Business & Investment

Don’t stop investing in bonds

Given the current fate and darkness, there are occasional relief spells, and given rising interest rates, does it still make sense to invest in bonds during savings and retirement life? ??

Well, when interest rates were (and still are) at historically low levels, it certainly didn’t seem to make sense. For example, who wants to earn 0.318% in the Treasury for 10 years? This is the amount I earned about a year ago.

And now that interest rates have risen since the March 2020 lows, it may not make sense. Keep in mind that as interest rates rise, the principal value of bonds goes down.

But what people may miss in today’s topsy-filled environment is the role that bonds should or should play in their portfolios.

Safe, not income

According to Larry Swedroe, co-author of Your Complete Guide to Success Retirement and research director of Buckingham Strategic Wealth, the primary role of fixed income in a portfolio is security, not revenue, not revenue, not cash flow.

In other words, if everything else goes to the pot, if the stock is cratered, the bond is there to provide principal security, at least at maturity.

In addition, bonds are for diversification purposes. Bond prices should rise when the value of other assets, such as stocks, goes down and goes up. The reverse is also true.

“Rule 1 that all investors should follow is that they want to have enough secure bonds in their portfolio to keep the overall risk of the portfolio at an acceptable level,” he said. “Otherwise, stocks will fall, falling once every 10 or 15 years or so, 40, 50%, etc., which is beyond the risk tolerance.”

At best, you won’t be able to sleep, enjoy life, or enjoy everything else, he said. And in the worst case, you will engage in the worst thing you can do: panic and sell. “And once you sell it … if you’re lucky, you’re destined to fail.”

Swedroe’s conclusion: “We need a good enough bond.”

Author of Beyond Diversification and T. According to Sébastien Page, Head of Global Multi-Assets at RowePrice, how much to invest in fixed income, equities and cash is “arguably the most important portfolio building decision an investor makes.”

How Much Do You Invest in Bonds?

According to Swedroe, how much you should invest in a bond is a function of your ability to take risks. And the ability to take risk is determined by four factors: the duration of the investment, the stability of working income, the need for liquidity, and the options that can be exercised if Plan B is needed. In addition, Swedroe said he owns the bond. If the maturity exceeds the investment period, the risk is higher than the improper risk.

Ability to take risks

Investment period (year)

Maximum capital allocation (%)

0-3

0

Four

Ten

Four

20

6

30

7

40

8-9

50

Ten

60

11

70

12-15

80

16-19

90

20 years and over

100

Source: Your complete guide to a successful and safe retirement

Like Swedroe, Page also believes that decisions depend in part on human capital, the present value of future salary income. And when we take into account human capital, which claims that pages behave more like stocks than bonds, the answer is a balanced portfolio with sound allocations to stocks rather than bonds.

To be fair, fixed income allocations are not static throughout the life cycle, either in Page or Swedroe’s model portfolio.

For example, Page’s model portfolio allocates 15% to bonds in the 20 years before retirement, 45% at retirement, and 69% in about 20 years after retirement. This is close to a rule of thumb. Subtract your age from 120 to determine how much you want to invest in stocks and bonds. Therefore, if you are 47, you will invest 73% in stocks, and if you are 87, you will invest 33% in stocks.

Appropriate bonds depend on the purpose of investment

DESMO Wealth Advisor Certified Financial Planner Massi De Santis says investing in proper fixed income is just as important as investing in fixed income. According to De Santis, good bonds can help you avoid unnecessary risk and get the most out of your portfolio, especially in low interest rate environments.

What is the correct bond? It depends on your investment objectives.

For growth portfolios, De Santis recommends diversifying fixed income components across the fixed income universe, including governments, government agencies, investment grade corporate bonds and global bonds. The period should be in the middle range (about 5-7 years).

Vanguard Total Bond Market Index Fund ETF
BND,
-0.06%
,
SPDR Bloomberg Barclays International Treasury Bond ETF
BWX,
-0.34%
,
And iShares Core US Aggregate Bond
AGG,
-0.07%

An ETF that works for this purpose.

For conservative portfolios, De Santis recommends high-rated short- to medium-term bond terms that are similar to the target range. iShares 0-3 Month Government Bonds
SGOV,
,
SPDR Bloomberg Barclays 1-3 months T-Bill ETF
building,
,
Vanguard Short Term Treasury Index Fund ETF
VGSH,
,
Vanguard Short Term Bond Index Fund
BSV,
-0.02%
,
iShares Core 1-5 Year USD Bond ETF
ISTB,
+ 0.04%
,
And iShares 1-3 Year Government Bond ETFs
SHG,
+ 2.51%

An ETF that works for this purpose.

For revenue-focused portfolios, De Santis also recommends government, inflation-protected, and investment-grade corporate bonds with average maturities. iShares TIPS Bond ETF
Hint,
+ 0.10%

Vanguard Long Term Bond Index Fund ETF
BLV,
-0.19%

Here is an example of an ETF that works for this purpose.

Don’t stop investing in bonds

http://www.marketwatch.com/news/story.asp?guid=%7BAFB23588-7B9A-11EB-B3F4-4B4827AD503E%7D&siteid=rss&rss=1 Don’t stop investing in bonds

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