In this episode, Justin and Jared explore the renewed relevance of bonds following the historic challenges of 2022. They explain how rising interest rates reshaped the fixed income landscape and why bonds are now offering more compelling opportunities. The discussion also highlights key differences across bond types and common misconceptions investors have when evaluating them. Ultimately, they outline how bonds can provide stability, liquidity, and risk management within a diversified portfolio.

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welcome back to another episode of FPOM Financial Planning for Oil and Gas Professionals.

This week on the podcast, we're going to talk about bonds being interesting again.

Kind of the nature of the fixed income landscape, how we think about it, and then common errors we see.

Justin, we're recording this in early March.

So I have the Olympics on my mind.

So my surprise segment is this.

Which Olympics is better, Summer or winter?

And then I would love for you to also answer for the Winter Olympics specifically because that's what's been fresh on our minds.

What is the most overrated and underrated sport in the Olympics?

Wow, that's a great question, Jared.

I'm just going to go rapid fire here.

I'm going to pick Summer Olympics as being better, and I'm not super passionate about that answer.

I'm going to just give it a slight edge.

So let's go Summer Olympics now.

Winter Olympics.

I am, I, I'm going to say this.

I don't have a ton of interest in skiing as a sport.

So maybe let me caveat this.

The most underrated in terms of, this is one of the craziest things that human beings, that athletes are doing at a high level.

When you see speed skiing and they are just reaching speeds on the slopes that are terrifying, that blows my mind.

I cannot believe, you know, I cannot believe a couple things.

Who figured out that we can just like go down a mountain on sticks like that and then we somehow morph that into millions of people every year, love it and do it.

That's amazing.

Which, hey, skiing is awesome.

Like, it's very fun.

But I think that's one of the craziest things that human beings do.

And I like it, but it's crazy.

It is.

So you said sufficiently underrated almost is like, even though that's one of the highlights.

What's an overrated one?

What are we doing with curling?

Let's call a spade a spade.

Get back to the office.

You know, leave the Olympics.

Curling athletes.

You're not athletes.

Leave the Olympics.

Go back to work.

What are we doing?

Throwing a Little disc on some made up ice and then shimmying the ice for the disc to go, like, what are we doing here?

And that's a reason why I would slightly give the edge to Summer Olympics.

A bunch of these sports just probably shouldn't exist.

And, you know, I don't know.

I think curling is captivating.

It's more of just fascinating.

Like, how does somebody come to do this, right?

Like, if I had a wager with somebody and they said, hey, your kid has to be an Olympian, I would pick a niche sport like that where the total addressable market of people participating in that sport is very few.

I've never been at a school or even heard of a school that has a curling team.

So it's just fascinating.

How do you even, how do you even get into curling?

And how do you get to that high of a level?

I will say this, this might be a crazy hot take.

And you know, I don't have it perfect.

We've talked on the podcast before that youth sports are just totally insane.

And, you know, the short version of that is if you are spending just endless hours and your family doesn't have dinners at home together, you know, on a nightly basis, your family isn't able to go on vacations often because every free moment is given to little Johnny's travel baseball team.

That's the dumbest thing in the world.

So with curling, there is an element where it kind of highlights that, like, what are we doing?

And then you realize, yeah, it's also stupid if you sacrifice every free moment ever.

Because guess What?

When Johnny's 19, if things go extraordinarily well, he's going to be putzing around in the minor leagues, which is a stupid idea.

And he needs to get focused on life and quit, you know, jacking around with this stupid sport.

Now, again, I'm going to freely admit that I don't have the right answer.

And as, as our kids get older, they are also very involved in activities.

And so the ideal is you want them to learn the life lessons that sports can teach that are very valuable, but you also don't want them to wake up at 19, 20, 21 and think that life revolves around basketball, golf, baseball, or curling.

Awesome.

And with that, let's talk about Bonds.

Okay, so it's funny because, Justin, I feel like you, I'd be curious if this is your experience as well, but most of my professional career, nobody has cared about bonds.

And if they have cared about Bonds, it's been one question.

Why on earth do we even own These things.

Yep.

Has your experience been similar?

Very similar.

