Ask The Expert: When Is The Best Time To Buy Bonds?
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Question: When is the best time to buy? And do they still have a place in my portfolio? -- Tracy, Atlanta, Ga.
Yet despite their misgivings, individual investors are now returning in droves to the market. Billions of dollars are flowing back into mutual , thanks in large part to a brightening outlook for the U.S. .
Does thatthat you should follow the crowd and shift your assets out of bonds and into ? Yes, you should, unless you are approaching retirement age.
Reason No. 1: Risk Equals Return
There's a simple but powerful reason you should favor asset class delivers a long-term return that is commensurate with the risk it represents. For example, holding in a checking account carries virtually no risk, but it earns almost nothing. Bonds fairly tepid returns, but if they are backed by a blue chip borrower like the U.S. government or IBM (NYSE: IBM), they are almost as safe as . Yet , which clearly carry short-term risk, tend to deliver superior longer-term returns.over bonds. Every
In an ongoing analysis conducted by New York University's Stern School of Business, $140 invested in in 1928 would be worth $167,000 by the end of 2011. About $100 invested in Treasury Bonds would be worth just $6,700. Of course, badly lagged bonds at various intervals, such as in the 1930s and 1970s; but for the most part, have been the winning asset class.
Although we don't know how rally. Moreover, you can find many high-quality that dividend yields that are twice as high as current 10-year yields.fare over the next few years, we have a pretty good idea about bonds: With interest rates already at stunningly low levels, there isn't any room for rates to fall much lower. So (which rise in value as yields fall) have no more room to
Reason No. 2: The Rule Of 100
But that doesn't home equity and other assets) should represent lower risk as you age. Simply subtract your age from 100 to figure out how much exposure you should have to the riskiest asset class -- . For example, if you are 25 years old, you should have 75% of your assets in . If you are 60 years old, then the percentage devoted to should fall to 40%. The remainder should be tied up in bonds, along with your homeowner's equity.that you should shun bonds. With the "Rule of 100," your base of assets (including , bonds,
Reason No. 3: Rainy-Day
Yet there is another year or two. Simply , the market is always capable of falling in value in any given year, and as many retirees saw in 2008, their nest egg shrank right at a time when they needed for everyday expenses.to consider when it comes to allocating your among and bonds. You should never into that you may need to tap in the next
As a rule of thumb, determine how much income -- and keep that out of . In this instance, bonds are a perfectly good place to your excess .you would need to live on for the next year if you lost your other sources of
dividend yield in the S&P 500 is around 2%, roughly in line with the on the 10-Year . But because tend to appreciate at a faster pace than bonds, you need to be compensated for the weaker gains in bonds by securing relatively higher yields., you want to look for yields that are much more robust than the yields of dividends found on . Right now, the average
Generally, awith yields in excess of 5% should be relatively appealing when compared to . And if yields approach 7% or 8%, as was the case throughout much of the 1970s, then bonds are the better deal -- hands down.