JULY 2017

Diversifying Your Bond Portfolio

M ost investors understandthe benefit of diversifyingtheir stock portfolios: it’s a

matter of spreading your risk. Butdoes the same principle apply to abond portfolio? The simple answeris yes.

Bonds carry risk. As an assetclass, bonds pose less risk thanstocks for the simple reason that ifand when an issuer goes out ofbusiness, bondholders take prece-dence over stockholders when itcomes to distributing assets.

Here, we’re talking about creditrisk — just one of the several differ-ent kinds of risk bond investorsface. It’s impossible to eliminate thisrisk entirely from any bond portfo-lio: companies go out of businessand pay bondholders pennies onthe dollar, and governments — evensovereign national governments —can run into financial trouble and

pay out later than scheduled orrenegotiate their debt on terms thatare less favorable to investors.

U.S. Treasuries’ Safety Comes at a Cost

When it comes to credit risk, the outlier is U.S. Treasuries: Treasury bills, bonds, and notes.Backed by what is still regarded asthe strongest, most stable govern-ment in the world, U.S. Treasurysecurities are considered the safestchoice for receipt of timely interest

U C C E S S

payments and full redemption. So,Treasuries remain bond investors’best choice for minimizing thechances that they won’t receiveredemptions at the bonds’ facevalue.

But because Treasuries are thesafest bonds out there, they comewith a downside: across the maturi-ty spectrum, the interest rates Trea-sury securities pay are among thelowest you’ll find. In other words,you trade income for safety — and

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Copyright © 2017. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. Thisnewsletter intends to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete analysis ofthese subjects. Professional advisers should be consulted before implementing any options presented. No party assumes liability for any lossor damage resulting from errors or omissions or reliance on or use of this material.

Securities offered through Raymond James Financial Services, Inc.Member FINRA/SIPC JOHN B. BURKE, MS, CFP®

Financial Advisorjohn.b.burke@burkefinancialstrategies.com

99 Wood Avenue South, Suite 102Iselin, NJ 08830(866) 603-3700 • (732) 744-1240 Fax

STEVEN CRISCUOLO, CPAFinancial Advisor

steven.criscuolo@burkefinancialstrategies.com

My Succession PlanJohn B. Burke, MS, CFP®

In 1983, I graduated from Lehigh University with joint finance and marketing majors.You might think that I had my career all planned out, since finance and marketingare the key elements in building a financial advisor’s practice. But no, at 21 years old,does anybody really know? I painted houses that summer because I was turned downby all the prospective employers that interviewed me at Lehigh. And I interviewed fora number of different jobs. I was actually hoping for a job crunching numbers, becausethe summer before, I sold books door-to-door and realized that I hated selling.

In the fall, my father connected me with a high-ranking manager at Merrill Lynch.I took a bus down to Brooklyn from my parent’s home in upstate New York to inter-view. I was not optimistic. I had already applied to Merrill Lynch in Rochester, Buffalo,Syracuse and Binghamton, and was rejected by all. Fortunately, Merrill Lynch did notkeep track of interviews. I was in a rambunctious mood when I met with the MerrillLynch manager. I was not the same person who interviewed upstate. In fact, right afterthe interview I went to a pay phone outside the office, called the manager, and asked ifhe had made up his mind yet. I got the job.

I started in December of that year. My manager started me part way through atraining cycle in order to save money. That cut my training short. Just 4½ months aftermy hire, I was sitting at my desk in Staten Island, which was a “satellite” of the Brooklyn

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not having the income you need tomeet your goals has to be consid-ered a risk.

So why diversify away fromTreasury bonds? Not to control riskbetter, but to achieve higher income.And that’s the principal reason fordiversifying your bond portfolio: toachieve a better balance betweenrisk and reward to match yourneeds and objectives.

There are basically three dimen-sions of bond diversification: issuer,credit quality, and maturity.

Different Issuers, Different Risks and Rewards

There are five major sectors of the bond market, and they’redefined by the class of issuer. Eachposes a different risk/reward pro-file. As in all financial markets, thelower risk you want, the lower your potential rate of return; to get ahigher level of return, you must takeon more risk. In ascending order ofreward, the sectors are:

4U.S. Treasuries. Backed by thefederal government’s authority

to print money and the U.S. econo-my’s long-term history of moderateto low inflation, Treasuries offer

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the highest level of safety and thelowest yield.