I mean we are talking about just an incredibly low interest rate environment, which means that the income produced by bonds is far lower than the kind of 50 year historical average.

And then we just had a 100 year storm back a few years ago and so.

Could not agree more.

Bonds have been terrible, but also too.

Right.

Like bonds have been terrible and we'll talk about the numbers, but bonds have been terrible and equities have been on a bear market tear.

Right.

Like it's not just like, like, I don't know, I think more people.

Yeah, yeah.

Bull market.

That's what I meant.

Yeah, they've been on a bull market tear.

Right.

They've just performed so well that like having risk management hasn't even really benefited you.

It was the COVID crash, it was liberation day.

Right.

And those were, you know, you know, fast, severe and back to all time highs very quickly.

Great point.

And it makes people forget that the reason why bonds are an incredibly important part of a portfolio.

Jared, we did a podcast maybe a year ago on this idea that no one actually gets to invest with purely a North Star of how do I get the highest return?

Like you don't get to invest that way.

If you're a family and you're retiring, you do not get to allocate 100% of your money to where can I make the most money?

You literally have to be mindful of, hey, how do I navigate the fact that I'm 62 and I'm going to spend $21,000 next month, therefore I better have the cash flow in my portfolio that will make that possible.

And then we also took that idea up to massive entities, whether it's pension funds, whether it's university endowments, they also have short term obligations which mean that they need to do what, what you like to call duration matching.

And so you have to provide current or a proper amount of liquidity cash flow income in a portfolio, whether you are an individual family or whether you are a massive entity allocating billions of dollars.

Yeah, there's a term in our industry, perpetual capital.

Right.

Like we just like, we don't even like need this money, but like every, like that, that defeats the purpose of investing.

Right?

Like if you're just going to invest in indefinitely and never spend it, what are we, what are we even doing?

The problem with that idea is all almost no one actually gets to invest that way.

Like even a family office who's allocating hundreds of millions or billions of dollars, they still have to have some element of duration matching.

Right?

Right.

And then these Ivy leagues selling some of their privates at a discount because they need liquidity.

Even these Ivy leagues.

Okay, so just for context of just how bad it's been and why we haven't been talking about bonds.

So fed funds rate is a really good proxy.

It's kind of the baseline interest rate that all other interest rates kind of build themselves off of.

We're not going to dive too deeply into the mechanics there.

But fed funds rate, so over the last 70 years it's been about 4.6%.

So most of our professional careers.

So rates were insanely low for an insanely long period of time.

But with, with base rates that low, like best case scenario, your real return.

So your return after inflation was flat.

Honestly, you probably lost a little bit of money after, after inflation, right?

If you get, you know, if, if you get a 3% interest rate, that's probably depending on how you're invested, it's probably subject to some amount of tax if it's in a brokerage account.

And so your after tax yield is lower than that.

And if inflation is, you know, two and a half percent, you're not, you're not making any money after inflation.

So for 10 years, for a 10 year period, you were probably best case scenario keeping pace with inflation, but probably not.

And so it went from 0 to 5.5% in a 12 month period.

Which to be clear, that's part of the reason they're interesting again, that's exciting, right?

Like okay, I was able to get, I was functionally getting nothing and now, you know, every rates have moved up so I can get something.

The problem is it's terrible for current bonds, right?

Because the price of my bonds has to adjust to the new reality, right.

If my bonds pay 2% and I can get other bonds in the market for 5%, I have to lower the price of my bonds to match that 5%.

Right.

Justin, is there anything that you remember about that period that was like particularly interesting or fascinating or at the time were you, you know, excited or discouraged or did we get lots of questions from clients about bonds?

Certainly did.

And you know, Jared, it, it obviously helped that we were very mindful and careful to be just hawks with the duration in the fixed income part of our portfolios.

And so, you know, quick camp out there.

If you own a two year bond and interest rates explode, well, the face value of that bond is in big trouble.

But you could just wait until it matures.

Right.

And get your principal back and then reallocate it at higher rates.

Yeah, so just like to put some numbers on this because like, yeah, it was, it was ugly and I think it still is ugly depending on the type of the part of the bond market you're looking at.

