This week’s theme is “should I invest in bonds now?”

Today, I’m talking about the 3 biggest mistakes that I see over and over and over again when I review people’s bond portfolios. When I talk to prospective clients, I have the opportunity to look under the hood of their portfolio, and when I see people make blunders with their bonds, it usually falls into 1 or more of 3 categories: 

1. Owning bonds that are too risky 
2. Reaching out too far for income, and 
3. Having too much or too little in bonds 

Let’s break down each one of these:

1. Owning bonds that are too risky. Credit quality or in other words the likelihood of default are very important factors when selecting bonds. If you buy individual bonds and the issuer files bankruptcy, you can kiss your money goodbye in most cases, so its important to keep a close watch on credit quality. Bonds have ratings to indicate their quality or likelihood of default, so watch those ratings carefully, especially if you own individual bonds. For my clients that means owning bonds with investment-grade ratings or higher, usually BBB+ or better. If a bond begins to deteriorate in quality, I sell. It’s not worth the risk in most cases to stay invested.During Covid last summer, I had this happen with a couple of well-known retailers and their bonds that a handful of my clients owned. There was so much uncertainty about the future of these businesses, that it wasn’t worth the risk to wait and hold, so we moved on and their portfolio is more secure now because we sold. 
2. Reaching out too far for income. Here’s what I mean by that - you might buy a bond that’s maturing in 30 years because it’s paying you 6% or 7% a year in income, but when rates climb higher, you can expect that the bond price will drop - and it could drop by 10-20% or more, so don’t be tempted to reach out too far into the future for income. With interest rates so low right now, reaching out too far for income or buying bonds that are too risky for income is problematic. Ive had clients get lured into buying some “guaranteed” investment that promised to pay them 13% interest, only to have it blow up later and never be able to sell and get out. This happens far too often, especially when rates are low and bond income is dismal. 

 

• Having too much or too little in bonds. We talked about this yesterday when I gave you some guidelines to consider when building your bond portfolio for retirement. By far, what I see most often is that someone has too little in bonds and too much in stocks. This can be dangerous if you’re approaching retirement and the right mix isn’t a one-size-fits all answer. Take a look at your overal mix of stocks and bonds and make sure you can handle a protracted drop of 25% or more if you are heavily tilted to stocks.

 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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