Bonds 101: Understanding the Basics
by SGL Financial
Our 2 Cents – Episode #220
Bonds 101: Understanding the Basics
On the podcast today, we’re diving into changing home values, the psychology of feeling wealthy, and kicking off a two-part series all about bonds. There’s a lot to unpack, so listen closely and tune in now using the link below!
- Gabriel’s Quick Hits:
- Find out the top 10 cities where home prices are surging.
- Think you’re feeling wealthy? Here are the magic numbers behind financial comfort.
- Getting to Know Steve and Gabriel:
- Have you ever walked out in the middle of a movie?
- What’s something funny that you do when you’re alone?
- Bond Basics:
- The Lewits are talking all things bonds, covering how they work, what happens when you buy one, and why they matter to your financial future.
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Podcast Transcript
Announcer: You’re listening to Our 2 Cents with the team from SGL Financial, Building Wealth for Life. Steve Lewit is the President of SGL Financial, and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Welcome back everybody. You are listening to Our 2 Cents. You’ve got Gabriel Lewit here and Stephen Lewit on the microphone. Hello Steve.
Steve Lewit: Good morning, good morning, you are loud in my ear.
Gabriel Lewit: Yeah, yeah.
Steve Lewit: I just asked Kate to turn me down a little bit.
Gabriel Lewit: Yeah, definitely. We had some technical difficulties this morning, but lucky for us, we have fixed them.
Steve Lewit: Yes. We thought it might be a no-go.
Gabriel Lewit: Yes. Yeah. So it’s working.
Steve Lewit: I love your little signs here to Kate. Up, down…
Gabriel Lewit: It’s a very sensitive microphone.
Steve Lewit: I know you’re all interested in this, folks. There’s nothing more important than the sound.
Gabriel Lewit: Yes. Well, you got to hear us, otherwise it’s not much of a show.
Steve Lewit: Silence is golden.
Gabriel Lewit: And if we can’t hear each other talk on the show, it would be pretty-
Steve Lewit: Even less of a show.
Gabriel Lewit: Yes, it would be very difficult to speak to one another.
Steve Lewit: Yeah. Hope everybody’s doing well this morning.
Gabriel Lewit: Yeah, we hope you’re doing great. Course, summer’s just flying by. I just realized the other day, it’s a couple weeks away from Bears preseason football. Oh man.
Steve Lewit: Is it really?
Gabriel Lewit: Yeah, it starts in August.
Steve Lewit: Oh my gosh.
Gabriel Lewit: And August is like 13 days away.
Steve Lewit: Oh my gosh.
Gabriel Lewit: Yes.
Steve Lewit: It is flying.
Gabriel Lewit: Yeah.
Steve Lewit: I wrote the date yesterday. The days fly by, and we are writing dates all the time on paperwork, but yesterday I wrote it was the, what, 17th, or today-
Gabriel Lewit: 17th, yeah, I think, or whatever it was.
Steve Lewit: Yeah. And I write…
Gabriel Lewit: 16th yesterday.
Steve Lewit: Whatever it was, the year is half over.
Gabriel Lewit: It is, yeah. Going by fast.
Steve Lewit: Yeah. Time does that.
Gabriel Lewit: Well, we hope you’re having, again, a wonderful day. We’ve got a, of course, great show lined up for you. How could it not be, right? At least in our opinion. We wouldn’t pick topics that we thought were boring.
Steve Lewit: And we’re not biased at all.
Gabriel Lewit: Yes, not biased at all.
Steve Lewit: We’re very objective. So it is going to be a fantastic show.
Gabriel Lewit: Yes. So we’re happy to have you with us. So we’re going to talk a little bit about where home prices are rising the fastest. Hint, it might be closer to home than you may think. Okay? Even though the general trend in the home industry is actually prices are declining a little bit. So we’re going to talk about that. We’re going to do a little get to know Steve and Gabe here. We haven’t done that in a while, and some of you tell us that’s your favorite part of the show, is hearing all about our quirks, and-
Steve Lewit: We haven’t done that in a while.
Gabriel Lewit: We haven’t.
Steve Lewit: Yeah.
Gabriel Lewit: Yep. We’ve got a listener question here if we have time about robo-advisors. We’re going to get to that if we can. We’re going to talk a little bit about bonds in more detail than we typically have in the past. Okay? Because interest rates are a theme that’s been still percolating in the news. And I just had a whole meeting with a client about bonds, and it prompted me to think, “You know, I think that would make a good topic for the show.”
Steve Lewit: Yes.
Gabriel Lewit: Okay? And last but not least, we’re going to talk about a new study that says how much does the average American feel they need to have to feel wealthy? Hint there as well, it’s probably higher than you think.
Steve Lewit: Yeah, it might even be higher than that.
