Birmingham, Alabama-based financial guru Jeff Roberts, who was recently named one of the top private wealth advisors in the nation by Barron’s®, came on Yellowhammer Radio to lay out the facts so people can decide for themselves.
The full conversation with Mr. Roberts can be heard on the Yellowhammer Radio podcast or in the video above, and a lightly edited transcript of his interview with Yellowhammer’s Andrea Tice and Scott Chambers can be read below.
Subscribe to the Yellowhammer Radio Podcast on iTunes. Learn more about Jeff Roberts’ private wealth advisory practice at JeffRobertsAndAssociates.com.
Scott Chambers:
Oh yeah, big money. We’re about to talk to big money. Jeff Roberts our local financial guru, founder Jeff Roberts & Associates. His team consists of seven seasoned advisors who share 125 years of financial planning with Ameriprise. Hey, Andrea did you know that Barron’s™ Magazine actually placed the among the top 1200 financial advising practices not once, not twice, but 6 times. How cool is that right there?
Andrea Tice:
That’s what you call it a decent record.
Scott Chambers:
Absolutely, he’s got a great record there. His team specializes in working with affluent clients to preserve and grow their wealth. They’re the go-to team in town for customized recommendations concerning estate planning, retirement planning or asset management. You know, Jeff, welcome into the program. How are you doing today my friend?
Jeff Roberts:
Very well, thank you. Market is fairly flat for the day so it’s better than down so we’re good.
Scott Chambers:
There you go. But I have a question for you, Jeff, I know you know interest rates change recently and I want to talk a little bit about some interest rates today. Can we do that?
Jeff Roberts:
Absolutely, it’s a good topic very pertinent with you know the interest rate environment with a steady moving rate. Maybe just a quick description will let this become a 101 basic level. To understand interest rates and particularly bonds we need to make sure we know what a bond is so just to get us on the same page. You know a stock is ownership in a company where you literally own a piece of a company and a a bond is a debt instrument that is issued by the federal government, a municipality, a corporation that is trying to raise money for a particular reason. So picture the largest company in the world they decide they want to build a new corporate headquarters they want instead of taking the money out of their own coffers they want to just raise it from a bunch of investors. They say we’re going to issue debt certificates, debt instruments and people they will find will give you some of our money. And the way it looks like is if I give the largest company in the world a thousand dollars then I have a thousand dollar bond with them and I have a timeframe, like let’s say it could be two years to be 10 years, could be 30 years whatever the time is and they promised to pay me an interest rate during that period of time. And at the end of the term i get my principal back. So I’m lending them money and I’m getting an interest rate for it. If you understand that it’s a debt instrument then it’s important to then understand how interest rates work. We’ll just use you two guys an example let’s say that you each were given a thousand dollars or let’s say you found a thousand dollars in your coat pocket that you’d forgotten was there or someone may have left it as a lottery winning for you or something. If I find five dollars and picking up the phone and calling somebody. A thousand dollars in my coat pocket would be great so if you each have a thousand already and say, hey we want to invest this let’s invest in the bond. So you know Andrea decides she takes the money and she wants to put it into a bond today, so she goes and she invests and she’s puts her thousand dollars in and the company that she’s lending the money to, the bond instrument, they’re going to give her let’s just make up a number and say the four percent. So she has a bond paying four percent let’s assume that it’s a 10-year note so for 10 years you’re going to get four percent that’s. Now hypothetically let’s say you know Scott you’re supposed to do the same thing, you all agreed to do it but you’ve procrastinated, you took some time off and then you later decided well she gave you a hard enough time about it and you say okay, I need to go invest. So you go to invest and in that period of time let’s assume that interest rates came down and so now that the same company might be offering the same bond for 10 years instead of it was four percent now they’re only offering it at three percent. Are you with me? So both of you have a thousand dollar bond. Scott, yours is it three Andrea yours is it at four, well the reality is if you both hold your bond for 10 years you’re both gonna be given back the original thousand dollars. They’re giving you your money back but you get paid those interest rates along the way. Andrea yours better obviously 4% well the idea is along the way if you decided you wanted to get out of that bond and you wanted to sell it and move on because you want to cash your money in, somebody might be willing to pay you more. Scott might be willing to pay you more for a bond paying four percent since every other bond on the street right now it’s only going to be paying three. Does that makes sense?
Andrea Tice:
Huh, okay yeah
Jeff Roberts:
So the idea is if everybody can go buy a bond at three percent but yours is paying four, they may be willing to pay you not just a thousand dollars for it they might pay you say eleven hundred dollars. When interest rates go down typically bond prices start to go up because when the market is paying less in interest, bonds with higher yields are worth more. Now the opposite is true. Follow me here, let’s assume that Andrea you got yours at four, Scott procrastinated he later went and bought a bond but during that period of time interest rates have gone up. Well if interest rates went up let’s say Scott now you can get a bond at five percent. You’re like, man i got one at 5, now I’m bummed I got one at four. Here’s the deal, Andrea if people can go out and spend a thousand dollars in the open market and get a bond at five why would they give you a thousand dollars for a bonded 4%? Well they wouldn’t so your bond is worth less if you tried to sell. Someone might only give you nine hundred dollars for a bond four percent when they can go get one in the market right now it’s five percent but if you hold it to maturity you still get your full thousand dollars back it’s just if you sell it along the way and rates have moved up or down. So the message is when interest rates go up bond prices typically come down. They have an opposite movement. What we’re seeing now is the Federal Reserve is starting to raise the Fed Funds rate and we’re seeing interest rates overall start to increase so that tells us it is a certain landscape that we’re going to see in the bond market. So far are you guys with me so far on that?
