Let’s Hug It Out With Bonds

4 Reasons Why Bonds May Fit In Your Portfolio

We’re going to take a peek at how bonds could fit into your portfolio and why you would want to buy them.

1. Your portfolio lost over 30% in 2008. You are approaching retirement and you don’t have the earnings power to make up huge losses anymore.

2. You have realized that your tolerance for risk has decreased for whatever reason. You just can’t stand to lose as much money as you did in your earlier investing years.

3. You don’t need to hit doubles and triples to reach your goals. You just need to hit singles to get where you want to go.

4. You want to have a proactive plan to cushion future losses in your portfolio by having interest payments from bonds (cash J) be deposited in your account.

What types of bonds can you buy? And what types of bonds should be purchased in what types of accounts?

In Your Retirement Account . . .

Retirement accounts are tax deferred. Taxable bonds usually pay higher rates than tax free bonds. So it makes sense to buy taxable bonds in retirement accounts.

There are 3 major types of taxable bonds you can buy: US Treasuries, U.S. Government Agencies (Fannie Mae, Freddie Mac, Federal Home Loan Bank, Federal Farm Credit Bank), and Corporate Bonds. In my humble opinion (IMHO), there is little risk of the US Government and US Govt Agencies defaulting and not paying you back.

Keep in mind that you could lose money on a bond you buy if you sell it prior to its maturity date. Why? Click here to learn about the relationship between interest rates and bond prices.

Corporate bonds are an entirely different story. When things don’t go right for US corporations, their bond prices can go lower very quickly. Buying an investment grade (what’s investment grade? Click here to learn) corporate bond fund can give you the diversification you may need. You can also get a monthly check and have, in most cases, better liquidity. Keep in mind that corporate bonds are more aggressive because they are not backed by our government. They are only backed by the company that is issuing them.

In your personal account . . .

You can buy the 3 types of bonds above (keep in mind they are taxable). You can also buy municipal bonds. They are exempt from federal taxes, and if you buy municipal bonds issued in the state you live in, they are exempt from state taxes.

But . . . IMHO, today many state municipalities are not in the strongest financial shape. Their budgets are not balanced. They have a large amount of debt and their revenues are down. So what can you do . . .?

You can buy a municipal bond fund. You’ll get diversification, better liquidity, and can receive monthly income.