4 Federal agency bonds. Theseinclude bonds issued by mort-

gage agencies backed by the federalgovernment, including Ginnie Mae,Fannie Mae, and Freddie Mac. His-torically, these bonds pay higheryields than same-maturity Trea-suries, since none of these agenciesare backed by the full faith andcredit of the U.S. Treasury. (Whilethe federal government did bail outbondholders in 2008 following thecollapse of the mortgage-backedbond market, there is no guaranteethat in the future the same thingwill happen.)

4Municipal bonds. These areissued by nonfederal govern-

ments and agencies. Because theyhave the legal power to tax orcharge fees, as an asset sub-classthey are regarded as second to Trea-suries in safety. As a result, they canpay a higher after-tax rate of returnthan other types of bonds. Becausethe income they generate is usuallyexempt from federal and sometimesstate and local income taxes,investors in higher tax brackets canearn higher after-tax income thanthey can from other types of bonds.

4Corporate bonds. These actu-ally fall into two categories:

investment-grade or high-qualitycorporate bonds and high-yield

corporate bonds, also known asjunk bonds. Corporate bonds offerhigher yields than Treasuries ormunicipal bonds; but because theirissuers are business enterprises,they present more risk. Junk bondsoffer the highest yields but areissued by companies in financialdistress — those that pose a greaterrisk of going out of business beforethe bonds mature.

4 Foreign bonds. This is really asprawling category of issuers,

since it includes national govern-ments and corporations and coun-tries in both the developed worldand emerging markets. The com-mon additional risk element acrossall of these subcategories is curren-cy risk — the possibility the valueof the foreign currencies will fallagainst the dollar, reducing the rela-tive value of the bond.

Riskier Credit and LongerMaturities Mean HigherYields

The lower you go in credit rat-ings and the longer you go out inmaturity, the higher the interestrates you’ll find. That’s becausethere are greater risks that an issuerwon’t be able to make its payments,or inflation and interest rates will behigher and bondholders will bestuck with below-market yields.

The purpose of diversificationin both stocks and bonds is to fine-tune the trade-offs investors makebetween risk and reward potential.With interest rates near historiclows, many bond investors havebeen tempted to reach for higheryield by taking on more risk in theform of lower-rated issuers andlonger maturities.

With literally thousands of dif-ferent bonds in the market, it’s asignificant task to find the best mix of issuer, credit, and maturity.Please call if you’d like to set up aportfolio review. mmm

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time you deposited $10, would youaccept that? That’s what manycompanies offer through their401(k) matching programs. Yet,surprisingly, many people don’tparticipate.

Simply put, in almost everycase, not participating in your com-pany’s 401(k) matching programdoes not make sense. Figure outhow to budget your monthly take-home pay so that you can con-tribute at least as much as youremployer will match (most match50 cents or $1 for every $1 contribu-tion, up to a certain percentage ofthe employee’s salary).

5. Suffering AnalysisParalysis

Is your retirement fastapproaching and the anxiety hasyou avoiding the details? Are youjust out of college and feel asthough you have a lifetime to accu-mulate enough for retirement?Whatever your situation, it is betterto be prepared for retirement thannot. The mistake here is either fail-ing to tap the benefits a 401(k) planoffers (like company matching) orsetting up contributions and thenfailing to pay attention to how theyare allocated and making necessaryadjustments.

If you feel like you may bemaking some of these mistakes orwould simply like help preparingyour investments for retirement,please call. mmm

Avoid These 5 401(k) Plan Mistakes

A popular retirement vehicle inthe United States, 401(k)plans bring millions of peo-

ple closer to their dream retirement.While it’s true that participation isthe first step, simply putting moneyinto a 401(k) plan won’t guarantee acomfortable retirement. All too fre-quently, people make mistakes withtheir 401(k) plans that cost themmore than they realize, sometimespreventing an early or on-timeretirement. Consider these fivecommon 401(k) mistakes and howyou can avoid them:

1. Believing Simply Contributing to Your401(k) Plan Is Sufficient

Again and again, people believethat spending carelessly is okay aslong as they are also contributing totheir retirement fund. Not true.Simply contributing to your 401(k)plan does not necessarily mean thatyou are going to have a comfortableretirement.

