As far as yawner investments, practically nothing's more snooze-inducing than bonds. Before you excuse yourself to refill your drink and sidle up to a racier asset class, consider that sooner or later you'll be pining for a fixed-income investment.
For most, the hankering for a boring little something for their portfolio strikes when retirement finally enters their crosshairs. After spending a lifetime amassing a cushy nest egg, man's natural inclination is to preserve it. So five to 10 years before you kiss your boss goodbye, suddenly bonds start looking good as you look to move money into something more secure in the short term than the stock market. Same goes for big-ticket purchases. Woe is the investor who bet their home down payment or kid's tuition on the market this summer. When you know you need the money soon, stay clear of stocks.
Shopping for bonds is a lot like buying any other asset class. Consider fees, diversification, and volatility before you buy.
Fees matter: In the world of bond funds, just a slim margin separates the winners and losers. The typical "intermediate-term" bond fund (where most fixed-income investors want to shop, according to Fool fund expert Shannon Zimmerman) has an expense ratio of 1.07%. The Vanguard Total Bond Market Index Fund -- sort of the plain Jane S&P 500 option -- carries a price tag of 0.22%. Any bond fund pick should have an expense ratio in that range.
Don't discount diversification: Diversifying a fixed-income portfolio may seem like splitting hairs. But the world of bonds offers some exciting -- well, different -- options. Junk bonds (which are really just the "high yield debt class" of bonds) and international markets can help balance things out. Yes, even bonds can have bad years, which leads us to...
Volatility is everywhere: Stock investors know that when large-cap growth stocks fall out of favor, small-cap value picks can help take up the slack in your portfolio. It's much the same in the universe of fixed income. Just because they're boring doesn't mean bonds don't get kooky once in a while. When an economic recovery gets underway, for example, high-yield bonds (and the mutual funds that buy them) tend to be among the best performers providing a cushion for your returns.
Finally, recent short-term performance is never a good reason to invest in anything, even bonds. But if you're heading into retirement, or have a short-term savings goal, boring can be beautiful.
For more bond basics, visit:
- The Motley Fool's Bond Center
- Bonds vs. Bond Funds -- what's the difference?
