Smart Saving Investing

All About Bonds – Part 3

—

by

Bill
in

This article is the third in a series:
All About Bonds – Part 1
All About Bonds – Part 2

On this blog, Smart Saving and Investing, I concentrate on three financial tasks that many people can do:

  1. Save money on a regular basis automatically by opening up an online savings account and linking it to your bank checking account to make sure the online savings account is funded every pay period automatically.
  2. Participate in their employer’s retirement plan, which forces you to automatically invest because it most likely comes right out of your paycheck and you’ve been forced in away to live without it.
  3. Open and invest in a Roth IRA. This takes some extra effort because you have to try and found out how you’re going to do this by opening up the Roth IRA somewhere and try and automatically fund it. Which also brings up questions like, “How am I going to fund my Roth IRA and where am I going to fund it at?”

Although these three actions sound simple, taking action to get these in place requires effort. It also takes effort to decide what to invest in. Which typically brings confusion and for a lot of folks, no action taken.

Well, depending on your age and your ability to stomach these markets that are going crazy lately, bonds can and do play an important part of your investment portfolio.

We’ve been taught that bonds are a more conservative investment because they are fixed investments and can ride out the markets ups and downs. While you watch your stock mutual funds go up and down, bonds sit there and provide stability. Which is kind of cool to watch when your stock mutual funds start falling.

I would start investing in Bond Funds at 50 depending on what I’ve accumulated in my portfolio over the years. However, I do know that some folks get queasy watching all the money they’ve invested over 10 or 20 years go up and down so dramatically no matter what age they are and Bond Funds would give them a more stable feeling through those times.

Therefore, if you’re going to invest in Bonds, invest in Bond Funds. Why? Because Bond Funds have the following benefits:

  • professional management
  • diversification of the different types of Bonds can be held in a Bond Fund
  • invest in no-load Bond Funds to reduce expenses and transaction costs
  • you can Dollar Cost Average* into a Bond Fund to build your Bond position over time
  • it’s more convenient to buy Bond Fund than Bond individually
  • with any income produced by the Bond Fund it can be automatically reinvested in the fund

* – Dollar Cost Averaging is when you invest the same amount on a regular basis to achieve the best average price. If you invest $50.00 every month and your bond mutual fund goes up, you buy less shares, if the bond fund goes down, your $50.00 involvement buys more. Over time, your average price is lower than if you tried to time the market and buy when you think it is right to buy.

There are a lot of Bond Fund types: U.S. Government Funds, Corporate Bond Fund, Municipal Bond Funds, Bond Index Mutual Funds, Multi-Sector Bond Funds, Convertible Bond Funds, Ultrashort Bond Funds, International Bond Funds, and Emerging Markets Bond Funds to name a few.

How to decide to include Bond Funds in your portfolio:

  • Where are you at in life in terms of age and current portfolio holdings
  • What is your risk tolerance (what makes you sleep at night)

Vanguard Group, Inc founder John Bogle recommends holding a bond position equal to your age. So if you’re 50, you’d own 50% of your portfolio in a bond index fund. When you turn 60 you’d have 60% in a bond index fund, etc. He also mentions that other investment professionals have called that too conservative. Mr. Bogle mentions you could also use your age minus 10 as well. So if your 50 years old then you’d have 40% in a bonds index fund.

I would suggest that when you’re in the accumulation stages of life, your bond fund exposure be 0% if you are under 50 years of age.

When you hit 50 years old, you might want to include one of the funds below. I’m more on the aggressive side of investing so I would hold something like 20% to 25% in bond funds or a balanced fund that owns a portion of stocks and a portion of bonds.

At 60 years of age I might look at 30% to 40% of my portfolio would be in bond funds. Even at 70 years old, I still would be involved with some aggressive investments but it would be below 40% of my portfolio, with bond funds occupying over 50% to 60% of my portfolio.

With all that out of the way here are the funds we’ve discussed and you can look at for your portfolio.