Gabriel Lewit: So that’s what we’ve got on the agenda for you today. I hope you’re excited to dig right in. So let’s talk about the home values and home prices discussion here.
Well, as I mentioned, prices in general, it’s kind of funny. I’m in client meetings obviously very frequently, as are you, and we get to the part of our plan where we talk about updating the home value. And I’ll say to a couple, “This happens all the time.” I’m like, “So what do you guys think your house is worth today?” And they’ll look at me and they’ll look at each other, and one spouse will be like, “I don’t know, like 400, 450, 500.” The other’s like, “No, no, it’s not worth that much. It can’t be.” And then we go on Zillow if they can’t agree and we pull it up, and sure enough, it’s way higher than they thought it would be.
Steve Lewit: Yes. Yes. Here.
Gabriel Lewit: Here, because prices have been going up quite a lot.
Steve Lewit: Yeah, the market here is terrific. People are putting their homes on sale and selling them overnight.
Gabriel Lewit: Yeah. So here’s the deal, folks. Key points from a recent article on Realtor.com regional trends. Here are the headlines. Midwest and Northeast are experienced double-digit… experiencing, helps if I can talk, double-digit home price growth, outperforming much of the country.
Steve Lewit: Yes. So in the rest of the country, what I was reading, which is why I was surprised to see the headline on this article, I was reading another article that said that home prices are softening.
Gabriel Lewit: Well, I love when I read national articles where Illinois or close to home is featured for some reason. I’m like, “We’re special here.”
Steve Lewit: “We made it.”
Gabriel Lewit: Yes, we made it. Right, so-
Steve Lewit: Other than for high real estate taxes.
Gabriel Lewit: Which we actually topped the list. I didn’t bring it up on the show, but there was a recent article that said Illinois is pretty much number one on the list in the country for high property taxes. So we win there too, or lose, depending on what you look at.
Steve Lewit: Yeah. Nice to win something, I guess. Right.
Gabriel Lewit: Okay. Now, where in specific? Decatur. All my Decaturans holler, right?
Steve Lewit: What, “My Decaturans”?
Gabriel Lewit: Decaturans.
Steve Lewit: Oh. Get up and cheer?
Gabriel Lewit: Yeah.
Steve Lewit: Because you lead the nation.
Gabriel Lewit: You lead the nation with 12.4% annual home price growth.
Steve Lewit: Now think about that. That’s better than the S&P.
Gabriel Lewit: Where is Decatur? It’s south. Middle? Middle south?
Steve Lewit: Decatur is south. Middle south. Decatur, nice town.
Gabriel Lewit: You know, yes, you are top of the charts here, Decatur. Now, West Virginia of all places has three cities in the top 10 for fastest growing home prices.
Steve Lewit: Does it say what cities those are?
Gabriel Lewit: Let’s see, let’s see. Hold on, hold on. Well, we talked about Decatur. Yes, we’ve got… Okay, here’s the list. Decatur, Illinois. We’ll jump right into the fun part, the list. 12.4% price growth. Now the median home price is a little lower there, hundred and forty-nine thousand, but it’s seeing great growth, and the community offers plenty of opportunities for water sports such as fishing, boating, and water-skiing. And it also boasts a 1300 acre park for hiking, biking, and running.
Steve Lewit: And you happen to have a piece of land for sale in Decatur you’re trying to sell, right?
Gabriel Lewit: I like to pretend, put on my little marketing voice, right?
Steve Lewit: Your advertising voice, yeah.
Gabriel Lewit: My advertising voice. And next up on the list we have Weirton, West Virginia, price growth of 12%.
Steve Lewit: Wait wait wait, what’s the name?
Gabriel Lewit: Weirton. Weirton?
Steve Lewit: Oh.
Gabriel Lewit: W-E-I-R, Weirton.
Steve Lewit: Weirton.
Gabriel Lewit: Weirton.
Steve Lewit: Yeah. That’s weird.
Gabriel Lewit: Okay. “With a median list price of just a hundred and fifty thousand and just 45 minutes away from-”
Steve Lewit: Everywhere. From everywhere.
Gabriel Lewit: “… from fabled Pittsburgh, this market is popular with commuters looking for a more rural vibe and more bang for their buck, as that bigger city has a much larger median price tag of 250,000” there in Pittsburgh.
Steve Lewit: Yeah.
Gabriel Lewit: Okay.
Steve Lewit: Yeah, yeah. So these are lower price prices.
Gabriel Lewit: Well-
Steve Lewit: I’m wondering-
Gabriel Lewit: Duluth, Minnesota. Okay, we’re getting there.
Steve Lewit: Let’s get up in price, yeah.
Gabriel Lewit: Price growth, 11.9%. Median list price, $327,000.
Steve Lewit: Yeah.
Gabriel Lewit: And “Duluth, Minnesota is just a two-and-a-half-hour commute to Minneapolis.”
