company like Verizon. Let's say they need to borrow money, maybe a billion dollars or two billion dollars. When it's a large sum of money like that, they're going to go to the bond market and borrow. So every investor like us would buy a small portion of that deal and they receive bonds. So the bond holder gets a coupon payment twice a year. Then they receive their principal back at the maturity of that bond. So bonds don't have that same price appreciation upside like stocks do, but they're also more protected on the downside if something should go wrong.

Yeah. And that's why they have a place in a properly diversified portfolio. Now you can buy individual bonds. They're also bond funds.

Is that a better way to invest in bonds? Well, so many people think that buying individual bonds is better than buying a bond fund. But the negative of these individual bonds is there's less liquidity. So that ability to be able to buy and sell is more difficult when you own just a small piece or a small portion of a bond. So a bond fund also has great diversification. So many bond funds might have five hundred individual bonds or maybe even more than that. So if one of those bonds does poorly, that might only be point two or point one percent of a portfolio where we've seen individual bond accounts that have individual bonds of two or five percent.

That can be really painful then if an individual bond does go bad. So those two things, better liquidity and more diversification that you have with bond funds. Yeah.

Makes sense. Not all of your eggs in one basket. Now, we do occasionally hear from folks on this program who have their entire portfolio in the stock market, the equity market, and they're naturally nervous about it. So talk about the role of bonds as a part of a diversified portfolio.

Yeah. So the closer a person is to needing to use a portion of their portfolio, then really the more they should have in bonds. So bonds are going to be less volatile than stocks.

We talked a little bit about that. And if a person needs money in a year or two or maybe even a few because they're using some of it for maybe a kid's college fund or for a portion of their retirement, then a stock swing of 20 to 30 percent lower right before you need that money can be really tough. So if it's an individual portfolio just for retirement, then we generally think of the older a person is, the more they should have in bonds for that safety. And a younger person really may not need that much in bonds because they're going to have a long time to ride the ups and the downs that can come from stocks. Yeah.

Makes sense. Now before our break, we want to talk about one particular type of bond and that is high yield bonds. What should we know about them and do they have a place in a portfolio?

Yeah. So high yield bonds are riskier bonds. You know, they're going to have a higher coupon, maybe a higher change or possibility of price appreciation depending on when they're purchased. But we think they can be a useful part of a diversified portfolio. They are safer than stocks, but they're also a little riskier than an average bond. So you don't want too large of a portion of your portfolio in high yield bonds either. Yeah.

Makes sense. We certainly want to diversify that risk even among that bond category because just like anything else, there are risky stocks and more conservative stocks. The same would be true with bonds, more risky bonds and more conservative, but you put them all together in a properly diversified portfolio and now all of a sudden you're making some good progress.

All right, well we're going to continue to unpack this just around the corner. Benjamin Bailey with us today. He's vice president of investments and senior fixed income manager at Praxis Mutual Funds and underwriter of this program. What about bonds moving forward? They were under pressure as rates were headed higher. What about as they start to fall and what about faith-based bonds, perhaps impact bonds?

What are those and should you consider them? Back with Benjamin Bailey and Praxis Mutual Funds just around the corner. Stick around.

If you're a Kingdom advisor in your area, visit faithfi.com and click find a CKA. I'm so glad you've joined us today on faith and finance. Joining me today is my friend Benjamin Bailey. He's vice president of investments and senior fixed income manager at Praxis Mutual Funds and underwriter of this program. We're talking bonds today.

What are they? And before the break, Benjamin was explaining how bonds can fit into a properly diversified portfolio. And, you know, it's easy to think that desirable gains are only made, Benjamin, in the equities market with stocks. But there are times when bonds actually perform better than stocks, right?

Right. So we talked a little bit about the place for bonds in a portfolio, right? So if you need liquidity or you have a shorter term time horizon.

