Q: I've heard that bonds should be a part of my retirement strategy. How much of my portfolio should be invested in bonds, and what's the best way to invest in them?
It's absolutely true that bonds (also referred to as fixed-income investments) should be included in every well-rounded retirement portfolio.
As far as asset allocation goes, younger investors should have more of their money in stocks, while older investors should allocate a greater percentage of their retirement assets to bonds. One good rule of thumb that I like to use is to subtract your age from 110. This is the percentage of your portfolio that you should keep in stocks, with the rest in bonds.
For example, if you're 40 years old, stocks should make up roughly 70% of your portfolio, and the other 30% should be in bonds.
The best way for most people to invest in bonds is through mutual funds or ETFs, as opposed to buying individual bonds. Broadly speaking, individual bonds can be rather illiquid, and the dynamics of bond pricing aren't well-understood by most retail investors.
One of my favorite bond ETFs is the Schwab U.S. Aggregate Bond ETF (NYSEMKT:SCHZ), which has a rock-bottom 0.04% expense ratio, and invests in a wide variety of U.S. Treasuries, government bonds, corporate bonds, and more. Essentially, this is designed to be an all-in-one bond investment. As of this writing, the fund yields 2.33%.
Younger investors who may want to be more aggressive with their bond investments may prefer the Vanguard Long-Term Bond Index Fund (NYSEMKT:BLV). Bonds with longer maturities generally produce better yields, and this ETF pays 3.78%, significantly more than the broader bond ETF I mentioned. The trade-off, however, is that the prices of long-dated bonds are also more sensitive to interest rate fluctuations.
These are just a couple of examples, but the bottom line is that you need bonds in your retirement portfolio, and funds are the best way to go for most investors.
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