Investors who are nearing or already retired have long been urged to shift the majority of their investment savings from stocks to bonds.
The idea is simple (and you’ve probably heard this advice many times):
You buy stocks when you’re willing — or can tolerate — exposing yourself to volatility in exchange for a potentially greater reward.
Subscribe to something Kiplinger’s personal finances
Be a smarter, better informed investor.
Save up to 74%
Sign up for Kiplinger’s free e-newsletters
Profit and thrive with Kiplinger’s best expert advice on investing, taxes, retirement, personal finance and more – straight to your email.
Profit and thrive with the best expert advice from Kiplinger – straight to your email.
You buy bonds when you want security and reliability in your portfolio.
The balance between these two investments is often adjusted over the years to reflect how much risk an investor is willing to take. For example, a popular rule of thumb is that the percentage of bonds in your mix should match your age. So a 70-year-old investor who is retiring or retiring might opt for a 30/70 portfolio split (30% stocks and 70% bonds) to better protect his nest egg.
Here’s the rub
The problem, of course, is that we’re currently in an inflationary environment with rising interest rates, which means investors could actually be losing money in two ways with their “reliable” bonds.
- Rising prices. Rising prices can reduce the purchasing power of any interest payment on a bond. If you hold your bond to maturity, inflation could eat away at your money for five years, ten years, or more. When it comes to inflation, duration matters. And a nibble can turn into a heavy bite.
- Rising interest rates. When interest rates rise, bond prices tend to fall. As new bonds start paying higher interest rates, existing lower-yield bonds become less attractive to buyers. If you decide to sell your bonds, you may need to discount the price to make up for the lower yield.
Because the media and most investors tend to pay more attention to the ups and downs of the Dow, Nasdaq, and S&P 500, it’s easy to just let the bonds in your portfolio do their thing. But with inflation at 8.3% in August (opens in new tab)it can be dangerous to think of bonds as “set-it-and-forget-it” investments.
How bad are your bonds?
Do yourself a favour: when looking at how your holdings are doing, separate your bonds from your stocks. You may be surprised at how poorly your so-called safe haven stocks have performed. For example, the Aggregate Bond ETF (AGG) is down 15.7% YTD since Oct. 12. And maybe you should reconsider your mix — especially if you depend on bonds for a large chunk of your retirement income.
The good news is that there are alternatives to bonds that can still offer you security and growth.
Some alternatives to bonds
While you may not be as familiar with options like buffer ETFs, multi-year guaranteed annuities, and indexing strategies within indexed annuities as you are with bonds, these products aren’t new, untested, or particularly complex. And with each, you can enjoy upside potential while benefiting from some downside protection.
Buffer ETFs (Exchange Traded Funds) are so called because they offer investors a buffer against market losses. In return, however, the investor accepts a cap on market profits. Here’s an example of how this works: You can create an ETF with a 30% buffer based on the S&P 500. In this scenario, the market would have to fall more than 30% for accounts to go down. There is no limit to how far the ETF can fall. There is a 25% buffer for losses and customers are responsible for the first 5.85% and are protected up to 25% thereafter. Of course, as mentioned, there is a cap on what you can win and as of September the buffers were 25% and the cap was 16.98%.
- A Multi-Year Guaranteed Annuity (MYGA) provides a guaranteed fixed rate of interest for a specified period of years. For example, as of this writing, a five-year MYGA with Nationwide is paying 4.95% compound interest, and Barclays’ five-year CD rate is 3.65% as of October 12th.
- Indexing strategies within a fixed-indexed annuity can be another good option. These pensions are tied to indexes like the S&P 500. The annual return on a fixed-indexed annuity is also capped, e.g. B. 8%. If the market is performing well, you will profit up to this limit, but if the market is falling or even crashing, you will not lose money.
Of course, just like bonds, each of these options has its pros and cons. (Unfortunately, there is no such thing as a perfect investment.) So talking to a is a good idea Certified Financial Trustee® who is legally obliged to look after your interests – through these and other bond alternatives.
There are multiple solutions available and this is definitely the right time to explore all possibilities. Just because you want to protect yourself in retirement doesn’t mean you have to settle for poor bond performance.
Kim Franke-Folstad contributed to this article.
The appearances at Kiplinger were achieved through a public relations program. The columnist was assisted by a public relations firm in preparing this article for submission to Kiplinger.com. Kiplinger was not compensated in any way.
This article was written by and represents our contributing consultant, not the Kiplinger editorial board. You can view advisor filings with the SEC (opens in new tab) or with FINRA (opens in new tab).
