Buying ‘smart’ bonds in today’s market
Q. In this market, what kinds of bonds are smart? It would be part of my retirement plan, and I have 15 years before I need the money.
A. Bonds certainly are part of a diverse retirement portfolio, no matter your age.
But in today’s market? Bonds are something that need to be watched.
It would be prudent to stay conservative with a bond strategy and make adjustments as interest rates start to move towards their normal range, said Brian Power, a certified financial planner with Gateway Advisory, LLC in Westfield.
“Bond prices move opposite of interest rates and the longer a bond’s maturity date is the more severe the fluctuation in the bond’s price can be,” Power said. “With interest rates at historical lows and the Federal Reserve trying to inflate our economy so they can start to bring interest rates back up to normal, you should be careful not to have too much of your bond money tied up for long term.”
A better strategy, Power said, might be to structure your bonds so that bonds are maturing every year for the next five years so if interest rates rise you can reinvest the maturing bonds into higher rates.
This strategy is referred to as laddering your bonds, because stacking your bonds maturities resemble the rungs on a ladder.
The risk with this strategy is if interest rates take longer to rise back to normal than expected, your bonds could underperform other risky or longer-term bonds, Power said.
“You must make the decision whether you want your bonds to act more as a shock absorber to your riskier investments or do you want to take on more risk with your bonds to potentially get better returns,” he said. “It might make sense to assume lower returns from bonds for a while and know that your bonds are your safety net if the stock market gets bumpy.”
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Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.