But another important part for this is we've seen investment portfolios and many investment portfolios that will have stocks and bonds in a mix. Maybe it's 60-40. Maybe it's 70-30.

Maybe it's going to be even more conservative. It might be 40-60, right? 40 stocks, 60 bonds. But so if stocks then fall in price, then utilizing the ballast in the portfolio and the role that bonds can play can be very beneficial. So, right, if a person only has stocks, then they can't really rebalance from anything, right? Their entire portfolio is going to fall when the stock market falls. So and of course, market timing is always tough. But having a portion in a diversified portfolio that has some bonds, you know, that can be safer.

It can help people sleep at night. It can also be really useful when stocks drop. There's been multiple times in the past couple decades when stocks have dropped and done really poorly and bonds have had slightly positive returns. So you can diversify and then kind of take from the bond side and invest into the stock side.

Yeah, very good. Now, of course, all eyes were on the Fed as they had those 11 consecutive rate hikes in the last several years. So talk about recent performance of bonds and how that's tied to interest rates.

Right. Certainly, you mentioned this a little bit earlier that bonds did poorly in 2022. Interest rates started low, inflation spiked, you know, as you mentioned, the Federal Reserve moved up very, very quickly. And so that was certainly a difficult time for intermediate term bonds.

But again, they started off at a really low level. So since then, interest rates have increased quite a bit. The intermediate term bond index called the Bloomberg aggregate returned 5.5% in 2023.

So far in the first three quarters of 2024, it's up 4.4%. So this would be more what people would expect from their bonds is more like four to 6% kind of on an annual basis. And again, when you have this higher starting yield available in the bond market, now you're much more likely to be able to protect somewhat on the downside. And there's also that benefit to a portfolio that yield you're going to get year in and year out for years to come. So would bondholders who've been disappointed in the last several years about the performance of the bond portion of their portfolio automatically assume that as rates start heading down that they're going to be rewarded?

Well, we hope so. I mean, one of the things that that is certainly true in people's minds is what has been happening recently is difficult to kind of overcome. So in 2023, again, 2022 was a difficult part for the bond market. It's always important to look ahead and to think about what will I be getting in the future, not necessarily what just happened. So we think that it's important for people that are thinking about diversification or thinking about some level of safety to really understand that even if bonds had a tough year in 2022, looking forward, they're looking like they could do much better going forward.

Yeah, that's helpful. All right, let's talk about faith based bonds, because an increasing number of our listeners and we're excited about this are thinking about how their values intersect not only with their charitable giving, but with their deployment of capital in stocks and bonds. So what about faith based bond funds?

And are they different from others? Yeah, so depending on the bond fund that you're investing in, a faith based bond fund is going to look a lot different than what you'd see with just a regular bond fund. I mean, one thing that's similar with faith based bond funds and faith based stock funds is probably going to be what's screened out of the portion of the portfolio, right? So companies that are involved in alcohol, tobacco, gambling, pornography and abortion, you know, these are things that don't match with our values.

They're issues that we don't want to be involved in. And so those are things that are going to be screened out of a bond portfolio that we would be involved in, and also many other faith based stock mutual funds. So another thing that we do at Praxis that's a little bit different from other bond funds would be we put a small portion of our holdings in community development investing, so that community development investing can really provide an economic advantage for those that are in disadvantaged communities all around the world. And so we love to be able to put a small portion of our investments towards things like that.

Yeah, that's really helpful. Now, Praxis has what you call impact bonds, and they're really an important part of faith based investing. So perhaps to explain these, you could share a story about the impact that these impact bonds have had and maybe some of the projects you funded. Yeah, so impact bonds or positive impact bonds support projects that benefit creation and benefit communities. At this point, it's about 35% of the Praxis impact bond fund.

About a decade ago, it was less than 20%. So it's certainly a portion of the portfolio that's really been growing for us. One recent example that we just bought last quarter is the African Development Bank, they issued a social bond. So the African Development Bank itself has really positive things to it in that of its five operational priorities.