Steve Lewit: Yeah.
Gabriel Lewit: “The small port city on Lake Superior is known for its summer destination sandbar Park Point, where billionaire Kathy Cargill made headlines last year for buying multiple properties.”
Steve Lewit: Wow. Okay. Well, would you ever move to Duluth-
Gabriel Lewit: Duluth, Minnesota?
Steve Lewit: … Minnesota.
Gabriel Lewit: Well, producer Katie’s from Minnesota. I don’t know. She’s a Minnesotan, right?
Steve Lewit: Yeah, but not a Duluthian.
Gabriel Lewit: A Duluthian, right?
Steve Lewit: What -ithian are you? Where were you born?
Katie:
Stillwater.
Steve Lewit: Stillwater? Stillwater.
Gabriel Lewit: She’s Stillwaterian.
Steve Lewit: She’s a Stillwaterian. Stillwateran.
Gabriel Lewit: Okay. Then we got Glens Falls, New York, price growth 10.6%, median list price $369,900. “An hour away from Albany and situated on the peaceful Hudson River.”
Steve Lewit: And Glens Falls is another beautiful town. I’ve been there and it’s just gorgeous.
Gabriel Lewit: And just to finish rounding-
Steve Lewit: And if you’ve never been to see the Hudson River in upstate New York, it’s worth a trip. It’s just gorgeous. It’s like from all-time paintings that you see, it’s like from another world.
Gabriel Lewit: Pretty.
Steve Lewit: Yeah.
Gabriel Lewit: Well, I’m just going to go quicker through the rest of the list here. You have Muncie, Indiana. Parkersburg, West Virginia. Charleston, West Virginia. Bridgeport, Connecticut.
Steve Lewit: No, no.
Gabriel Lewit: Lewiston, Idaho.
Steve Lewit: Is the top growing, Bridgeport?
Gabriel Lewit: Bridgeport, Connecticut.
Steve Lewit: Because that’s been a disaster town for a long time.
Gabriel Lewit: Well, I’ll bet if they lived in Bridgeport, maybe you wouldn’t say… Maybe you would, who knows?
Steve Lewit: Sorry. Sorry, Bridgeportians, but-
Gabriel Lewit: Lewiston, Idaho.
Steve Lewit: … the truth is the truth.
Gabriel Lewit: And Lewiston… Wow, there’s two Lewistons in different states, all with price growth of 10% or higher.
Steve Lewit: Okay, yeah.
Gabriel Lewit: So, there you go. Well, if you live in one of those states or towns, right, and you are excited about your property growth price appreciation, now you know why.
Steve Lewit: Or, if you’re thinking of buying a second home…
Gabriel Lewit: Well, do you want to go buy in the hottest markets? Or maybe it’s overvalued. That’s what we just don’t know.
Steve Lewit: Yep. We don’t. We don’t.
Gabriel Lewit: All right, so we thought that would just be a little bit of interesting points for you, especially if you’re a local Illinoisian like we are here. That is why you’re seeing your prices stay high. We’re in a hot market at the moment. Even though, although, the last point here, right? Nationwide growth is slowing. Overall home prices grew just 1.8% year over year, down from a 5% increase in May 2024.
Steve Lewit: Yeah, and think about it, folks. If you are thinking about selling, I wouldn’t wait, because sometimes when the rest of the country is slowing down, that filters into the hot markets eventually, rather than the other way around. It usually works where the softer markets infiltrate the higher markets, rather than the other way. Did that make sense?
Gabriel Lewit: Sure.
Steve Lewit: Okay. All right.
Gabriel Lewit: Infiltration of the markets.
Steve Lewit: So, all I’m saying is, if you’re thinking of selling, sell now.
Gabriel Lewit: You want to sell while you’re high, not when you’re low. Right Just like the regular stock market.
Steve Lewit: Thank you. Just like the stock market, yeah.
Gabriel Lewit: Yes, okay. Well, let’s talk about feeling flush or not flush with cash based on the study that says, “What do Americans think being wealthy means, or what do you need to feel wealthy?” Okay? So this is a recent report from Charles Schwab’s 2025 Modern Wealth Survey, and two thirds of the respondents said it takes more money, quite a bit more, to be wealthy today compared to last year. And apparently according to respondents, the magic number to feel financially comfortable is 839,000, which is a big jump up from 778,000 in the same report last year.
Steve Lewit: It’s just to feel comfortable.
Gabriel Lewit: Comfortable, yes. To be considered-
Steve Lewit: Comfortable is not wealthy.
Gabriel Lewit: To be considered wealthy, in the same study, people think it takes 2.3 million, up from 1.9 million in 2021.
Steve Lewit: Yeah, the problem with this… Well, go ahead. I don’t want to interrupt you and get into the other side of it.
