401k, 403b, 457, Finance, Retirement

Bonds as a choice of investment for your 401k/403b/457 plan?

Bonds as an investment choice

Bonds are debt obligations of the issuer to return the principal amount with interest to the investor. Bonds are issued by both domestic and foreign entities such as a government or corporation.  So it can be differentiated based on geographies, just like equities. Refer to our previous blog on equity Equity Funds (right to ownership). But the more common differentiator for bonds is time horizon or duration.

The first differentiator is the Time Horizon or Duration

The bond or debt duration varies from 1 day to 30 years. There are different ways to slice and dice bonds but let’s focus on the most common factors. Long-term bonds are usually 10 or more years in duration, Medium-term 3-10 years and Short-term 1 day to 3 years. The choice of a term depends on the investment horizon. The longer the term, the higher the interest rate. You, as an investor will be subject to a higher risk for a longer period of time. If you are looking for very liquid investment, you should pick Money Market funds.  The maturity of the securities part of money market funds is usually under 13 months and mostly consists of highly rated treasury securities of shorter duration.

Bonds duration

The second way to differentiate is based on Bond Issuer or the Entity taking the loan

Bond is a huge market and it’s even bigger than even equity markets. The three main issuers of bonds in the US are US Treasury, US Municipalities and Corporates/Businesses. In addition to these 3, there are bonds backed by your mortgage, cars and other kinds of assets commonly known as Asset-backed securities. The mortgage-backed securities are well known and we all have experienced, the painful recovery after the last market crash which started as a result of sub-prime mortgage-backed securities.  Treasury is the biggest player in US bond market and comprises of 35% or $14 Trillion of the total bond market. It’s considered one of the safest investment option. During a market turmoil or shock, the money usually flows from equities to the Treasury securities. It’s backed by US government and is very popular both with domestic and foreign investors.

Bonds issuer

Source: Wikipedia.com

US government issues various securities and it differs based on duration or tenure. The short-term usually becomes part of Money market fund which we discussed before.

Municipal bonds are issued by various municipalities in the US such as state, city or town to fund various projects making roads, building a new school etc. But keep in mind, all the municipalities are not the alike. They have different default risk or credit rating and you should understand the risk before investing. Why do people want to invest in municipal bonds? The main reason is tax incentive. Usually, no federal taxes are payable on interest from municipal bonds. In certain cases, issuing state also exempt residents from paying state taxes. But if you don’t live in the issuing state you may still have to pay the state tax.

The third way to dissect is Credit quality. It’s comparable to your credit score.  The better the rating or score, the lower the issuer has to pay interest

Another key differentiator is underlying risk or quality.  The Credit Rating agencies such as Moody’s, S&P and Fitch (rating agencies) have simplified the work for an average investor assuming these agencies did a thorough job. They assign ratings for bonds issued by US Treasury, Corporates or Municipalities and give them a “Letter Grade” that can be compared to the grades you used to get in school and college. The only difference is these ratings are more elaborate. The rating agencies have created their own hierarchy such as AAA, AA+, AA, AA-, BBB- BB, C and so on (Refer the chart below). Anything equal or better than BBB- is considered Investment grade (worth investing) and lower than that are called Junk bonds or High Yield (not high in quality) which means they provide higher returns as the Risk is higher. Corporates issue bonds or debt instruments for building a new factory, buying new plant and equipment, business expansion, or for additional liquidity. As an investor what you want to know is when the time comes for repayment of debt and interest, the corporate should have enough resources to meet their obligations.

Bonds credit rating

Source: Marketdeal.com

 Inflation-Linked bonds commonly known as TIPS (Treasury Inflation-Linked Securities)

One of the main concerns of an investor is how the inflation erodes the value of money over time. Here enter inflation-protected securities known as TIPS (Treasury Inflation-protected securities). The underlying purpose of these bonds is to keep the purchasing power of the money intact. Inflation reduces the value of money over time. Your grandfather could buy more goods and services for $1000 dollars 50 years ago than what you can buy today with the same $1000 dollars. If your money is lying idle in a bank account and not earning any interest, it’s actually deprecating by the rate of inflation in the economy.  So the purpose of TIPS is to hedge against inflation. It’s a good idea to allocate certain retirement assets to TIPS to maintain your standard of living during retirement.  TIPS are issued for 5, 10 and 30-year duration.

In the list of funds offered in 401k, 403b or 457 plans, you will find bond funds offering various time horizons, issuers, geographies or quality of underlying securities. It is a good idea to include TIPS in the diversified plan if that option is available. To create a diversified portfolio some people hire a financial advisor, who may charge 0.25% to 2% of total assets, as fees.

Plootus does it for Free. You may ask why? We are on a mission to democratize financial planning. Our app Plootus (available on Apple and Android) will not only choose the best performers to suit your retirement needs but will also help you to decide how much to invest in the various options available to you. Our algorithm first estimates how much money you will need for your retirement period.  Sounds like a no-brainer.

That’s it for today. We so far covered 2:1 principle for retirement, Bitcoin as an option for retirement, types of Equity funds & Bonds. We will dig deeper into Target dated funds next time.