These include light up and power Africa and feed Africa. And this specific social bond will support individual social projects that will do this type of thing. So when we can buy a bond that not only where the issuer itself is doing positive things and really benefiting people, but that the individual projects themselves are also specifically benefiting people. That's what we love to do.

This type of thing isn't available in the stock market, but it is available in the bond market. And we can make a difference in the lives of people. You know, it reminds me of in Matthew 25, 31 through 46, where Jesus is talking about the sheep and the goats and the righteous say, Lord, when did we see you hungry and feed you or thirsty and give you something to drink?

The Lord responds, whatever you did for one of the least of these brothers and sisters of mine, you did it for me. Right? So the exciting part is that the kingdom impact that we can do can be done in a diversified bond portfolio. And that many people need this in their retirement portfolio in the first place, right? We can do these things that are helping to feed people that are able to give water to people, not only in Africa, we've also done other things in Southeast Asia and other parts of the world. So it's exciting when we can do kingdom impact things in a bond portfolio.

Oh, it sure is. We've got just about a minute left. How should someone think about the bond portion of their portfolio vis-a-vis impact bonds in terms of percentage and even the expectation on yield and return? Well, we think that's important to have a diversified bond portfolio, no doubt. So that's why we have about 35% of the bond fund at this point in the specific positive impact bond. So at this point, we think that's the right portion, right? It doesn't need to be a whole lot larger. If we can find other impact bonds that have the yield that we need, we'd love to be able to put more. But at this point, a little over a third of the portfolio is what we think is appropriate.

Okay, yeah, very good. And of course, how can folks get more information? Because I suspect they want to learn a lot more about what you're describing. Yeah, so Praxis, and that's P-R-A-X-I-S, praxismutualfunds.com is a great place to start. We have information on our four diversified equity funds, and also on our Praxis impact bond fund. So that's the bond fund that's been around for over 30 years. And I've been one of the co portfolio managers on that for almost 20 years. So that's a great place to get good information on all the different Praxis funds. Excellent. Well, Benjamin, we are out of time today, but we really appreciate you stopping by and sharing with us.

Oh, it's great to be on. Folks, that's Benjamin Bailey of Praxis Mutual Funds. Benjamin is Senior Fixed Income Manager and Vice President of Investments at Praxis Mutual Funds. And again, if you want to learn more, just go to praxismutualfunds.com. And while you're there, be sure to check out their most recent impact report to see how these investments are making a difference. Hey, we're back with your questions just around the corner.

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For licensing information, please visit NMLS consumer access dot org. Well, are you overwhelmed by financial fear and anxiety? If so, you're not alone here at Faithfy. We hear it every day. People weighed down by worries related to wealth and money. But financial anxiety isn't about the size of your bank account. It's really about, at its core, the condition of your heart. And that's why we created the Look at the Sparrows 21-Day Devotional that'll help you find peace through Jesus' teaching and remind you to trust in God's provision. If you'd like to replace your financial anxiety with peace today, you can visit us at faithfy dot com slash sparrows and start your journey. Again, our brand new 21-Day Devotion is out. We've had so many already order it.

They're excited to get their hands on it. We'd love to put it in your hands as well. Again, faithfy, that's faithfy dot com slash sparrows. And you can learn more today. All right, let's go to Wichita, Kansas. Hi, April. Go ahead.

Hi. Thank you for taking my call. I'm calling in regards to my daughter. She is currently 16 at the age of 14. She was hit by a vehicle on her way to school. And by the grace of God, she's made a 1000 percent complete recovery. So she's perfectly fine.

She's in dance and she's a junior in high school at this time. Now, because of that accident, she was awarded a settlement amount in total of three hundred thousand dollars, of which the attorney took one hundred thousand. The remaining two hundred.

Yeah, the remaining two hundred and I believe was like fifteen thousand or something like that. I have two hundred thousand of it in a CD for her under her name. And then I have like twelve thousand in a money mutual market.