Gabriel Lewit: Well, the general consensus side is, why are people feeling that way? Rising cost of living, a sense that the economy is worsening, and high interest rates are causing people to feel they need a lot more money to be comfortable or wealthy.
Steve Lewit: Well, when things become unpredictable… It’s the reason you stock up if you think there’s going to be a water shortage. What do you? You stock up on water. So people stock up on money to feel better when there’s unpredictability that you need more of it.
Gabriel Lewit: Yeah. So now very few Americans, only a third, think they are on track or already wealthy. And the fewest of them, of course, are younger people. So. And four in 10 Gen Z-ers are feeling pretty similar vibes, and boomers, only two out of 10 baby boomers are feeling wealthy.
Steve Lewit: Well, do you know what that means, to feel wealthy? What does that really mean?
Gabriel Lewit: Well, according to this article, I guess it means 2.3 million in money. But yeah.
Steve Lewit: But here’s the scoop, is that you and I know people that have 2.3 million, we know people that have eight million, and if you say to them, “You know, you’re really a wealthy person,” they say, “Well, I don’t feel that way.”
Gabriel Lewit: Yeah, it’s all relative. I mean, studies are just averages, right? Everyone’s unique, your plan’s unique, what you need is unique. But it is helpful data points for us as we think ahead. And I think what’s challenging, the bar is so high for younger people, and it’s interesting… I think a lot about this philosophically.
Steve Lewit: Really?
Gabriel Lewit: Let’s say the number when I first got out of college was 400,000 dollars to feel wealthy, or 500,000, right? Now it’s 900,000, or 839,000 according to the… So I think for young people coming out of college, if you were to read this study, like, “How am I going to get 839,000 to feel comfortable?” Right? The number just seems so high. Right?
Steve Lewit: It seems unreachable.
Gabriel Lewit: And it just gets bigger and bigger. I remember when I was 21 years old, a million dollars seemed like a lot of money. I’m like, “How do you get to a million dollars?” And nowadays, if the number you need… If a million doesn’t even mean that much now you need $2.3 million to feel wealthy. It’s like, “How in the heck am I going to get that?” Right? If you’re a young person in today’s world. Very hard.
Steve Lewit: Yeah, and to add onto that, that financial literacy amongst the young people-
Gabriel Lewit: Which we’ve talked about, right?
Steve Lewit: Which we talked about, is not very high.
Gabriel Lewit: No.
Steve Lewit: So, it’s daunting. It really is daunting. There’s a lot of pressure on young people, but there’s also a lot of pressure on folks that are thinking about retirement that are still far short of that number, and they’re running out of time.
Gabriel Lewit: Yeah. So anyways, what’s the recipe to solve this? You got to have a plan. We beat that drum a lot here. You’ve got to have a plan. You got to save money. Right? If you’re not where you want to be and you’re not saving money, well, you’re not going to get there very quick. So you do have to put money away. That takes discipline, planning, investing wisely. All those things will start to chip away at this and get you closer to where you want to be if you’re not where you currently want to be.
Steve Lewit: Yeah. So numerically it says you got to get to 2.3 million, but Gabriel, we find that we know people that have $800,000 and they live very frugally and are super happy, and they feel wealthy because their lives are working well.
Gabriel Lewit: Yes, correct. Yeah.
Steve Lewit: Well, sounds like you want to move on.
Gabriel Lewit: I was trying to wrap that up there.
Steve Lewit: Well, you could wrap it up after I say what I want to say.
Gabriel Lewit: Yes. Well, you had already said that, so I’m kicking you a little under the table here. So.
Steve Lewit: Yes, you are.
Gabriel Lewit: All right, well, if you have questions on selling homes, how to achieve the wealth you’d like to be, how to be on track, any of the things that these topics bring up to the table as a topic of discussion, give us a call here, (847) 499-3330, or go to sglfinancial.com, click Contact Us. Again, we will always offer a complimentary one-two meeting introduction sessions with you, to get to run your preliminary numbers, your preliminary mini-plan, help you see where you are, your current financial picture, and see if you’re on track for where you want to go. And then talk about strategies and ideas that can help you get there better. So that’s, again, just a quick call out for you there. If you haven’t yet connected with us, we are here and happy and ready to do so. Would you agree?
Steve Lewit: I would agree, absolutely. And I want to move to bonds.
Gabriel Lewit: Oh, you’re rushing me now, okay.
Steve Lewit: Now I’m rushing you.
Gabriel Lewit: Well, honestly-
Steve Lewit: What goes around comes around.
Gabriel Lewit: You’re throwing it back.
Steve Lewit: You know how that is, right?
Gabriel Lewit: Yes. Well, before we get to bonds, actually I was going to do a get to know you.
Steve Lewit: Really?
Gabriel Lewit: Just a little interlude here for our listeners.
Steve Lewit: That makes me nervous. Interludes make me nervous, folks.