Feel free to use the comments section and we will be happy to answer any questions you have.

Until next time!


Author: Sunil Gangwani, Co-Founder, Plootus

http://www.Plootus.com: 10 minutes could add 50 thousand dollars or more to your retirement account!

Download on Apple Store: Plootus

Download on Android Store: Plootus



3 Tenets of Equity Funds

In my last blog, we discussed that most Millennials and GenXers will have to fend for themselves for retirement. Instead of offering a pension, most employers today offer what is known as defined contribution retirement plans (401k for businesses, 403b for non-profits like universities, 457 for government employees). Don’t let the numbers confuse you – they are just different sections of the Internal Revenue Services (IRS) tax code. Employers offer a retirement plan to employees which they can invest in for retirement and in most cases match a certain percentage of the amount the employee contributes. There are some DIY tools but mostly you are left on your own to make your investment choices.

It may sound like a daunting task but let’s look under the hood to get a basic understanding of Equity funds as an investment option for retirement.

A typical retirement plan may have anywhere between 15 to 30 investment options. In certain cases, the list may contain 100+ options. Honestly, the longer the list, the harder it is for employees to make a sensible choice. Keeping a tab and trying to understand so many options is not an easy task and requires a lot of time. And that dilemma sometimes results in inaction and you may end up parking your hard earned money in assets that don’t offer a good return or charge higher fees.

Let’s take an example of a retirement plan that has 15 options. A typical line up consists of 7-8 equity funds,4-5 bonds and 1-2 options focused on specific assets like real estate, oil & gas etc.

Let’s dig deeper into equity options. The first question in your mind may be ‘why 7-8 equity funds?’ The idea is to offer choice and diversification so that you don’t pull all your eggs in one basket.


The1st level of differentiation is geography or location. Most companies domiciled in the United States are listed on one of the US stock exchanges such as NYSE, Nasdaq etc. Keep in mind, in today’s globalized world, you will also come across foreign companies listed on US stock markets. The companies based out of Europe or Asia are listed on stock exchanges in those regions. More often than not, you will also see a fund for Emerging markets that has companies from countries such as Brazil, Russia, India, China and South Africa (BRICS).

Geography Equity view

You get the point: Location.

Market Capitalization: Size

The 2nd level of differentiation is the size. Publicly traded companies can be grouped into 3 different categories based on market capitalization: Large-cap, Mid-cap, and Small-cap. Large-cap is short for Large Market Capitalization. Think of it this way – you can relate to the size of companies based on its revenues or sales figures. The financial market determines that based on market capitalization i.e. shares outstanding X price per share. Generally, a company with market capitalization of >$10 billion is called Large cap. Common names are Walmart, Apple, Alphabet, Microsoft, Ford, GE, JPMorgan Chase etc. Mid-cap (Middle Market capitalization), usually have a market capitalization between $2 billion and $10 billion. Small-cap (Small Market Capitalization) is usually below $2 billion. Generally, Large-cap is considered more stable and less risky compared to Mid-cap and Small-cap. And Mid-cap comes after Large-cap in terms of riskiness and Small-cap companies are usually associated with the highest risk.

Market Cap Equity view

So the second differentiator is Size.

Investment Style

The 3rd differentiator is based on which stocks the investment manager has picked. These again can be of three types: Growth, Value, and Blend.  A company is considered a Growth stock if the earnings are growing at a higher rate than peers or industry and you can bank on capital appreciation in future.  Value stocks are considered to be trading at lower than the intrinsic value (bargain deals) and usually pay regular dividends. Blend style is a combination of Growth and Value. Style based funds are usually found in the funds’ lineup of the retirement plans. The fund prospectus provides details about the investment strategy of the fund.  So if you really want exact details, you may want to go through that. More often than not, the terms are written in a way that allows flexibility for the investment manager. One example is the Apple stock which may be found both in growth and value funds.

Style Equity view

The third differentiator is Style.

The above three ways to differentiate are the most basic to get an idea about Equity funds. But, unfortunately, when you start going through the list of funds in your retirement account (401k, 403b,457), you may not find a clear distinction. Instead, you will find names like Vanguard S&P 500 Index fund that will suggest it is US-based and Large-cap. S&P 500 contains top 500 Large-cap companies listed on US stock exchanges. Most Mid-cap & Small-cap funds make reference to their size, in their nomenclature.  Some retirement plans may have one International stock fund covering various geographies such as Europe, Asia-Pacific, South America and Latin America. Unless you dig deep into their offer documents, you may not always gather the level of market capitalization, geographies covered and other important information. The fund’s name is a hit or miss – it sometimes gives you the required information but not always.

Target Date Funds, Active and Passive Funds

Target date funds are also widely used nowadays which are a combination of various Equity and Bonds securities or funds. Then there are Active and Passive Funds. Active Funds pick various securities to invest based on the fundamentals or technical analysis. Some of these funds may follow top-down, bottom-up approach to select securities. Passive Funds just try to replicate indices like S&P 500, which basically means they choose to invest in the securities part of a popular equity index such as S&P 500.

