fi nancialforum Principal Defense W
When protecting your principal is your primary investing objective, your investment choices to generate a gain or income are signifi cantly limited. Primary players include certifi cates of deposit (CDs), treasury bonds, fi xed deferred an- nuities, and corporate bonds. A one-year CD is paying about 1 per-
cent. A fi ve-year CD is paying in the high 1-percent range. Treasury bonds currently return 0.18
percent for one-year and 1.1 percent for fi ve-year. Five-year fi xed deferred annuities
Find Your Interest Use MOAA’s certificate of deposit (CD) calculator to determine how much interest you can earn on a CD. Go to
www.moaa .org/calculators and click on Savings Calculators and then Certificate of Deposit Calculator.
aren’t much better at the high 1-percent range, but their gains are tax-deferred. After taxes and infl ation, that leaves you with no gain or income, and your principal will be worth less than when you started. For some, that’s fi ne because their principal amount didn’t go down — at least they didn’t visually lose money. While there wasn’t a positive result, psy- chologically, our fear of loss is greater than our desire for gain, so this lack of visual loss helps us sleep at night. With corporate bonds, to ensure prin-
cipal protection, you have to own an individual bond and hold it until matu- rity. If you sell a bond prior to maturity, all bets are off on principal protection. Bonds within a mutual fund don’t meet the principal-protection requirement. To buy corporate bonds, you’ll need a brokerage account at your bank or in- vestment fi rm or online. You can pur-
46 MILITARY OFFICER JUNE 2012
Consider corporate bonds if you are looking to protect your principal. Lt. Col. Shane Ostrom, USAF-Ret., CFP® how they work and off ers some additional options.
, explains
chase corporate bonds within a regular taxable account or in an IRA. I used my online brokerage account
to search for “investment-grade” cor- porate bonds. These aren’t high-yield or “junk” bonds. These companies have good fi nancial status, which is important because that’s the determining factor in whether you get your money back at the bond’s maturity. These are not FDIC- insured, but they can be insured. Realize that rates, yield-to-maturity (YTM), and bond inventories change constantly. Corporate bonds maturing around
one year can be found paying in the 4-percent range. Keep in mind, good bonds can sell at a premium, meaning a $1,000 face-value bond can cost more than $1,000. This premium cost reduces the YTM (your total return at maturity over the maturity period) to less than 1 percent. A fi ve-year bond pays from 2 to 4 percent. The fi ve-year YTM runs in the low 2-percent range. However, if current income is your desire, a bond pays its stated interest rate as you hold it. Final score: You might fi nd something
that provides better monthly or quarterly income, but you still are limited in your total gain upon maturity. MO
— Lt. Col. Shane Ostrom, USAF-Ret., is a CFP® in MOAA’s Benefi ts Information and Fi- nancial Education Department. To speak with a fi nancial planner, contact USAA at (877) 913- 6622 or
www.usaa.com/moaa, or visit www
.moaa.org/fi nancialcenter for other resources.
PHOTO: SEAN SHANAHAN
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