Should You Back Off on Bonds?

By Ken Moraif

Looking at the recent data, our economy is a little uneven, but generally positive. That's good news for the stock market. And though I don't think we should ever be overconfident, I don't see anything that will derail the market's rise right now. Even if things slow down, the Fed will up the ante, and the stock market will respond. All of this is good news for stocks-and bad for bonds.

Most bonds (but not all) go down in value when interest rates go up. I think the good economic news will result in higher interest rates. Why? The Fed has been buying massive amounts of long-term bonds, creating a huge demand for them. This demand drives bond prices up which in turn lowers interest rates. If the good economic news encourages the Fed to reduce spending on bonds, the pressure will come off interest rates, which will probably rise. That's bad news for bonds.

It could be bad news for your portfolio, too. I think municipal bonds have the potential to lose about seven percent a year for the next three years. Long-term treasuries could lose as much as twenty percent with a one percent rise in interest rates. I believe interest rates may rise three percent over the next three years. If that happens, treasuries-considered by many to be the safest investments on the planet-could lose sixty percent of their value. Sixty percent!

Obviously, this could be a very dangerous situation. At Money Matters, we're watching the bond market very carefully, and are very close to advising our clients to sell about half of their bond portfolios. If the economy keeps improving and the stock market continues to do well, the trend for bonds does not look good. Review your bond portfolio now, and keep your eye on that trend. And remember, if the trend is not your friend, you shouldn't play with it anymore.

-Gandolfini's $30 Million Mistake

You probably heard that James Gandolfini passed away recently. The actor, best known for his leading role on The Sopranos, was just fifty-one years old when he died. Sad news, but it gets even sadder. Gandolfini's estate is valued at around $70 million. He did write a will before his death, but even so, it looks like his family is going to be stuck with a $30 million estate tax bill.

I think this unfortunate situation could have been avoided, but instead there will be a bunch of lawsuits. I bet his heirs will want answers to the question we're all asking: How could a guy with $70 million bucks die without proper planning and a $30 million tax bill?

In his will, Gandolfini left 30 percent of his estate to each of his two sisters and 20 percent to his daughter, Liliana, who was born in October. His wife, Deborah Lin, will receive the other 20 percent of his estate. Sounds reasonable, right? Here's where Gandolfini made a mistake: though the 20 percent his wife receives won't be subject to estate taxes (no taxes between spouses), the other 80 percent of his estate will be. Gandolfini's sisters and his daughter will have to pay 40 percent of their inheritance to Uncle Sam, around $30 million in estate taxes. And all because he didn't do proper estate planning.

Few of us have $70 million to give to our heirs, but even if you only have you have a couple of shekels to rub together, you need to do your estate planning. Most of the mistakes Gandolfini made could have been avoided. It's a tragic story, but one we can learn from. If you haven't properly planned for your estate, your family could wind up paying the maximum amount of estate tax. Make sure you plan, and do it now.