This is my problem. She is 16 years old. And because she was the one that was hit by a car, the money was like it's her money.

Right. And what that means is that when she's 18 in the state of Kansas, that money is just it can be automatically released to her. And I, as her mother, have no say so over it. My question is, I do not want my daughter to have access to two hundred and twenty thousand dollars at 18.

I just don't want that. I had inquired about putting it in a trust, but I was advised that's not an option because it's not my money. It's her money. And I don't even want her to know that she had that much money. As of right now, at 16, she does not know that she's got two hundred and twenty thousand dollars in accounts. And my goal for her is to go to college. She's a high achieving student. She most likely will get scholarships. She will not need to use that money to pay for school.

My question is this. What are my options to keep that money from her? I'm not doing that because I want her money.

I just don't think an 18 year old should have access to two hundred twenty thousand dollars. So can I become her guardianship or how do I move? How do I move that money? What are my options?

It's a great question. I can certainly understand why you'd want to protect her from herself until she's financially mature enough to have these funds available to her. Unfortunately, you may not have an option. It's probably going to come down to how the settlement was worded. Generally, you know, these things are held in escrow until the beneficiary reaches the age of majority and then it's they have a legal right to the money. So I think the main thing you can do is two things. Number one is you could get legal counsel just to somebody who could look at the settlement and how it was worded.

Look at how this account is titled and tell you what options you have, if any. I'm not an attorney, so I wouldn't want to tell you that definitively because it really is a legal matter as to who has title over this and how it's right now. It's handled in terms of if it's in a custodial account, it automatically becomes her asset at the age of majority. And because it was for her benefit and currently in a custodial account, I'm guessing and that's all I'm doing, that you're not even able to retitle it at this point just because you don't have a legal right to the money. And by doing that, you would, in a sense, be taking this money, even though that's not your intent, you would have the option to do with it what you want if you pulled it over into your name.

And obviously that was not the intent here. So I think you need to get some legal counsel, perhaps in a state attorney, someone that could review this and advise you on it. Secondly, I think the biggest thing you can do right now is just start to the best of your ability teaching her how to manage money and really leaning into teaching her biblical financial principles, starting with small amounts, teaching her the importance of hard work and the importance of generosity. And I'd love to send you a resource that I think could be great for you guys to go through. It's a curriculum called Open Hands Finance and it's by a good friend of ours.

They were graduates of Taylor University and they do a lot of writing and speaking now, a godly couple that's young, and they developed this curriculum that really is geared for freshmen, sophomores in college who are just starting out, just trying to learn as young adults how to manage God's money to do it in a biblical way, but it's very practical content as well. And I think that could be something that you could systematically go through with her. It actually even gives some kind of fictitious scenarios and helps her kind of determine how to manage money in those situations.

And it's just really well done and beautifully designed. So I'll send you a copy of that. Again, it's called Open Hands Finance and I think it'll be a real blessing to you. And then I think you should schedule a meeting with an attorney to kind of work through this and just see if there are any other options for you to exercise some protection over her with regard to this money given the situation. Does that make sense?

Yeah. They assigned a conservator. It's under a conservatorship. The conservator is also an attorney. I did speak with the attorney and basically the lawyer told me that all I could do basically was just kind of extend until she's 21. But I'm like, well, I want to be her guardian, but I can't be her guardian. I don't know. But the Open Hands Finance will help me.

Yeah, I will get that in the mail to you. So you stay on the line. Unfortunately, we're just going to have to trust the Lord on this one because you can't be a guardian for somebody who's now a legal adult.

And there's not any hardship or anything medically that would allow you to step in and retain control. And so we're going to have to trust the Lord and do everything you can do to prepare her for what you know is coming, even if she doesn't know that it's coming. So all the best to April. Why don't you stay on the line? We'll get that information out to you and hope it'll be a blessing to you. Thanks for calling today.

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