So U.S. treasuries, Aswath Demoderin from NYU, he publishes annual returns by asset class.

And so just so, you know, goes back about a hundred years, U.S. treasury bonds, which is intermediate so, you know, not short term, not long term.

Treasury bonds had their worst year annual return ever.

That's like stock market volatility right there.

Worst return ever.

Right.

So I think it's very important for listeners.

Legitimately the worst return ever.

Yeah.

Corporate bonds, second worst return ever.

And we had a, we had just a little bit going on in the Great Depression, I would say.

And those were down, you know, 15%.

And again, you know, treasury bonds are functionally the risk free asset and corporate bonds have some amount of credit.

So, you know, so it's not exactly apples to apples, but two of the larger, more important bond markets having, you know, worst year ever and the second worst year ever tells you something about just how Bad it was, I think it's so important, you know, you talked about this idea of duration, right?

Like the longer term your bonds are, the longer duration.

So a 30 year bond, for example, the interest rate risk is material, right.

And so you know, TLT, which is iShares 20 Year Bond Fund, it is still 37.

It is still about 38% off of its all time highs.

Right.

And it's just like, and again people perceive bonds as safe and again those are treasury bonds.

It doesn't really have the credit risk that those bonds do.

But you know, we'll talk about this here in a minute.

But like it's why it's so important why you think about what bonds you own and why do you own bonds?

Because some bonds still haven't recovered, right?

And you know, those bonds are still meaningfully underwater.

Justin, I think before, like, so we'll talk about how we, you know, I don't want to do, I don't want to spend and bore our listeners too much, but I do think it's important we just highlight the different because like when we say bonds it means a bunch of different things and fixed income markets are huge.

So I just want to briefly go through all of them and kind of, but then also talk about how we think about them.

Anything else before, you know, kind of how we got here and why bonds are interesting.

Again, before we start talking about what do we even mean by bonds, it's

really critical because when you're investing capital it's obviously you're wanting to look at your different investment options and you're wanting to see how did they perform, what is the one year return, what is the three, five, ten year return.

And when you're looking at bonds, you're going to look at a 3, 5 year return and you're going to see this disaster.

And it's important to kind of right size this and understand, hey, this is a terrible kind of four or five year window and it is an absolutely historic infamous five year window.

And so you have to be able to kind of right size, hey, I know this happened, but what is the probability of this happening again?

If the federal funds rate went from near zero to 5.5% and that caused this once in a hundred year disaster, okay, what are the odds that that happens again?

Did we go from five to ten?

Yeah, right, right, right, right, right, right.

And again, like I think structuring Your bond portfolio with the Black Swan event in mind is a very helpful exercise.

It is, but with back to back Black Swan events, we're, we're dealing with a probability that's probably not helpful.

I, and I think it's important to draw a comparison.

Right.

So what if you look at that three year graph, the five year graph, and you're like, oh my gosh, the s and P500 is still.

And look at how disastrous this is.

What if this happens in my next three years?

And obviously, well, you're paying such a lower price for the earnings at that point that the odds of that happening again are lower.

But what I'm trying to say is it's like 10 degrees more exaggerated with bonds because yeah, when a stock market crash happens, it's still possible that you see more downward movement, you know, over the next three to five years.

That dynamic is not close to the reality in bonds.

Is it possible that bonds are in trouble in the coming years?

Yes, it's absolutely possible.

But the odds of what happened in 22 happening again is like infinitely lower than even that stock example itself.

Exactly.

So let's chat just briefly about kind of all the.

Because we use bonds loosely and all those things have different kind of underlying components and different risk factors.

So we'll, I'll just go, I'll, I'll be brief with this.

But Treasuries default, right?

So it's a risk free.

Risk free.

And I'm using air quotes for those of you not watching.

It's kind of the baseline rates for all other fixed income rates.

You know, the issuer of the debt is the federal government.

One nuance here about Treasuries, it's confusing because they're issued by the federal government and are exempt from state income taxes, but subject to federal income taxes.

I feel like it would be.

Intuitively, it makes sense.

Hey, if the feds issue it exempt from Fed.

But.

Right, okay.

