Should You Ditch Your Bond Investments?

Should You Ditch Your Bond Investments?

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[delt]

I will start owning bonds when I'm 5 years away from retirement. Until then, I want to maximize my potential return every year.

[reaper-sztm]

I follow the warren buffet method, 90% index funds, 10% bonds.

[donh]

Here's the deal: Bonds are based on what investors will to take as a yield (how much the government pays you for the use of your money). They are considered "SAFE" investments. But they are not considered money making investments. If inflation is 3% and bonds have a yield of < 1%, you are effectively losing 2% of your money's value per year. BUT during a down year, that is certainly better than losing 20%->40% of a bear market.

That said investing in an bond indexes, means you are investing in current holdings, which might have a yield of 1%, and new bonds of 3%. And you have to look at the distribution rate of the bonds % and when they expire to truly determine the estimated long term payout as older bonds expire. This is how this works against you: If indexes hold a lot of bonds with low yields, and a long term left, and it looks like bond yields are going up, investors will go "Why am I holding my money here. I can dump what I have and buy the new higher yield products?" So then the index bonds will loose value despite the fact they are a safe investment, because investors are after the higher yields. And who wants to buy the low yield product unless you offer them a serious discount? This is why bond indexes have been losing value during a bear year. (more people buying as a safe haven &lowering yield, and predicting future bond yields will shoot up) These later investors (bond yield shoot up predictors) buy the higher yield bonds directly and hold onto them. So they sell the index mix for determined yield bonds they will typically hold onto longer. This is the danger of the inverted curve.

If you think yields will improve in the future, and you want the security of bonds, investing in short term might bonds might be a logical choice. Their payout is even lower, but you TYPICALLY lose less if you want to dump them. But it's a gamble either way. So do NOT take it as investment advice.

[vulpixelful]

My 401k isn't my only investment account, so I use a cheap target date index fund for it. I just picked the one that's dated 5 years after the one recommended for my age, so the glide path doesn't include a lot of bonds than much later. Not a lot of bonds everywhere else

[genxretiree]

We’re rolling 80/20 through retirement. I’m fine with the bond allocation. It’s closer to 85/15 right now though here in fall 2022.

[macjackslack]

I’m watching this 2 years in the future

[Anthony-zwqb]

If u have 30 years till retirement I feel 100% stocks are fine. “My opinion” index everything

[JoeCoz]

Bonds only purpose is to reduce drawdowns and standard deviation/volatility of your equities. Even though the NAV of your bond fund went down this year because of raising rates, long term it doesn't matter as these bond funds are adding new bonds in at higher rates as the NAV falls the yield eventually goes up.

[marc]

If you are going to have another source of income in retirement I think you can discount bonds unless you don't like volatility.

[hanwagu]

the thinking you will be in a lower income tax rate in retirement from when you are working was based on the old belief that your retirement expenses would be 70-80% of your working expenses. I don't believe that assumption is viable anymore, especially with higher medical costs and people living longer. Plus, our government has widen the range of tax rate brackets, so even if you were to base your retirement expense need at 80%, you will probably be in the same income tax bracket as you were working.

[emadrahim]

When we talk about bonds in the portfolio, can an ETF index or mutual fund focused on the bond market be used in place of buying actual bonds? What are the pros and cons? I'm new to the discussion on bonds, but now that I'm in my mid 40s it seems that I need to learn more about it. Thanks in advance

[SantaBarbaraAlberto]

Answer: Depends.
If Cash Flow > expenses then yes
If Cash Flow = Pension/SS Then yes
If Emergency Fund > 12 Mo then yes
IF investments > $500K then yes
If Spouse only dependent then yes
If Homeonwer > 50% equity then yes

[Luckyaau]

In a rising interest rate environment, the best bond to buy will be the one for sale tomorrow.

[matthewdavis]

Everyone is different. I’ll probably add 10% to bonds at 40 and slowly accumulate my % as I get closer to retirement.

[vinnyC-]

If you are young you should do high yield bonds. In the long run it should outperform

[livingunashamed]

No bonds for me to each their own though.

[jackstar]

Under 30 years old here. I invest 100% in the S&P500 up to the employer match. When the market tanked earlier this year, I increased my contribution. If the market tanks more, I'll buy more. Don't worry about bonds and maximize your growth potential till you reach a million dollars.

[elmateo]

"When bonds are paying 6%"... and inflation is 10% :P
Bonds not only offer lower average returns than stocks or REITs, they also don't protect against inflation like owning actual assets does. If you're close to retirement they're better than holding tons of cash, but when you're still years off you should be 100% in high ROI assets.

[hays]

Aren't bonds good for people like hitting their 50s?

[TheBeagle]

I’ve been buying individual bonds now that they are starting to pay something. Mostly short term since I expect rates to continue rising. Stay away from bond funds! They’re a trap!