Gabriel Lewit: Well, very quickly here-
Steve Lewit: Digging into my private life.
Gabriel Lewit: … just two little things. The first question is… And again, yes, where do I come up with these? I just Google them, and I pick one that jumps out at me. Have you ever walked out in the middle of a movie?
Steve Lewit: Yes.
Gabriel Lewit: You have?
Steve Lewit: I have. Once.
Gabriel Lewit: You did?
Steve Lewit: Yes. I don’t remember the movie, but it was just god-awful. It was a long time… I can’t remember the movie. It was just terrible.
Gabriel Lewit: I’ve never done it. I mean, I haven’t been to a movie in a while, quite frankly. But no, I’ve never walked out of a movie.
Steve Lewit: And I’ve walked out, believe it or not, in the middle of an opera, where the singing was so bad I couldn’t take it anymore.
Gabriel Lewit: Isn’t that all opera? Folks, he used to be an opera singer, so that was a little…
Steve Lewit: Just remember what goes around comes around.
Gabriel Lewit: A little dig over there.
Steve Lewit: Yeah, it’s like soccer.
Gabriel Lewit: I don’t walk out; I just don’t go.
Steve Lewit: You never walk in.
Gabriel Lewit: Right. Ah-
Steve Lewit: No, yeah. Have you? You’ve never walked out?
Gabriel Lewit: Never walked out of a movie. No.
Steve Lewit: …
Gabriel Lewit: There’s some I’ve been pretty close. I’m like, “God, this is bad.”
Steve Lewit: “It’s just terrible.” Yeah.
Gabriel Lewit: But I pay for the popcorn, I’m going to see it through.
Steve Lewit: Now let me ask you a question. You go on Netflix and you rent a movie that has, “This is the top 10 movies of the year.”
Gabriel Lewit: Yeah. I have turned off a few Netflix movies about 15 minutes in. I’m like, “God, this is bad.”
Steve Lewit: And how does it get to be, “This is top. This is number eight in the US-”
Gabriel Lewit: Because everybody knows it’s not actually number eight, it’s what they’re promoting. There’s no data to independently verify that. Netflix wants to promote a movie? “Top of number one. Here we go.” You think it’s real?
Steve Lewit: You see how naive I am, because I see it’s number two and I say, “Oh, I got to watch that.”
Gabriel Lewit: No, they put in $200 million into it. They better get people to watch it, right? So you’re number one on the list. That’s what you know happens. Because then it forces people to watch it.
Steve Lewit: Darn. Darn, I’m so trusting. Well, you know-
Gabriel Lewit: I’m so skeptical. Oh my gosh.
Steve Lewit: Yeah. Wow. I should be more skeptical.
Gabriel Lewit: Next get to know you question. What’s something funny you do when you’re alone?
Steve Lewit: What’s something funny I do when I’m alone? Oh…
Gabriel Lewit: I’ll start. You want me to start?
Steve Lewit: Yeah, you start. I have no idea.
Gabriel Lewit: No, I will not do this on the show. I do accents. I’m the worst at accents in the entire world.
Steve Lewit: Oh, we got to hear one.
Gabriel Lewit: No. No, but I try so hard.
Steve Lewit: My son’s a coward.
Gabriel Lewit: I’ll talk like Forrest Gump talks in the Forrest Gump movie.
Steve Lewit: Yes.
Gabriel Lewit: You know?
Steve Lewit: You do that at home when you’re alone?
Gabriel Lewit: Not alone per se. I mean, not in public, I would just say.
Steve Lewit: Because this says when you’re alone, doesn’t it?
Gabriel Lewit: Yeah, I guess I’m putting that not in public. I’ll do it in front of my kids or Dee Dee. You know, I’ll talk like Forrest Gump talks. I want to do it now, but I’m not going to. And then when I’m reading books with the kids, usually it’s one kid and me, I’ll… Just because I get bored reading the same books over and over again.
Steve Lewit: You start reading it with an accent.
Gabriel Lewit: I’ll literally just read it with a different… a Southern accent. “Hi, y’all.”
Steve Lewit: English accent.
Gabriel Lewit: I’ll just read the whole thing. But I’m really terrible at accents, but I try to do them.
Steve Lewit: Well, that’s fun. That sounds like fun.
Gabriel Lewit: It keeps me engaged.
Steve Lewit: Like playing with your voice and seeing what it can do and stuff like that?
Gabriel Lewit: So, there’s mine.
Steve Lewit: Yeah, I don’t know. I never thought… What do I do? So what is funny? What would I do, laughing at myself?
Gabriel Lewit: You make faces at yourself in the mirror?
Steve Lewit: No, I don’t do that. Give me some help here, guys.
Gabriel Lewit: When you’re staring in the mirror, do you flex your muscles, see how strong you are?