Investment grade corporates.

Right.

And these are all, you know, if you just buy a basic ag bond fund, you will see all of these inside of that.

So investment grade corporate, higher yield than Treasuries generally because they have credit risk.

Right.

So if I'm a.

So, you know, we can debate the merits of, you know, the US defaulting, but the probability is higher that, you know, a tech company Defaults.

Right.

And so there's an embedded risk.

There's not just a interest rate risk that I bear, but it's, it's credit risk.

Okay.

What is the probability that this company stays solvent long enough for me to get my money?

So generally there's a spread, meaning I have to get more yield in investment grade corporates.

But, you know, that spread, the additional interest I'm earning for taking credit risk varies over time in an economic environment.

High yield as otherwise known as junk bonds.

So, you know, investment grade corporates, which is companies like Apple, Walmart, with strong balance sheets.

You know, high yield is more credit risk.

Right.

So it's companies that maybe some oil and maybe some EMP companies, right, that have levered up to acquire some assets.

Right.

Lower quality companies, higher rates, higher average credit risk.

And again, there's an additional spread, Right, because there's higher credit risk.

So you should be getting compensated more.

But again, it's interesting because the spread, meaning the difference between these rates moves, ebbs and flows over time.

Municipals.

So it's confusing because these are bonds issued by municipalities and states.

And you know, kind of getting back to the confusion, they're exempt from federal taxes, but they're taxed at the, you know, state income tax level.

And I know for our Texas listeners, that's not applicable.

Interesting thing to know about municipals.

There's always, you know, the yields are generally lower, so you need to do a tax equivalent yield.

So what that means is treasuries are paying 4%, munis are paying 3%.

And you know, that 4% yield in treasuries is actually subject to a 37% tax bracket if you're in the highest tax bracket.

So the actual after tax yield is 2.5.

But if I'm getting immunity paying 3%, I get that 3% of any state income tax or federal income tax.

And the inverse is true.

If you have a very, very low income taxable year, then you may not need to worry about saving on income tax.

And the tax equivalent yield is going to be different.

And those move over time.

Right.

So it's not as simple as, hey, I'm just going to set it and forget it.

Sometimes, depending on the way the yield curve is moving the spreads between these, the answer could be one today and another one two years from now.

As your income tax situation changes, as the rates and the curves change, we'll talk about securitized credit.

Scary, scary.

So it's a pool of debt, like instruments.

Right.

So hypothetically it should be lower risk.

Right.

And like there was a crazy amount of leverage in the system.

But these are actually a big part of the fixed income market clos, which are collateralized debt loan obligations, which are pools of loans.

And one of the interesting things about them is their floating rate and mortgage backed securities, which is pools of mortgages.

So these kind of have been out of favor of the great since the great financial crisis.

But they are a big part of credit markets and philosophically can be lower risk than say being a single, like owning a single loan from an issuer or owning a single pool of mortgages or a single mortgage versus a pool.

And then private credit is really, you know, those are.

You're not going to find those in an AG fund.

But I do think it's important we talk about it because they're all the rage today.

So, you know, post gfc, there's a lot of banking regulation.

So, you know, there's a lot of things that banks could or are interested in loaning to but can't for whatever reason or their risk profile and advertising there.

So there's private pools of capital that have loan money to private businesses for a multitude of different reasons.

And you know, it's a growing part of the economy.

And you know, characteristics of private credit, they're often higher yielding, you know, floating rate, they're pretty high on the terms of the, you know, list of secured debtors, you know, generally first or second liens and they have a piece of collateral that is some subsegment of the business or the business itself.

So, you know, interesting part of the business.

And then the other thing is convertibles.

So they're bonds that have equity like conversion properties.

So that's, you know, 10,000.

Again, I could have made a podcast about each of those and talked to the nuance of that, but assumed our listeners know, just kind of giving, you know, I feel like that context is good before we give the landscape of how we think about fixed income, but before we dive into that.

Justin, anything we missed?

Yeah, I think I would just.

I love the overview you just gave.

I think it's really helpful for our listeners think about the stock market.

So if you have different investments in the stock market, they will.

A popular term is called a style box.

