{"id":2682,"date":"2013-02-14T09:20:28","date_gmt":"2013-02-14T13:20:28","guid":{"rendered":"https:\/\/kerryhannon.com\/?p=2682"},"modified":"2013-02-14T09:20:28","modified_gmt":"2013-02-14T13:20:28","slug":"pbs-next-avenue-women-and-investing-how-to-be-a-bonds-girl","status":"publish","type":"post","link":"https:\/\/kerryhannon.com\/?p=2682","title":{"rendered":"PBS Next Avenue: Women and Investing: How to Be a Bonds Girl"},"content":{"rendered":"
\"next-ave\"<\/a>When I speak with women about investing, I find they’re often a little insecure about investing in bonds. That’s not terribly surprising: it\u2019s ridiculously easy to get information about stocks and stock mutual funds (just turn on CNBC), but it’s much harder to find the basics about bonds and bond mutual funds.<\/div>\n

\nBut bonds belong in your investment portfolio and retirement accounts. Here’s why: Stocks have been on a roll; the S&P 500 Index has risen 14.2 percent in the last year. So you\u2019ve got to ask: Can that kind of pop\u00a0really continue?\u00a0I think you might want to hedge your bet a bit with bonds, as I have. I\u2019ll show you how in a minute.<\/em><\/em><\/div>\n
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How Bonds Can Help You<\/strong><\/a>Bonds provide the ballast to hold things steady when the stock market slips and slides. No, they don’t offer the potential upside that stocks generally do. But bonds do provide a fixed return that repays you the original amount you invested plus interest (these days, they typically yield between 0.4 and 7 percent).To put it simply, when you buy a bond \u2014 whether it\u2019s a taxable version from either the federal government or a corporation or a tax-free municipal bond \u2014 you\u2019re making a loan to the issuer. Municipal bonds and muni bond\u00a0funds may be attractive for higher income investors, since their interest is free from federal taxes. If the bonds are issued by your state, they may be free from state and local taxes, too.<\/p>\n

(MORE<\/strong>:\u00a0Tool: Compare Taxable vs. Tax-Free Return<\/a>)<\/p>\n

The government agency or corporation agrees to pay you a set rate of income, known as the coupon rate, and you receive interest quarterly. At the end of the bond\u2019s term (its maturity date), you get back the principal amount you originally invested.<\/p>\n

Bond values fluctuate primarily depending on interest rates and the financial health of the issuer. The general rule is that when interest rates go up, bond prices go down and vice versa.<\/p>\n

Bond rating services, like\u00a0Moody\u2019s<\/a>\u00a0and\u00a0Standard & Poor\u2019s<\/a>, appraise the security of those investments; the safest are in the AAA category. Typically, the highest-rated, most secure bonds are issued by the U.S. government and its agencies.<\/p>\n

The Right Amount of Bonds for You<\/strong><\/p>\n

How much of your portfolio should be in bonds?<\/p>\n

It\u2019s impossible to generalize, but my financial adviser suggests that since I\u2019m 52, I should currently hold about 70 percent of my retirement portfolio in stocks and 30 percent in bonds. And I do.<\/p>\n

Money pros typically say that as you get older you ought to increase bond holdings and reduce your exposure to the stock market. That\u2019s because you\u2019ll have fewer years to compensate for any downturn in the stock market and, without a full-time income in retirement, you\u2019ll be counting on your investments to help cover your living expenses.<\/p>\n

(MORE<\/strong>:\u00a06 Investment Mistakes That Can Wreck Your Retirement<\/a>)<\/p>\n

In general, a good\u00a0rule of thumb<\/a>\u00a0is that the percentage of your portfolio invested in stocks or stock mutual funds should be 120 minus your age; bonds and bond funds should then make up the balance. So, at age 45, you\u2019d have roughly 25 percent of your investments in bonds; at age 65, roughly 45 percent.<\/p>\n

How Risky Are Bonds Today?<\/strong><\/p>\n

But I confess that a recent article about bonds in The Wall Street Journal scared me a little. Patrick McGee wrote that \u201csome of the biggest fund managers warn that dangers are lurking in what were once seen as the safest investments.\u201d<\/p>\n

The reasoning: Interest rates are so low that they\u2019re likely to rise, which would depress bond prices; as a result, investors could lose money.<\/p>\n

Then, 10 days ago, John Melloy wrote an\u00a0article for CNBC<\/a>\u00a0reporting that \u201cGoldman Sachs strategists have issued a big warning to clients hiding out in bond funds: You’re about to lose your shirt.\u201d<\/p>\n

I did a little more research and learned that other Wall Street types believe bonds will still be fine investments because they expect inflation and interest rates to remain low. I tend to side with them.<\/p>\n