Steve Lewit: But that’s not funny. I mean, I am strong. That’s impressive. What is funny? Well, sometimes I’ll laugh at myself when I’m cooking a steak.
Gabriel Lewit: Okay, there you go.
Steve Lewit: No, so I’m cooking the steak, and I know it’s cooked where it should be, but the timer hasn’t gone off, and then it overcook, and then… It’s not funny, but I laugh at myself.
Gabriel Lewit: That’s what you came to mind? That’s a good answer. Okay, there you go.
Steve Lewit: Well, what do you do? You’re home alone. It’s not like telling jokes to yourself, or… I don’t do mug shots in the mirror.
Gabriel Lewit: You take selfies, and you make goofy faces?
Steve Lewit: I don’t…
Gabriel Lewit: All the girls, the young girls, do the duck lips in selfies? Like… you know?
Steve Lewit: No, I don’t do that. I have fun at home. I have a lot of fun. I mean, I paint, I play the piano, I sing.
Gabriel Lewit: You’re just not a funny guy, it’s okay.
Steve Lewit: No, I’m not. I’m very serious.
Gabriel Lewit: All right. Well there you go, folks. Now you know us one notch better than you did before.
Okay, let’s talk bonds.
Steve Lewit: Let’s talk bonds.
Gabriel Lewit: So, a bond. What is a bond, Mr. Lewit? Pop quiz for you for our listeners.
Steve Lewit: A bond is a debt instrument offered by corporations or governments that say, “You’re going to lend us money, we’re going to give you a bond, and then you can collect interest on that bond for a period of time.”
Gabriel Lewit: Yeah, so first notation is, if somebody buys a bond, or a municipality or a government or somebody else sells a bond, what does that mean? Right? If you’re buying a bond, you are giving, say, the federal government a hundred thousand dollars, just for-
Steve Lewit: Lending. Lending.
Gabriel Lewit: Right, well, yeah, you’re lending. But when you buy the bond, you’re lending your money.
Steve Lewit: Yes.
Gabriel Lewit: But if you think it in terms of an investment, right? You’re giving-
Steve Lewit: You’re giving it away.
Gabriel Lewit: You’re giving the money to the government. Right? They’re selling the bond to you, meaning they are actually receiving your money, right? As they sell the bond to you, they’re selling an obligation to pay you interest over a set period of time, and at the end of that time period, they’re going to give you your principal back.
Steve Lewit: Yes. And just like all corporations, the reason bonds get sold is corporations and governments need money.
Gabriel Lewit: Yeah, you can also buy a bond from somebody else that already owns the bond.
Steve Lewit: Yes.
Gabriel Lewit: Which is different than buying it from the issuer, which is called the bond market. And you could then… Let’s say you, Steve, bought a bond for a hundred thousand dollars.
Steve Lewit: Yes.
Gabriel Lewit: From the government. Okay? Now you don’t have a hundred grand, but you’re getting interest.
Steve Lewit: Yes.
Gabriel Lewit: And a promise for that a hundred grand back-
Steve Lewit: At the end of the term of the bond.
Gabriel Lewit: … at the end of the bond term. One year, three year, five years, 10 years, 20 years, 30 years even, especially from the US government. And let’s say that hundred thousand dollars, interest rates, let’s say they’ve increased.
Steve Lewit: Yes.
Gabriel Lewit: Okay? And now let’s say you were getting four percent, and now you could get… the government’s now selling bonds and paying five percent.
Steve Lewit: Yes.
Gabriel Lewit: Okay? So you look around, you say, “Gabe, will you buy my bond that’s going to pay you four percent? I want to get some of my money back, so I can buy these five percent bonds.”
Steve Lewit: And I would say to you, “Well, I’m going to buy your bond, but at a lower price, so I can get five percent, because why should I buy your bond at four percent?”
Gabriel Lewit: I think you’re confused, because if you’re trying to sell it to me, you’re not going to be saying buying it. So I would be saying to you, Steve, “If I can get five percent on the open market, I’m not going to give you a hundred thousand for your bond paying four percent if I can give the government a hundred grand and give five percent.”
Steve Lewit: We’re saying the same thing, maybe from a different person.
Gabriel Lewit: Just making sure we’re using the right vantage point so as to not be confusing.
Steve Lewit: Okay. Yeah.
Gabriel Lewit: If you own a hundred-thousand-dollar bond in the market, you already gave your hundred grand to the government, right? They owe you your money back, plus interest.
Steve Lewit: Yes.
Gabriel Lewit: So, you own that bond right now, that contractual agreement.
Steve Lewit: Okay, I own the bond.
Gabriel Lewit: Yes.
Steve Lewit: All right.
Gabriel Lewit: Now, me, Gabriel, different person, I have two options.
Steve Lewit: Different person who doesn’t own the bond.