So if I'm really doing an X ray on someone's portfolio in the publicly traded Stock market.

I'm going to categorize how much exposure do you have in large companies, how much exposure do you have in small companies?

So the size of the company, that's one metric.

And then you could also look at are they a value company, are they growth?

And you can begin to kind of categorize where's my stock market exposure?

And then you could do that for US Stocks, international stocks on the bond market.

I think the most helpful way to approach this is two things, credit rating and duration.

I should, if you're watching this on YouTube, credit rating and duration.

And so credit risk.

Really, really helpful to have a quick example.

Pretend that you are lending money to the US Government.

Now pretend that you're lending money to Coca Cola.

Now let's go on the really extreme example.

So a third one is you're lending money to Cousin Eddie.

So we have the US Government, we have Coca Cola and we have Cousin eddie.

Those have three very different credit ratings.

The U.S. government is very likely going to pay you back.

Coca Cola definitely likely to pay you back.

But in a real sense it is more risky than the US Government.

Cousin Eddie, very risky.

We don't know if Cousin Eddie is going to pay us back.

Now let's apply that second element of evaluating bond risk and that is duration.

Are you loaning money to the US government for six months?

Coca Cola for six months.

Cuzzanetti for six months.

Now pretend that you're loaning money for 26 years.

Those are very different risk profiles.

I think Coca Cola is, you know, probably a good company for the next few years.

Are they going to be good in 26 years?

Tough to say.

So that changes the risk profile the longer you go out.

And so just kind of a quick overview of some different comparisons with credit rating and duration.

I want to, I want to start an ETF that, that is just like the worst, highest, highest yield bond and make the ticker.

Cuz so it's like, it's like loaning to an unreliable relative where the yield, where the Yield is like 20% but the default rate is something crazy high.

We may have just come up with

a new investment idea which is also just fascinating.

And private credit is really interesting because there could be a massive spectrum of what that means.

Yeah.

And how underlying, how much underlying diversification is the, does the fund have exposure to.

And the other thing we didn't talk about with private credit is because it's private, the fund structure, it's like there's not also ample liquidity.

Right.

It generally it's an interval fund structure where you can redeem on a quarterly and it's prorated up to a certain percentage amount.

So like, you know, not as, not as liquid.

So your money's kind of locked up.

There's a liquidity component there.

So Justin, how would you say, like, okay, that.

Because I love the framework of, you know, thinking about duration and default.

How would you like, summarize?

And I think we've kind of touched on it in other episodes.

But like, how do we think about fixed income investing?

Generally, we are largely wanting to see significant long term appreciation by owning great businesses, owning great assets.

Therefore, the purpose is very different within fixed income.

And that is instead we want reliability and we want cash flow when we need it.

How would you define it?

Yeah, yeah, I would say, right.

Like generally, is it Nick Murray who says you want to be an owner, not a loaner?

Right.

Like we, generally we want to be owners, not loaners.

And like, if we think about optimizing investment, like risk adjusted investment returns, which really matter, there are some parts of the portfolio that optimize return that are more return centric and some that are risk centric.

And we don't own bonds because they increase expected return.

We own them as a source of funds.

When equity inevitably has down years, drops in equity market do not hurt long term investors.

They're part of investing.

Right.

That's the cost of admission.

That's why, it's why you have return over the risk free rate.

What hurts equity investors is selling stocks at the bottom.

And it's when unrealized losses become realized losses and you don't allow for their recovery.

So.

Right.

Like I would say, like fixed income principally, you talk about this idea of like the war chest.

So five years of living expenses with minimal exposure to volatility.

Right.

And fixed income also.

Right.

Like we looked at TLT and talked about their drawdown.

But depending on where you are in terms of the credit risk curve and the duration, so yield, you know, the time curve determines a lot of your volatility.

But you know, fixed income, if it's managed prudently, can create a smart sort of smoother ride.

Right.

Where if I own all equity and equity's down 40%, that's really painful.

If I'm 50, 50 stock and bond, and my bonds are, my bonds are flat and my equity is down 40%, my overall portfolio is only down 20%.

So it really, really kind of makes this the ride smoother.