Your goal should be to con-tribute the maximum annual limit— $18,000 for people under 50 yearsof age and $24,000 for investors 50years of age or older. Contributingat that level clearly isn’t realistic foreveryone, and certainly some levelof contribution is better than noth-ing. But living well within yourmeans today — taking control ofyour spending so you have someleft over at the end of the month tosock away in a retirement fund —can mean a more comfortable retire-ment tomorrow.

2. Using Your 401(k) Planas a Savings Account

When you go through a majorlife event, such as a job change, thebirth of a child, sending kids to col-lege, or a divorce, it can be tempt-ing to cash out your 401(k) plan toget you through that rough patch.Indeed, the lure of the now can bedifficult to resist, but the point of a

401(k) plan is to give yourself acomfortable tomorrow.

Withdrawing from your 401(k)plan today not only puts a dent inthe balance that will compoundover time, but if you’re not yet atretirement age, the Internal RevenueService may send you a hefty taxbill for withdrawing that retirementmoney early.

Here’s an example. If at age 25you cash out a 401(k) plan with abalance of $5,000, you wouldreceive around $3,100, $5,000 minus28% ordinary income tax ($1,400)and the 10% early withdrawalpenalty ($500). However, if you keptthat $5,000 invested until age 65(assuming 8% annualized earnings),you could end up with more than$108,000 at retirement. (This exampleis provided for illustrative purposesonly and is not intended to project theperformance of a specific investmentvehicle.)

To the extent that you can, leaveyour 401(k) alone to grow until yourretirement. Use other cash assetsfor those inevitable rainy days.

3. Fearing DiversificationDiversification is a risk -

management technique that mixes a wide variety of investments with-in a portfolio. It’s based on the ideathat a mix of different investmentsmay yield higher returns with lowerrisk than any individual investment.

A good rule of thumb is toinvest more in equities the furtheryou are from retirement, and thengradually increase your bond allo-cation over time to help make thatshift from a growth orientationtoward an income orientation. Thepoint is this: a blend of investmentsis important and requires adjust-ments along the way.

4. Not Participating in aCompany Match Program

If your bank gave you $10 every

Welcome Anthony CaggianoW e are very

pleased to welcome AnthonyCaggiano to our teamas a new financial advi-sor. Prior to sourcingpotential candidates,

I gave deep thought to the type ofperson I wanted to add to the team. I decided that the successful candi-date should fit both intellectually and culturally into our organizationand, specifically, share our dedicationto client service and our long-terminvestment philosophy. Anthony fits this description perfectly.

Anthony received a Bachelor of Arts degree in Economics fromNew York University. He continuedhis education at NYU by adding aMaster of Business Administrationdegree with a concentration inFinance. In addition, Anthony

completed the rigorous education and testing requirements to earnboth the Certified Investment Management Analyst® (CIMA®) andthe CERTIFIED FINANCIAL PLANNER™(CFP®) certifications.

Anthony has extensive experi-ence in the financial services industryand has accumulated a wealth ofknowledge in his 30 years at severalpremier financial firms. He began hiscareer as a high-yield bond analyst.Anthony moved on to other chal-lenges including building, evaluating,and recommending new financialproducts and services that could benefit wealth management clients.

Most recently, Anthony was aSenior Portfolio Specialist with theinstitutional services and researchgroup of the mutual fund manager,Davis Advisors. Davis was managingmore than $100 billion for both retail

and institutional clients at the time.In this role, Anthony worked closelywith the firm’s portfolio managersand research analysts and representedthem and their views at a variety ofhigh-profile meetings and presenta-tions. He gained deep expertise inglobal capital markets, portfoliodesign and bottom-up fundamentalequity analysis. He regularly contributed market insights and an investment outlook.

Anthony is passionate aboutinvesting and helping clients succeed.He is excited to join our team andlooks forward to helping many of youin the years to come.