How to Get Started in Bonds<\/strong><\/p>\n

So here\u2019s my recommendation for getting started investing in bonds:<\/p>\n

Educate yourself online.<\/strong>\u00a0I suggested a few Web resources in an\u00a0earlier post<\/a>\u00a0on how women can become more confident investors.<\/p>\n

You might also check out the Next Avenue article, \u201cHow Women Who Have Never Invested Can Get Started<\/a>,\u201d In that one, Ann C. Logue writes about some other great sites, including The National Endowment for Financial Education\u2019s\u00a0Smartaboutmoney.org<\/a>, which has free guides explaining bonds and mutual funds. (There are other excellent\u00a0articles from Smartaboutmoney.org on Next Avenue<\/a>.)<\/p>\n

Also, spend some time on two fine money sites that are oriented toward women:\u00a0Daily Worth<\/a>and\u00a0LearnVest<\/a>. Both sites let you sign up for regular emails with useful personal finance tips.<\/p>\n

(MORE:\u00a0<\/strong>Why Risk Tolerance Is Overrated<\/a>)<\/strong><\/p>\n

Another terrific financial site for women is called\u00a0WISER<\/a>\u00a0(that\u2019s the acronym of the nonprofit Women\u2019s Institute for a Secure Retirement).<\/p>\n

Invest in bond mutual funds or bond ETFs.<\/strong>\u00a0Most women I know own bonds primarily through bond mutual funds (which hold an assortment of bonds) and exchange-traded bond mutual funds, or ETFs, which are similar.<\/p>\n

That’s what I do.<\/p>\n

With bond funds and bond ETFs, fees and minimum investments tend to be low. You can often buy a bond fund for $3,000; ETFs trade like stocks, so there\u2019s no fixed minimum investment. By contrast, many bonds cost up to $10,000 apiece.<\/p>\n

But the best part about bond funds and bond ETFs is that they make it very easy to diversify, particularly if you opt for a total bond index fund, such as the\u00a0Vanguard Total Bond Index Fund<\/a>(ticker symbol: VBMFX). It invests about 70 percent in U.S. government bonds and 30 percent in corporate bonds. Vanguard has a similar ETF:\u00a0Vanguard Total Bond Market ETF<\/a>\u00a0(BND).<\/p>\n

If you\u2019d rather buy a bond fund or ETF that\u2019s actively managed \u2014 its skipper decides which bonds to buy and sell \u2014 you might consider the\u00a0Pimco Real Return Fund<\/a>\u00a0(PRRIX) or its ETF cousin,\u00a0Pimco Total Return<\/a>\u00a0(PTTRX). Both invest primarily in high-quality taxable bonds. The ETF is run by Bill Gross, one of the world\u2019s most celebrated bond managers.<\/p>\n

Or buy individual bonds and \u201cladder\u201d them.<\/strong>\u00a0That\u2019s what Gregory A. Bitz, president of the Metropolitan Financial Group in Chevy Chase, Md., recommends.<\/p>\n

With laddering, you buy a few bonds from the same issuer and each one has a somewhat longer maturity date than the next. For example, you could invest $50,000 by purchasing five $10,000 bonds with terms ranging from one to five years.<\/p>\n

Bitz\u2019s reasoning: With individual bonds, you won\u2019t lose money if bond prices drop as long as you hold the securities until maturity. But bond funds are forced to sell when they have redemptions, so they may need to sell holdings at a loss. The purpose of laddering is that you\u2019ll sell the bonds at different times, when you might need the money, rather than waiting for them all to come due at once.<\/p>\n

Consider Treasury Inflation-Protected Securities (TIPS).\u00a0<\/strong>TIPS aim to shield investors from inflation because the returns of these U.S. Treasury bonds are tied to the Consumer Price Index.<\/p>\n

Here\u2019s how TIPS work: If you buy $10,000 in TIPS and the annual inflation rate is 3 percent, your principal will be worth $10,300 by the end of a year. TIPS pay interest every six months, which is exempt from state and local taxes but subject to federal taxes.<\/p>\n

My last piece of advice, no matter which bonds you consider: Consult a financial adviser. A professional can help match your portfolio to your life stage, risk tolerance and the amount you can afford to invest.<\/p>\n

Becoming a Bonds Girl might not be the sexiest way to invest, but they could produce blockbuster results for your retirement portfolio.<\/p>\n<\/div>\n

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posted by\u00a0Kerry Hannon<\/a>, More by this author<\/a><\/p>\n<\/div>\n<\/div>\n<\/div>\n

\"AKerry Hannon has spent more than 25 years covering personal finance for Forbes, Money, U.S. News & World Report and USA Today. Her website is\u00a0kerryhannon.com<\/a>. Follow her on Twitter\u00a0@kerryhannon<\/a>.<\/div>\n<\/div>\n
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