So I would say fixed income principally is, you know, it just, it.

I would Say it's insurance preventing us from being net sellers of equities in bear markets and it reduces the, you know, the standard deviation or the nerd speak of the, you know, the average down year to kind of create a smoother ride along the way.

So principally it's a risk reduction tool, not a, not an investment optimization, not a, not a return optimization tool.

Right.

And I do think it's helpful to call out if you really do have a bucket of money that you don't need for 20 years and you're absolutely not going to use it for 20 years, well then don't get consumed with risk reduction methods in your portfolio allocation and instead own great assets that have the highest probability of returning great returns.

But like we mentioned at the beginning, we work with a ton of clients who do not get to live in a scenario where they don't need any cash for eight years or 18 years.

Yeah, yeah.

And like again, I think a good kind of place to go next is like, okay, in light of how we think about this, we'll talk about common misconceptions but like in light of our stated goal of what we want bonds to do, owning 20 year bonds that have had four 10 plus percent drawdowns since we've been invested, since, you know, over the last probably 15 years, that's a, that's a meaningful drawdown.

And that doesn't really solve why I, why I would want to invest in bonds in the first place.

Because it introduces a substantial amount of volatility.

Probably same with high yield.

Right.

Like it just introduces a level of volatility again, which isn't a bad thing, but it's not congruent with how we think about owning bonds.

Justin, what are some common misconceptions or mistakes we see people make related to how they're thinking about fixed income or bonds and we use those interchangeably.

I think there's a lot, I think one of the biggest ones that I want to talk through is this idea that bonds as a catch all term and then that means, well, long term bonds is the same as the index agg and that's the same as maybe just US debt and that's the same as short term debt.

And so I think there's just a lot of, hey, they're all the same.

When in reality, I mean you could say that cash is actually a bond.

Like it's just a hyper, hyper ultra short term bond in many ways.

And so it's kind of this combination of bonds means all of these things.

When those things are all very different.

Yeah, yeah.

I think like if you look at the, like embedded, like if you own a, a passive bond fund, like it's composed of all of these things and all of those things may or may not be congruent with how you think about fixed income.

So like, I think, you know, I guess private credit isn't in like an AG fund, but generally like AG has exposure to all of this and a, you know, the duration of close to seven years.

So it takes about seven years for you to get your money back.

And again, if my goal is to have fixed income as a source of funds in the event of an equity bear market, equity bear markets generally last less than seven years.

So that, that doesn't actually help me.

So I think it's weird because we're very pro index investing, but when it comes to fixed income and how we think about it, I think blindly owning the index is actually a huge mistake.

So, you know, I think, I think that's a big, that's a big thing, is just kind of blindly owning the index and not duration matching, to use that verbiage.

Again, love that.

I mean, the reason you own bonds is because you need a war chest.

You might have $5 million, but you're spending $150,000 a year.

So you are taking money out of that every single year to pay for living expenses.

And guess what?

You can't put all 5 million in assets that hopefully appreciate.

You need to have some exposure to assets that you can reasonably take.

And so if the duration is seven, that's not workable for a war chest.

If that's your only position.

Yeah, man.

I think another interesting thing is like another common misconception we see people make is like the vanguard passive on the market, which also inherently means like global diversification.

Foreign bonds are really weird to me because again, I don't necessarily think it's a terrible idea.

But you have to make a decision of do I hedge the currency risk?

Because you're introducing like, if you think about why we own fixed income, it's preservation of purchasing power and equity market drawdown.

If I own foreign bonds, I could actually get the yields right.

But if, if I get the currency trade wrong and I don't hedge it, then all of the interest could be eaten up by being on the wrong part of a currency trade.

And again, I don't think it's a terrible idea.

But you're introducing another potential risk to the portfolio, which is currency risk.

So why am I adding an additional risk?

What is my purpose of Bonds.

And does adding foreign bonds help or deter me getting from getting there?

And I think it's another kind of interesting thing where it's like the taxation's not favorable and it adds currency risk unless you hedge that currency risk.

So I think just generally foreign bonds are, I don't know, I probably lean no.

Unless there's a really clear and compelling reason to make it.