Anthony resides in Chatham,New Jersey, with his wife of 32 years,two of his three sons, and the family’stwo rescued dogs. He can be reachedvia his e-mail at: anthony.caggiano@burkefinancialstrategies.com

Succession Plan

branch. I was 22 years old and knew noone in New York City or New Jersey.

While selling books the summer of 1982, I had promised myself that Iwould never take a sales job. Yet there Iwas in Staten Island…selling. Given mylack of skills, I sold investment productsand focused on the features of those prod-ucts. I hoped clients would not considermy age, lack of experience and lack of con-nections, and instead consider the featuresof the products. If nothing else, I wasenthusiastic.

I almost didn’t make it. By Decemberof that year, investors had invested a total of about $400,000 with me. I wastold this was not enough, and I was givenan ultimatum. By the end of 1985, I had togather $3 million in client assets or I wouldbe shown the door. Somehow, some way,clients invested nearly $10 million with methat year.

In 1985, all financial advisors wereselling product and earning commissions.Though the finance industry was deregu-lated in 1975, commission-based sellingwas the norm well into the 1990s. Since Inever wanted to sell in the first place, Iworked to become a professional, not asalesperson. I earned the CERTIFIED FINAN-CIAL PLANNER™ (CFP®) certification in 1992and a Master of Science degree in FinancialPlanning in 2003. I truly felt like a profes-sional when I opened this office in 2005.

Last week, I hired our fifth financialadvisor, Anthony Caggiano. We are busy;we need the help. When I opened theoffice in 2005, we were managing a littlemore than $80 million for 200 or so clients.Today, we are managing over $320 millionwith almost 400 clients. And we areaccepting new clients.

While I am proud to have grownenough that in 2015 and 2016, the FinancialTimes named me one of the top 400 Advi-sors in the United States,* I am most proudthat almost 400 families rely on us to investtheir money, plan for their children, andplan for their own retirement. Many ofyou have thanked me. When I received theFinancial Times recognition, I received sev-eral dozen congratulatory letters. Butmany of you have also recently expressedconcern about my succession plan. Restassured, it will take something happeningto me for you to worry. I am not leavingthe practice. While I kind of stumbled intothe profession, I have grown to love what Ido. Providence? Maybe, but I certainly amdoing what I want to do and have no plansto retire. Hiring Anthony was part of mylonger-term plan to build the practice to belarger than me. It is now large enough thatif something does happen to me, I knowmy clients will be in good hands.

Anthony is not a millennial. My origi-nal intention was to hire a millennial, butAnthony is so much more qualified thanany of the candidates. He is the one Ihired. He has many years of experiencewith a focus on asset management. Of myfour advisors, I currently have one woman

(note that we received only one applicationfrom a woman in the 10 months that I wassearching), one advisor with business andaccounting expertise, one with a strongbackground in insurance and pensionplans, and now one with significant assetmanagement experience.

I might not have had a plan when Ileft college, but I do now. I will continue tobuild the practice so that you can count onthe advisors at Burke Financial to help youfor the long term, especially as you and Iage. Thank you for your business, andthank you for your continued trust in us.

Sincerely,John B. BurkeJohn B. Burke, MS, CFP®Financial Advisor

*The FT 400 was developed in collaboration withIgnites Research, a subsidiary of the FT that providesspecialized content on asset management. To qualifyfor the list, advisers had to have 10 years of experi-ence and at least $300 million in assets under man-agement (AUM). The FT then invited a list of justunder 1,000 advisors to complete a survey used toobtain more information on the advisors practices.400 qualified advisers were then scored on six attrib-utes: AUM, AUM growth rate, compliance record,experience, industry certifications and online accessi-bility. AUM is the top factor, accounting for roughly60-70 percent of the applicant's score. Additionally,to provide a diversity of advisors, the FT placed a capon the number of advisors from any one state that'sroughly correlated to the distribution of millionairesacross the U.S. The ranking may not be representa-tive of any one client's experience, is not an endorse-ment, and is not indicative of future performance.Neither Raymond James nor any of its FinancialAdvisors pay a fee in exchange for this award/rating.The FT is not affiliated with Raymond James.

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