Gabriel Lewit: I do not own the bond. At the moment, I have two options with my hundred thousand.
Steve Lewit: Yes.
Gabriel Lewit: The interest rates have risen; I can buy from the government.
Steve Lewit: Or you could buy it from me.
Gabriel Lewit: Or I could buy from you.
Steve Lewit: But if you buy it from me, you’re going to want the same interest rate, if not more, than you can buy it for from the government.
Gabriel Lewit: But that’s not possible. Your bond is paying four percent, so if I buy your bond at a hundred thousand, I would get four percent, or I can buy the government’s bond for a hundred thousand, getting five. So if that were the case, which one would I buy?
Steve Lewit: The government.
Gabriel Lewit: Right. So for you to sell your bond to me, and your bond contractually is paying you four, what are you going to have to do?
Steve Lewit: Okay. We finally got there. I would have to lower my price.
Gabriel Lewit: Yes. Yes, because for me to want to buy your bond, paying four percent-
Steve Lewit: You might have to buy it.
Gabriel Lewit: … versus the government’s at five, I’m going to have to pay… I’m going to pay you less for it.
Steve Lewit: Yeah.
Gabriel Lewit: Okay?
Steve Lewit: I hope everybody understands that, because the amount that the bond pays is fixed. So if I want to get a higher interest rate on that bond, I have to buy it at a lower price.
Gabriel Lewit: To not be confusing, the interest rate per se on the bond is not changing.
Steve Lewit: That’s what fixed means.
Gabriel Lewit: Right, but you said to get a higher rate on the bonds. If I’m buying your bond, I’m not getting a higher rate. The rate on the bond is the same.
Steve Lewit: Yeah, good point.
Gabriel Lewit: My actual interest earned, my yield, would be higher if I buy your bond at a discount.
Steve Lewit: Very good point. There’s a difference between the interest on a bond and the yield from a bond. Very good point.
Gabriel Lewit: Yes. Yes. Okay? So bonds are actually, for many people, more confusing and more complicated than stocks.
Steve Lewit: As you can plainly see.
Gabriel Lewit: Okay? You have yield, you have yield to maturity, you have the actual bond itself, you have buyer-sellers, you have the actual issuers. It can get very muddy very quick. But what I was trying to explain is there’s an inverse relationship between interest rates and bond prices. Right? Using that very simple example, if interest rates went up, then the bond you own is now worth less, as we saw, because people would otherwise buy a new issued bond with a higher interest rate versus yours if it was the same price.
Steve Lewit: If you try and sell it before it matures.
Gabriel Lewit: Before it matures. Now if you hold it to maturity, you always get your money back, and you get the yield that was contractually agreed upon.
Steve Lewit: So, if I buy a four percent bond for 10 years, I’ll get four percent for 10 years, and if I put a thousand dollars in 10 years later, guess what?
Gabriel Lewit: Yeah.
Steve Lewit: I get my thousand dollars back.
Gabriel Lewit: Yeah.
Steve Lewit: But let’s say mid-term, I don’t want this bond. Well, somebody’s got to buy it, and they’re going to buy it to equate whatever the interest rate is competing with this bond.
Gabriel Lewit: Yeah. And we might end up having to do this in two parts, but maybe today we’re going to do just what are bond basics, and then next time we’ll do all sorts of additional topics about… you know, we’ll spend the core of our next show talking about more specifics of bonds. Because they’re very important. Bonds are a really core element of investing. We talk a lot about stocks on the show, but bond fund, individual bonds, bond ladders, bond alternatives, I’ve realized we haven’t really spent a lot of time on those topics.
Steve Lewit: You know, I can’t remember a show we had on bonds.
Gabriel Lewit: I’m sure we’ve touched upon them, but one doesn’t come to my memory in recent history.
Steve Lewit: But we’ve never taken a deeper dive.
Gabriel Lewit: And we always just talk about, “Hey, interest rates go down, blah blah blah.” But-
Steve Lewit: Bonds go up.
Gabriel Lewit: Yeah, I really want to do a deeper dive on this. Okay, so for the rest of our show here, let’s talk about… let me use another example, the inverse of that. So let’s go back. You bought a bond from the US government, paying you four percent with your hundred grand.
Steve Lewit: Okay.
Gabriel Lewit: Okay?
Steve Lewit: So, I no longer have a hundred grand. I have a bond, I have a piece of paper.
Gabriel Lewit: Yeah. And the government’s going to pay you interest and give you your money back in the future.
Steve Lewit: Yes.
Gabriel Lewit: Now interest rates go down.
Steve Lewit: Yes.
Gabriel Lewit: Now folks, this is more the environment that we’re in.
Steve Lewit: Headed towards, yeah.
Gabriel Lewit: Or headed towards, most likely. Okay? So I now have a hundred thousand, Gabriel. Interest rates went down. The government’s now issuing new bonds at three percent. Steve Lewit, father over here, owns a bond paying four percent.
