Women and Investing: How to Be a Bonds Girl
If you don't want to flirt with the stock market right now, make a move to help keep your portfolio safe and secure
Kerry Hannon has covered personal finance for Forbes, Money, U.S. News & World Report and USA Today for nearly three decades. She's the author of Love Your Job: The New Rules for Career Happiness; What's Next? Follow Your Passion and Find Your Dream Job; Great Jobs for Everyone 50+ and Suddenly Single: Money Skills for Divorcees and Widows. Her website is kerryhannon.com. Follow her on Twitter @kerryhannon.
But 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’ve got to ask: Can that kind of pop really continue? I think you might want to hedge your bet a bit with bonds, as I have. I’ll show you how in a minute.
How Bonds Can Help You
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 — whether it’s a taxable version from either the federal government or a corporation or a tax-free municipal bond — you’re making a loan to the issuer. Municipal bonds and muni bond funds 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.
(MORE: Tool: Compare Taxable vs. Tax-Free Return)
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’s term (its maturity date), you get back the principal amount you originally invested.
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.
Bond rating services, like Moody’s and Standard & Poor’s, 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.
The Right Amount of Bonds for You
How much of your portfolio should be in bonds?
It’s impossible to generalize, but my financial adviser suggests that since I’m 52, I should currently hold about 70 percent of my retirement portfolio in stocks and 30 percent in bonds. And I do.
Money pros typically say that as you get older you ought to increase bond holdings and reduce your exposure to the stock market. That’s because you’ll have fewer years to compensate for any downturn in the stock market and, without a full-time income in retirement, you’ll be counting on your investments to help cover your living expenses.
(MORE: 6 Investment Mistakes That Can Wreck Your Retirement)
In general, a good rule of thumb is 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’d have roughly 25 percent of your investments in bonds; at age 65, roughly 45 percent.
How Risky Are Bonds Today?
But I confess that a recent article about bonds in The Wall Street Journal scared me a little. Patrick McGee wrote that “some of the biggest fund managers warn that dangers are lurking in what were once seen as the safest investments.”
The reasoning: Interest rates are so low that they’re likely to rise, which would depress bond prices; as a result, investors could lose money.
Then, 10 days ago, John Melloy wrote an article for CNBC reporting that “Goldman Sachs strategists have issued a big warning to clients hiding out in bond funds: You're about to lose your shirt.”
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.
How to Get Started in Bonds
So here’s my recommendation for getting started investing in bonds:
Educate yourself online. I suggested a few Web resources in an earlier post on how women can become more confident investors.
You might also check out the Next Avenue article, “How Women Who Have Never Invested Can Get Started,” In that one, Ann C. Logue writes about some other great sites, including The National Endowment for Financial Education’s Smartaboutmoney.org, which has free guides explaining bonds and mutual funds. (There are other excellent articles from Smartaboutmoney.org on Next Avenue.)
Also, spend some time on two fine money sites that are oriented toward women: Daily Worth and LearnVest. Both sites let you sign up for regular emails with useful personal finance tips.
(MORE: Why Risk Tolerance Is Overrated)
Another terrific financial site for women is called WISER (that’s the acronym of the nonprofit Women’s Institute for a Secure Retirement).
Invest in bond mutual funds or bond ETFs. Most 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.
That's what I do.
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’s no fixed minimum investment. By contrast, many bonds cost up to $10,000 apiece.
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 Vanguard Total Bond Index Fund (ticker symbol: VBMFX). It invests about 70 percent in U.S. government bonds and 30 percent in corporate bonds. Vanguard has a similar ETF: Vanguard Total Bond Market ETF (BND).
If you’d rather buy a bond fund or ETF that’s actively managed — its skipper decides which bonds to buy and sell — you might consider the Pimco Real Return Fund (PRRIX) or its ETF cousin, Pimco Total Return (PTTRX). Both invest primarily in high-quality taxable bonds. The ETF is run by Bill Gross, one of the world’s most celebrated bond managers.
Or buy individual bonds and “ladder” them. That’s what Gregory A. Bitz, president of the Metropolitan Financial Group in Chevy Chase, Md., recommends.
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.
Bitz’s reasoning: With individual bonds, you won’t 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’ll sell the bonds at different times, when you might need the money, rather than waiting for them all to come due at once.
Consider Treasury Inflation-Protected Securities (TIPS). TIPS aim to shield investors from inflation because the returns of these U.S. Treasury bonds are tied to the Consumer Price Index.
Here’s 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.
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.
Becoming a Bonds Girl might not be the sexiest way to invest, but they could produce blockbuster results for your retirement portfolio.