Retirement Planning Mistakes with Bonds
Retirement planning didn't end with the current crisis. If you lost money and are off track, it's just gotten that much harder. You've got a big challenge now.
One thing to avoid is compounding your problem - you know, making things worse. You don't need more losses. That's why you've got to be careful about investing in stocks during what I believe is a bear market in stocks. If you're not, you may just lose more.
But stocks aren't the only things to watch out for. Be cautious with bonds too. People are pouring billions into bonds and bond funds now. I'm afraid we're building up a bond bubble that's just going to blow up in people's faces.
I'm not saying to forget investing in bonds. But I think you can't just plunk your money into bonds willy-nilly. If you're going to put bonds into your portfolio, you've got to be selective.
One solution is to only buy bonds that mature within a few years. If you keep what's called a "short duration" in your bond portfolio, you won't be as subject to losses as if you have bonds that mature 10 or more years from now. You can find "short" bond funds or ETF's that do this.
What about individual bonds? A friend recently mentioned he wanted to invest in GE bonds that paid something over 6% - a pretty good return these days. I didn't think he should, because of the possibility of the bond defaulting. Sure, I know it was GE. But GE's not in the best financial shape these days (a subject for another time).
What happens if the bond defaults? You might lose your money, or at least a good portion of it. With bonds, just like with stocks, you need to diversify your holdings.
A good example of losing money with a bond is the recent Chrysler bail-out. When the government stepped in to "re-structure" the company, it imposed certain provisions on the bondholders. Well, that's a nice way of putting it, I suppose. Because what happened is that the government told bondholders that, while they would get something back for the bonds they bought, they would only get back 29 cents on the dollar. That means if you invested a dollar, you get back 29 cents (plus any interest you may have collected along the way).
(Bondholders weren't too happy with this. Many thought that had the company taken it's chances in the marketplace - without the government's help - they could have gotten more than 29 cents for their bonds. Of course, now they'll never know.)
So there's your exposure when you buy an individual bond. You may not ever get your principal back if something goes wrong with the company.
Now, there are some professionals who know how to pick individual corporate bonds. These professionals typically identify a company that is basically sound, but, for various reasons, the market has discounted price of their bonds. If the professional really knows what they're doing, they'll find bonds that will mature soon - let's say in one, two, no more than four years or so. And they'll find enough of these bonds so that you can "ladder" a short-term portfolio, with bonds coming due every year.
While these sorts of professionals are few and far between, you can do really well by buying bonds of sound companies at a big discount. Not only will you get back more than you paid for the bond when it matures, but because you bought at a discount, your interest rate should be pretty good to - maybe 7, 8 percent, or more. That's a really good interest rate these days.
Of course, even here, you've got to buy more than one or two bonds. Even the most skilled professional won't be able to avoid a defaulting bond from time to time. But if you don't put all your money into just one bond, you'll probably be OK.
But for most folks, individual corporate bonds are not going to be the best place to invest retirement funds - or any of your funds if you're an individual.
Retirement planning won't be so easy now. At least not so easy as people said it was for so many years. You remember, don't you? Basically, the advice was to invest a good portion of your 401k or other retirement money in stocks and - like magic, I guess - you'd retire rich.
It's not working out that way for a lot of people.
So just don't make the mistake of thinking that if stocks don't work, you'll go with bonds. Especially if you're doing retirement planning.
One thing to avoid is compounding your problem - you know, making things worse. You don't need more losses. That's why you've got to be careful about investing in stocks during what I believe is a bear market in stocks. If you're not, you may just lose more.
But stocks aren't the only things to watch out for. Be cautious with bonds too. People are pouring billions into bonds and bond funds now. I'm afraid we're building up a bond bubble that's just going to blow up in people's faces.
I'm not saying to forget investing in bonds. But I think you can't just plunk your money into bonds willy-nilly. If you're going to put bonds into your portfolio, you've got to be selective.
One solution is to only buy bonds that mature within a few years. If you keep what's called a "short duration" in your bond portfolio, you won't be as subject to losses as if you have bonds that mature 10 or more years from now. You can find "short" bond funds or ETF's that do this.
What about individual bonds? A friend recently mentioned he wanted to invest in GE bonds that paid something over 6% - a pretty good return these days. I didn't think he should, because of the possibility of the bond defaulting. Sure, I know it was GE. But GE's not in the best financial shape these days (a subject for another time).
What happens if the bond defaults? You might lose your money, or at least a good portion of it. With bonds, just like with stocks, you need to diversify your holdings.
A good example of losing money with a bond is the recent Chrysler bail-out. When the government stepped in to "re-structure" the company, it imposed certain provisions on the bondholders. Well, that's a nice way of putting it, I suppose. Because what happened is that the government told bondholders that, while they would get something back for the bonds they bought, they would only get back 29 cents on the dollar. That means if you invested a dollar, you get back 29 cents (plus any interest you may have collected along the way).
(Bondholders weren't too happy with this. Many thought that had the company taken it's chances in the marketplace - without the government's help - they could have gotten more than 29 cents for their bonds. Of course, now they'll never know.)
So there's your exposure when you buy an individual bond. You may not ever get your principal back if something goes wrong with the company.
Now, there are some professionals who know how to pick individual corporate bonds. These professionals typically identify a company that is basically sound, but, for various reasons, the market has discounted price of their bonds. If the professional really knows what they're doing, they'll find bonds that will mature soon - let's say in one, two, no more than four years or so. And they'll find enough of these bonds so that you can "ladder" a short-term portfolio, with bonds coming due every year.
While these sorts of professionals are few and far between, you can do really well by buying bonds of sound companies at a big discount. Not only will you get back more than you paid for the bond when it matures, but because you bought at a discount, your interest rate should be pretty good to - maybe 7, 8 percent, or more. That's a really good interest rate these days.
Of course, even here, you've got to buy more than one or two bonds. Even the most skilled professional won't be able to avoid a defaulting bond from time to time. But if you don't put all your money into just one bond, you'll probably be OK.
But for most folks, individual corporate bonds are not going to be the best place to invest retirement funds - or any of your funds if you're an individual.
Retirement planning won't be so easy now. At least not so easy as people said it was for so many years. You remember, don't you? Basically, the advice was to invest a good portion of your 401k or other retirement money in stocks and - like magic, I guess - you'd retire rich.
It's not working out that way for a lot of people.
So just don't make the mistake of thinking that if stocks don't work, you'll go with bonds. Especially if you're doing retirement planning.
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