Yes.

But I do see people that are kind of like, I own U S stocks, international stocks, I own US Bonds, I own international bonds.

And it's interesting because global fixed income, US as a percentage of global fixed income is actually smaller than US Equity is as a percentage of overall equity.

So foreign bonds are a huge, massive part of the market.

But I think that narrative, oh, it's in the market, so I have to own it.

It's just a very different way to think about things.

Really quick call out there.

We love this idea of what does it actually mean to be a passive or index investor?

And the actual definition is, well, if you're, if you're truly index and passive, then you should probably have market capitalization weighted exposure to every asset under the sun, which would mean that you're going to own a ton of foreign credit.

And I think it's just kind of a good reminder that hey, we do love evidence based, sound passive investing.

But in practice no one is fully passive.

No one is fully indexed because if they were, they would have a 0.5% exposure to cryptocurrency, they would have a x percent exposure to foreign bonds, and so on and so forth.

So just interesting.

No one is actually purely passive or index.

Exactly, exactly.

I think another, another kind of mistake we see people make is like the, the fixation on private credit.

I think every, every few years our industry switches to like a hot product.

Whether it's like smart beta option overlay, private credit.

There's always what we would call investment du jour.

Right?

There's like always like a new cool idea that somebody's selling.

I don't think private credit fits in most investors portfolios because okay, you're introducing a multitude of risk, liquidity risk, right?

So you have higher.

So, so the credit risk is higher because you're loaning to small businesses that are outside banks.

So they're going to be higher probability of default.

But also liquidity risk like in the probability of this money being there when I need it is also lower because private credit is typically more locked fund structure.

Right.

Where I, you can't just, I can't just buy and sell Any given day.

Super simple example.

There are private credit strategies where, you know, you could lend money to a person who's flipping homes.

That's the thing that exists.

Well, guess what?

When you lend money on middle of March this month, if you need it at the end of March, you can't get it, most likely.

So you're right.

Yeah.

And yeah, I think any of the other things, I have one more.

But any other mistakes that you see

people make, I think that's pretty good.

I think the other big mistake is when looking at, when doing due diligence on bonds, you look at price return versus total return.

That's like another big one.

It's like, oh, this bond, you know.

And again, even with a short term bond fund, there will be some movement in price as rates move and ebb and flow.

I would say have to look at total return.

Have to look at total return.

It's like, look like.

But, but if you think about the way that bonds pay returns, the primary mechanism for return in bonds is interest.

Interest payments.

Right, right.

And so to just look at the price return and say, hey, it went down 5%.

No, no, no, no.

Yeah, the price went down.

But if you look at the total return, you know, that's a meaningfully different.

A good analog is it's like looking at US equity returns but only looking at dividends.

Totally.

Or I, Jared, I was going to give like pick a laughably massive dividend.

Like a company that just pays a dividend that is four times the average of the S&P 500.

Would you ever evaluate that stock performance and exclude their dividend when they are outwardly all focused on having a massive dividend?

That wouldn't make sense.

You would have to look at the appreciation and the dividend.

Right, right.

And again, like I want to caveat this by saying these are mistakes we see people make based on our fixed income investing framework.

If we, if we were to hypothetically have a client that, you know, 85 year old, terrified of the stock market and didn't want any stock market exposure, you know, and you got a $5 million portfolio, we're going to need to put some of it in these other buckets because you know, we're going to have way more than five years of short term liquidity.

We're not saying these are inappropriate at all times, but just in light of how we think about fixed income, it's incongruent.

So I think it's important for you to think about a.

How do I, how do I think about fixed income?

And okay, in light of that, what part of the fixed income market do or don't I need exposure to and why?

Cool.

Awesome.

Well, I think that's a good place to wrap it up.

I mean, fixed income is fun.

Again, it's good to talk about it.

And I think rates are in a compelling spot and you know, real rates are positive, which is a, which is a great thing.

And I think I'm excited for fixed income.

I'm excited for the long term outlay.

But again, it gets back to the important idea of why do you own it?

And in light of why do I own it, what do I believe about, you know, all the ways to participate in owning it.

Awesome.

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