Bloomberg’s John F. Wasik published a column about investing in bonds during tumultuous times in the stock market–a standard strategy. But are they really as safe as they sound? Here are a couple of things to watch out for:
–Taking out bonds too early.
(Rising rates are bad for you only) if you aren’t holding the issues to maturity. Write down a few financial goals with set dates, for example, a child starting college, or a new home purchase. Ladder tax-free municipal bonds and hold them until their respective maturity dates, then reinvest them until the target date.
–Inflation.
If you were to aggressively fend off inflation, conventional bonds wouldn’t be the preferred weapon. Treasury Inflation- Protected Securities, or TIPS, and I-Bonds from the U.S. Treasury, are indexed to the Consumer Price Index and guaranteed by the government.
–Increasing commodities prices.
Protect against commodity-price increases (with mixed funds). The Pimco Commodity Real Return Strategy fund, another one of my favorite holdings, mixes TIPS with commodity-derivative instruments.
–US stagnation in lieu of international economies’ growth
Bonds also won’t capture any earnings growth from non-U.S. markets with robust economies. Wasik suggests trying a world stock index fund instead.
In sum, muni bonds are safe, but not risk-free. Heck, neither is your mattress, which, unless it’s an air mattress, doesn’t keep up with inflation, either.
Thank you the wonderful tips. Learned a lot from it. Really educational.