Today, I’m pleased to bring you another installment in the Dick Davis Digest’s Contributor Interview Series. Last week, I got to talk to Bob Brinker, editor of The Brinker Fixed Income Advisor. Read our conversation below for his advice on investing in low-interest rate environment, achieving financial independence, and more.
Chloe Lutts: Hi Bob, thanks for talking to me today. To start, tell me, how long have you been publishing the Brinker Fixed Income Advisor? What did you do before that and then how did you get into the investing newsletter business?
Bob Brinker: Our first edition was in early 2005—so we are now in our eighth year of publication. Before that, I worked for 15 years in information technology. I grew up in a house where investing and finance was a regular topic of conversation. I learned from an early age the value of earning money, and more importantly, the benefit of investing your money.
The concept of “critical mass” is deeply rooted in my thinking—critical mass is the point in your life when you reach financial independence. That is, you can spend your time doing whatever it is you enjoy, without worry of needing to collect a paycheck. Your investment portfolio is able to provide you with the income you need to support the lifestyle that suits you. I think taking control of your financial future and making it a priority to achieve critical mass is one of the most important concepts investors should embrace.
CL: Fixed Income Advisor is a little different from most of our other contributors’ newsletters because it provides data on fixed income investments such as treasuries, CDs and bonds. What sort of investor is this advice aimed at, and how do they use the information in your newsletter?
BB: Fixed Income Advisor strives to provide investment information that is easy to use for yourself. We provide you with the information that you need monthly to build and maintain a date-certain portfolio of U.S. Treasury securities, CDs or municipal bonds. We also publish Model Portfolios that invest in no-load mutual funds. We also offer a portfolio of exchange-traded funds.
Our investment letter attempts to make fixed-income investing easy and our recommendations attempt to provide the income stream necessary to enjoy your lifestyle. We believe strongly in keeping costs to a minimum and implementing an investment portfolio that is easy to maintain and that offers attractive returns.
CL: That’s a lot to cover. What sort of research goes into writing your letter?
BB: The bulk of my work centers on reading a variety of economic research material. There is a tremendous amount of economic data that is released monthly, and I comb through much of it to validate our current forecast and catch turning points. We keep an eye on economic growth using a variety of leading and coincident indicators. This is important in assessing the direction of short, intermediate, and longer-term interest rates.
We also monitor the spreads between various types of interest rates. These include U.S. Treasuries, agency and non-agency mortgage-backed securities (MBS), municipal bonds, investment grade corporate bonds, high-yield (junk) bonds and convertible bonds. More recently, we’ve been keeping an eye on interest rates around the globe. There are many variables at work, so finding the right mix of interest rate risk and credit risk is important if you want to outperform over the longer-term.
CL: Speaking of interest rates, how have the last few years of super-low rates affected fixed income investing? Any advice for income investors trying to cope?
BB: It is a struggle for many retirees to generate the income they need. In the end, each investor needs to balance their need for yield versus their risk tolerance. It makes no sense to me when I see investors who have plenty of money take unnecessary risk. If you can provide an income that meets your lifestyle in U.S. Treasuries and CDs, do it! Do not take risk just to earn more money that you do not need. Only take on added risk if you need to in order to generate additional income.
Another important point I emphasize is to focus on real return, not nominal return. Earning 7% in a 4% inflation environment is not better, in real terms, than earning 4% in a 1% inflation environment. A final important point is to consider spending your principal—that is, not passing along your fortune to your heirs. Instead, allow yourself to have your portfolio shrink in the very late stages of life. This is often referred to as “dying broke. ” The benefits of your investment portfolio quickly vanish at the end of your life—so use your money while you can. You cannot take it with you.
CL: Do you have a favorite type of fixed income investment you’d recommended investors look into today? Why?
BB: I think no-load bond index funds continue to offer an attractive vehicle as they provide very low costs, broad diversification, daily liquidity and a steady, predictable income stream. Although I generally prefer an indexed approach, I have seen a handful of fixed-income managers display an ability to outperform over the long-term. The challenge for active managers is overcoming the higher expenses charged by these funds. A typical low-cost index fund may charge 25 basis points, or of 1%, whereas an actively managed fund may charge closer to 1%. That may not sound like a big difference, but with yields this low, it is difficult to overcome that hurdle.
If you want to “set it and forget it,” the Vanguard Total Bond Market Index Fund (BND) is a great investment vehicle that offers low cost, broad diversification, and solid long-term results. If you want to attempt to outperform, as we do, you can construct a portfolio with various weightings. At this writing, we include the DoubleLine Total Return Fund (DLTNX) and the Loomis Sayles Bond Fund (LSBRX) in our Model Portfolios.
CL: More generally, what’s one important piece of advice you think more investors need to hear?
BB: This one is simple: Take control of your financial future. There are so many great books that explain how easy it is and you can do it yourself. There is no reason, in my view, to pay someone a percentage of your assets every year just to invest your money. Do it yourself and take responsibility for your decisions. John Bogle, founder of The Vanguard Group, has written many great self-guided investment books. Consider how hard you work to earn your income. Why not make it a priority to learn how to invest your money so that one day you can reach critical mass?
CL: What do you see as the biggest challenge to investors right now?
BB: I am an eternal optimist. As you look back in history, when has there been a long period of time without uncertainty or concern? Never! There are always very serious concerns and problems all around the world and today is no different. Investors need to build a long-term investment plan that will lead them to critical mass so long as they follow the steps. Make it easy to succeed and enjoy the journey.
In my view, the greatest challenge for fixed income investors today is the historically low level of interest rates. I do not expect this to change in the near term. It will take many years—perhaps a decade or longer—to work through the debt/deleveraging process. Look for opportunities as they present themselves and invest in those opportunities. Do not be afraid to make changes to your portfolio when the time is right. I think investors can safely plan on a 4%-5% withdrawal rate with a properly constructed fixed-income portfolio.
CL: Before you go, let us get to know you better—what else do you like to do besides investing?
BB: I enjoy spending my free time with my family. My wife and our two children take full advantage of all the outdoor activities available to us in Colorado. I enjoy golf and trail running when the weather is good, and skiing or snowboarding when we receive a decent snowfall. As a family, we travel as much as we can so that our children gain an appreciation for different cultures. Colorado is a wonderful place to live and raise a family; the only thing it lacks is an ocean view.
CL: Thanks for talking to us, Bob!
As always, you can learn more about Bob Brinker, Brinker Fixed Income Advisor, and all the other Digest contributors by visiting our website.
Wishing you success in your investing and beyond,
Editor of Investment of the Week