Given the current gloom and gloom, with occasional periods of relief, due to rising interest rates, does it still make sense to invest in bonds when saving for retirement or living? retired?
Well, that certainly didn’t make sense when interest rates were (and still are) at historically low levels. For example, who in their mind wants to earn 0.318% on a 10-year Treasury, which they earned about a year ago?
And it might not make sense now that rates have risen from the lows in March 2020. Remember that the principal value of your bond goes down when interest rates rise.
But what people might miss in today’s upside down environment is the role bonds should or should play in a portfolio.
Security, not income
According to Larry Swedroe, co-author of Your Complete Guide to a Successful Retirement and Director of Research at Buckingham Strategic Wealth, the primary role of fixed income in your portfolio should be security, not yield, not income, not investment. cash flow.
In other words, if everything else goes to the pot, if stocks are to go down, bonds are there to keep the principal safe – at least at maturity.
In addition, bonds are there for diversification purposes. Bond prices should rise when they are in value when other assets, for example, stocks fall in value, and vice versa.
“Rule # 1 that every investor should adhere to is that you want to make sure that your portfolio has a sufficient amount of safe fixed income securities to cushion the overall risk of the portfolio to an acceptable level,” he said. -he declares. “Because if not, and stocks go down, which they tend to do once every 10, 15 years or so, 40, 50% or whatever, then you’re going to exceed your tolerance for risk.”
At best, he says, you won’t be able to sleep, enjoy your life and everything in between. And, at worst, you’ll indulge in the worst thing you can do: panic and sell. “And once you sell… I think you’re pretty much doomed unless you’re lucky.”
Conclusion for Swedroe: “You must have enough secure bonds.”
But, according to Sébastien Page, author of Beyond Diversification and global multi-asset manager at T. Rowe Price, how much you should invest in bonds, stocks and cash, “is, without a doubt, the most important portfolio construction decision you can take. ‘an investor takes. “
How much to invest in bonds?
According to Swedroe, the amount you should invest in fixed income securities depends on your ability to take risks. And your ability to take risks is determined by four factors: your time horizon, the stability of earned income, your need for cash flow, and the options that can be exercised when a plan B is needed. In addition, Swedroe has declared to have bonds. whose maturity exceeds your investment horizon takes more risk than is inappropriate.
Ability to take risks
Investment horizon (years)
Maximum equity allocation (%)
Source: Your Complete Guide to a Successful and Safe Retirement
Like Swedroe, Page also believes that the decision rests in part on his human capital, the present value of your future salary income. And once you factor in a person’s human capital, which Page according to Mr. Page acts more like a bond than a stock, a balanced portfolio with a healthy allocation to stocks, not bonds, is the reply.
To be fair, the allocation to bonds is not static throughout the lifecycle in the Page or Swedroe model portfolios.
For example, in Page’s model portfolios, you would allocate 15% to bonds in the 20 years before retirement, 45% in retirement, and 69% some 20 years after retirement, which is close to the rule of thumb that would have you subtract your age from 120 to determine how much to invest in stocks and how much in bonds. So if you were 47 you would invest 73% in stocks and if you were 87 you would invest 33% in stocks.
The right bonds depend on your investment goals
Investing in the right bonds is just as important as investing in bonds, said Massi De Santis, a certified financial planner at DESMO Wealth Advisors. According to De Santis, the right bonds help you avoid unnecessary risk and get the most out of your portfolio, especially in a low interest rate environment.
What are the good links? It depends on your investment objective.
For growth portfolios, De Santis recommends that the bond component be diversified into the bond universe, including government bonds, government agencies, investment grade and global corporate bonds. Duration should be in the middle range (around 5-7 years).
The Vanguard Total Bond Market Index Fund ETF BND,
the SPDR Bloomberg Barclays International Treasury Bond ETF BWX,
and iShares Core US Aggregate Bond AGG,
are ETFs that would work for this purpose.
For conservative portfolios, De Santis recommends highly rated short to mid-term bond durations, similar to the target horizon. IShares 0-3 month SGOV Treasury bonds,
SPDR Bloomberg Barclays 1-3 months T-Bill ETF BIL,
; Vanguard Short-Term Treasury Index Fund ETF VGSH,
Vanguard BSV Short Term Bond Index Fund,
; iShares Core 1-5 Year USD Bond ETF ISTB,
and iShares 1-3 Year International Treasury Bond ETF SHG,
are ETFs that would work for this purpose.
And for income-oriented portfolios, De Santis recommends high-quality, inflation-protected, government-owned bonds with target duration equal to average maturity. The iShares TIPS Bond ETF TIP,
and the Vanguard Long-Term Bond Index Fund ETF BLV,
are examples of ETFs that would work for this purpose.