After you understand the various options available, the next step is to choose the most suitable options for your retirement investment.  If you are not close to your retirement date, then you should put some of your assets in Equity funds as they offer better returns compared to Bonds over a longer period of time but keep in mind they are riskier as well.

To do all this work, some people hire a financial advisor, who may charge 0.25% to 2% of total assets, as fees. Plootus does it for free. You may ask why? We are on a mission to democratize financial planning. Our app Plootus (available on Apple and Android) will not only choose the best performers to suit your retirement needs but will also help you to decide how much to invest in the various options available to you. Our algorithm first estimates how much money you will need for your retirement period.  Sounds like a no-brainer.

That’s it for today. I know this is a lot to digest but for something as crucial as retirement planning, it is important to understand every aspect. We will look into Bonds next time.

I’m sure you will have a lot of questions as you go along. Feel free to use the comments section and we will be happy to answer any questions you may have.

Until next time!

Author: Sunil Gangwani, Co-Founder, Plootus


http://www.Plootus.com: 10 minutes could add 50 thousand dollars or more to your retirement account!

Download on Apple Store: Plootus

Download on Android Store: Plootus


Bitcoin: Should you invest your retirement money in Bitcoins?

Bitcoin IRA

Image courtesy: U.S. News, Robert Berger, the sun.co.uk

2017 was undoubtedly the year of Bitcoin. The price of bitcoin rose from less than $1,000 to 14,822 as of Dec 28, 2017, resulting in 15 times plus return in just one year.  Bitcoin is the brainchild of Satoshi Nakamoto, the top cryptocurrency in the world and dominates the cryptocurrency trade per CoinMarketCap. There is significant interest from Asian countries, especially neighbors of the famous Rocket Man – Japan, South Korea and Vietnam, accounted for 80% trading of Bitcoin in Nov 2017. The market cap of all cryptocurrency was $576B as of January 16, 2018, and Winklevoss twins of Facebook fame became first bitcoin billionaires by investing a portion of their Facebook settlement in Bitcoin. The price of Bitcoin remains volatile and may go up and down 20% in a matter of hours. There are many success stories of Bitcoin millionaires and billionaires and now everyone wants to have a piece of the action.

 Bitcoin in 2018

Before investing your hard earned retirement money, you should understand the risks involved. Bitcoin is probably the most volatile asset of all. According to Warren Buffet, cryptocurrencies will come to a bad ending. Therefore there is an equal probability of downside risk, as there is an upside. In the first two weeks of 2018, the Bitcoin price has lost significant value. Some argue it’s a short-term phenomenon as every asset class goes through ups, downs, and corrections. To put things in perspective, as of Jan 16, 2018, Bitcoin’s price was down 15% compared to S&P 500 Index which is up 4.89%.

Bitcoin IRA offerings

The good news is, in addition to the usual asset classes like Stocks, Bonds, Mutual Funds, ETFs, Annuities, CDs, Real assets you can invest in Bitcoin through your IRA account.   However, cryptocurrency based IRA is a relatively new phenomenon and no industry leaders like Vanguard, Fidelity, Blackrock, American Funds, T Rowe Price and others are offering this product.

You may set up a self-directed IRA and invest in Bitcoin, however, the procedure involves a lot of paperwork and needs to meet IRS compliance requirements. The second option is Bitcoin IRA, a company founded in 2017 that allows people to invest IRA money into Bitcoin and other cryptocurrencies. Bitcoin IRA offers 4 different investment strategies:

  • The Popular option invests 70% in Bitcoins (BTC) and 30% in Ethereum (ETH).
  • The Balanced allocates 20% each to Bitcoins (BTC), Ethereum (ETH), Ripple (XRP), Litecoin (LTC) and Bitcoin Cash (BCH).
  • In case of 3rd option and 4th option, you can create your own allocation among various offerings before or after going through the enrollment process.


Keep in mind there is 15% upfront fee as reported by various investors compared to less than 1% charged for other IRA accounts. So you will lose 15% value at the start and need to wait for the Bitcoin to rally to recover the fees and then show you some gains in your Bitcoin IRA account.

Bitcoin IRA enrollment process

The enrollment process is bit long and requires a copy of driving license, social security, a copy of retirement account statement for last 60 days, beneficiary details, Social security and birth details. It takes some time and patience to go through the steps and ensure that you provide all the necessary documentation.


Bitcoin and other cryptocurrencies have a potential to become an alternative medium of exchange to major world currencies. The underlying Blockchain technology may be used to make the current processes and products more efficient in Banking and other industries. As an investment option, Bitcoin is very volatile and operating in an ever-changing regulatory landscape.  Therefore, before investing, do your own due diligence and understand the downside risks.

Disclaimer: Plootus.com or any of affiliates does not endorse BitcoinIRA. The investor should perform their own due diligence and risk assessment before investing through BitcoinIRA Plootus.com is no circumstances will be responsible for any losses or damages, directly or indirectly, caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

Author: Sunil Gangwani, Co-Founder, Plootus

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http://www.Plootus.com: 10 minutes could add 50 thousand dollars or more to your retirement account!

Download on Apple Store: Plootus

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