Andrea Tice:
Okay, so yes. It has an inverse effect when the interest rate goes up, it inversely effects bonds?
Jeff Roberts:
Broadly speaking, yes and there’s exceptions to those but let’s first talk to you about well how do we get in the situation with the Feds wanting to raise rates because we hear so much about that. It goes back if we if we go back to 2007, 2008, and 2009 when we went to the global financial crisis. Now i’m sure you guys remember that economic period of time probably quite well. Probably the second worst economic period time that in this country in the last hundred years. It was really bad. So essentially what happened then was our economy was in freefall, the banking industry had what’s called credit crisis where the free flow of money was locking up. The bank’s didn’t have money to lend out it was just a very difficult situation. Companies and banks were calling the Treasury secretary Frank Paulson saying we don’t have money what do we do? So essentially what the Fed tried to do is they said we’ve got to figure out a way to stimulate this economy and get people buying, spending and doing stuff again. So they were lowering interest rates at that time and they lowered rates the Fed Funds rate which is the rate in which banks lend to each other. The rate started coming down because the idea is if overtime rates drop and money becomes cheap particularly to go borrow then that tends to stimulate the economy. Because if I can go get a car now let’s say at 0% or a mortgage it two or three percent that might stimulate me enough to want to go buy a car do something with the house. And so they they start lowering interest rates and it didn’t work, it didn’t seem to stop the freefall of the economy. And so they lower rates about 10 times and finally they lowered them virtually to zero on the Fed funds rate. So you can’t go lower than that. And it still kinda didn’t work so then the Feds started printing money to the tune of 85 roughly billion dollars a month and they just were printing printing printing trying to essentially prop up the economy the best they could with low rates and printing money it’s essentially the economy turned around. The Federal Reserve stopped printing that money so that was one steroid shot that they took out and then they kept interest rates down and now they’ve got to raise them back up because essentially the policy of having super low rates right now is tied all the way back to that economic crisis that we went through. And they don’t want to leave late too low for too long because then that can keep too much money and can cause inflation essentially to rise the cost of goods. Eggs and things like that goes up and they want to avoid that. So you’re seeing rates going to start creeping up now. Feds raised them last year and the year before once and they’re talking about raising them anywhere from one to three times this year and the reason I mention all this and the reason I want to talk about it today is clients are starting to ask these questions. And so, Scott you’re bringing this up is pertinent because people need to start realizing the environment that we’ve been in in the last few years with bonds and interest rates moving forward will look quite different.
Scott Chambers:
How differently could what going forward?
Jeff Roberts:
Well, the way I described it as if you’ve ever been walking on the beach and if you’re going down the beach and your feet are in the sand and the surfs coming in. And if the wind at your back and you’re going down the beach you don’t really feel it but when you turn around and head back towards the house and the head wind is in your face it’s harder to walk and you get tired quicker especially out for a jog. Well that’s essentially the same type of thing with the bond market. When rates were coming down for the last several years you’re seeing bonds appreciate in value. Now what you’re going to see if interest rates come up that can cause bond prices to come down. They may be paying more but bonds that you hold may be worth less. Now there are certain types of bonds that can perform and historically have performed better in rising interest rate environments. We’ve seen things like floating rate bonds or high-yield convertible bonds in times of inflation. Things like tips they can typically do better. And the point is this, we encourage people to take a close look at the portion of their portfolios that exposed to bonds now because again it’s a different environment today moving forward than it was in the last couple years. Extremely important.
Andrea Tice:
And this condition of the bond is also very contingent on whether you’re choosing to sell ahead of time.
Jeff Roberts:
That’s correct. Holding onto the bond until maturity or there may be a need to liquidate for some particular reason. And it’s much more complex than I’ve laid out from the basic explanation today because you have issues like quality of the bond, the rating of the company that you’re buying through is it the largest company in the world or very small company that could go out of business. The ratings of those bonds make a difference, the time frame of the bond whether it’s a short duration bond or a long duration bond. The types of the bonds whether it’s government or corporate or municipality. All of those things play into the ingredients of determining how they are affected by different rates and the bond environment in general. So bonds are complex and they’re changing direction a bit with the different environment that we see right now with interest rates and again we encourage people if you haven’t looked at your bond portfolio closely or the portion of your portfolio that’s in bonds it’s a time to do so.
Scott Chambers:
Absolutely, that’s very fascinating topic. To be honest, Jeff, before you brought up bonds on the show when I thought a bond I thought of a 007 film so that’s about the only bonds I knew about.
Jeff Roberts:
Except the other one that gets you out of jail.
Scott Chambers:
Exactly, well I tell you this really is a fascinating topic, Jeff and if there are clients out there who have some interest in bonds or need to know more tell them how to get in touch with you?
Jeff Roberts:
Give us a buzz at 205-313-9150 or you can always look at us on the web site JeffRobertsandAssociates.com.
Scott Chambers:
Jeff Roberts a pleasure speaking with you today, enjoyed it.
Andrea Tice:
I learned a lot today that same thing with you.
Scott Chambers:
Andrea’s got like two pages of notes over there. Alright, Jeff Roberts of Jeff Roberts & Associates we’ll chat again next Wednesday. Once again that phone number is?
Jeff Roberts:
313-9150