Steve Lewit: Yeah.
Gabriel Lewit: So, I have a hundred grand, and I could either… If Steve was willing to give me his four percent bond for a hundred grand, versus the government giving me a three percent bond for a hundred grand, which one would I take?
Steve Lewit: And why would Steve do that?
Gabriel Lewit: Exactly. If he did, I would take Steve’s.
Steve Lewit: Immediately.
Gabriel Lewit: But Steve’s going to say, “Well, why would I do that?”
Steve Lewit: I said that. “Why would I do that?” I know you can’t buy a bond at four percent.
Gabriel Lewit: Yeah. So I’m going to sell you mine at a premium.
Steve Lewit: Higher price.
Gabriel Lewit: Okay? So he might sell me his bond for a hundred and six thousand dollars.
Steve Lewit: Right.
Gabriel Lewit: Okay? So this idea is, if interest rates go up, bond prices go down, and if interest rates go down, bond prices go up, is a very core tenet of bond investing. And it’s very important to understand the interest rate environment, where it’s headed, where you are, when you’re going to invest in any portion of bonds. And Dad, do most retirees own some amount of bonds when you’re 55-plus?
Steve Lewit: Absolutely.
Gabriel Lewit: And why is that the case?
Steve Lewit: Well, bonds add a component of safety to the portfolio. What is supposed to happen, supposed to, careful there, is that when stock prices go down, bond prices go up. In other words, money leaves the market and the demand for bonds, something safe, it’s called a flight to safety. And money goes towards safety when things get volatile. So when there’s a greater demand, the prices of bond goes up, or vice versa.
Gabriel Lewit: Yep. So there’s supply-demand, there’s also interest rate environment changes. There’s a lot of factors, again, going into bond pricing.
Steve Lewit: And there is the health or the financial stability of the company or municipality, or the government that’s offering the bond.
Gabriel Lewit: Yeah, and we’ll get into more of that next time. But what I was going to mention is, yeah, most retirees have some elements of bonds. Why? Because a hundred percent stock portfolio, when you’re 55, 60, near retirement, is very risky. Right? If we have big market drop, market drops 40%, you lose 40% of your money, you’re going to be pretty unhappy, especially if you needed that money for retirement.
Steve Lewit: Yeah.
Gabriel Lewit: So, most people are going to have a blend of stocks and bonds, and I think it behooves us to know how these things work in your portfolio.
Steve Lewit: Well, we were talking about target date funds a few weeks ago, and what do they do when you start to approach retirement? That portfolio shifts from equities to where?
Gabriel Lewit: To bonds.
Steve Lewit: To bonds.
Gabriel Lewit: Yeah.
Steve Lewit: Yeah.
Gabriel Lewit: So that’s our intro for today, and next time we’re going to pick up from this, right? We’ll do a super quick recap on the next show if you’re a regular listener. And then we’ll talk more about individual bonds, which is what we’ve been talking today for easy examples, versus bond funds. We can talk about individual bond ladders, the pros and cons of these, and we can also talk about bond myths that people aren’t familiar with or have heard that may not be true, and dispel some of those myths for you, our listeners.
Steve Lewit: Yeah, there’s so much you can do with bonds, and folks, there’s so much you can’t do with bonds. So I think it’s an important deeper dive.
Gabriel Lewit: And there are many bond alternatives that people aren’t aware of.
Steve Lewit: Exactly. Exactly.
Gabriel Lewit: Yep. So we’re going to talk about all of those and much more on the next show.
Steve Lewit: Good stuff. More important than what I do at home to make people laugh, make myself… I’m still thinking about that.
Gabriel Lewit: Which there’s nothing apparently.
Steve Lewit: I can’t think of one thing.
Gabriel Lewit: You don’t just chuckle or something? You make finger shadows in the lights, right, and-
Steve Lewit: No, no, I don’t. But I’m going to do something tonight to make myself laugh.
Gabriel Lewit: All right, this is going to be your homework. You figure out how to-
Steve Lewit: I’ll report it next week what I did to make myself laugh at home.
Gabriel Lewit: All right guys and gals, well thank you so much for listening. We love having you on the show. Give us your feedback, give us your questions-
Steve Lewit: Send us your questions, please.
Gabriel Lewit: Let us know if we can help you schedule a complimentary visit with us, if we can help you with your planning or financial questions. (847) 499-3330, or go to sglfinancial.com, or email us info at sglfinancial.com any time to schedule a time to talk.
Steve Lewit: Stay well, be healthy, everybody.
Gabriel Lewit: Have a great one.
Steve Lewit: See you later.
Gabriel Lewit: Bye.
Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at (847) 499-3330, or visit us on the web at sglfinancial.com, and be sure to subscribe to join us on next week’s episode.
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