Page 425 - How to Make Money in Stocks Trilogy

Money Management 295

ment will always get less revenue, not more. I’ve had many older, retired
people tell me they will keep their stock until they die so they won’t have to
pay the tax.

What Are Convertible Bonds, and Should You Invest in Them?

A convertible bond is one that you can exchange (convert) for another
investment category, typically common stock, at a predetermined price.
Convertible bonds provide a little higher income to the owner than the
common stock typically does, along with the potential for some possible
profits.
The theory goes that a convertible bond will rise almost as fast as the
common stock rises, but will decline less during downturns. As so often hap-
pens with theories, the reality can be different. There is also a liquidity
question to consider, since convertible bond markets may dry up during
extremely difficult periods.
Sometimes investors are attracted to this medium because they can bor-
row heavily and leverage their commitment (obtain more buying power).
This simply increases your risk. Excessive leverage can be dangerous, as
Wall Street and Washington learned in 2008.
It is for these several reasons that I do not recommend that most
investors buy convertible bonds. I have also never bought a corporate bond.
They are poor inflation hedges, and, ironically, you can also lose a lot of
money in the bond market if you make what ultimately turns out to be a
higher-risk investment in stretching for a higher yield.

Should You Invest in Tax-Free Securities and Tax Shelters?

The typical investor should not use these investment vehicles (IRAs, 401(k)
plans, and Keoghs excepted), the most common of which are municipal
bonds. Overconcern about taxes can confuse and cloud investors’ normally
sound judgment. Common sense should also tell you that if you invest in tax
shelters, there is a much greater chance the IRS may decide to audit your
tax return.
Don’t kid yourself. You can lose money in munis if you buy them at the
wrong time or if the local or state government makes bad management deci-
sions and gets into real financial trouble, which some of them have done in
the past.
People who seek too many tax benefits or tax dodges frequently end up
investing in questionable or risky ventures. The investment decision should
always be considered first, with tax considerations a distant second.