Don't go to all bonds in investing
Just as it is a mistake to dump all your equities, it's a mistake to go to the other side of the cliff and fill up entirely with bonds and other "safe" investments.
Yet, many people view bonds as rock-solid investments somehow immune to the dangers that stocks pose.
But events of the past several months, when interest rates began gradually rising, have proved this reasoning to be fallacious. People who held long-term government bond funds got a rude awakening when the value of their holdings declined more than 13 percent on average between May 9 and Sept. 5, according to Morningstar. Bond prices move in the opposite direction of interest rates.
"While bonds and other fixed income investments have a place in most investment portfolios, it shouldn't always be a place of honor," says Bill Riccio, assistant vice president of ERISA Plans at United Planners Financial Services in Scottsdale, Ariz. "Investors with bonds in the current interest rate environment don't earn much of a return without taking extraordinary risks."
So rather than be seen as safe investments, bonds need to be analyzed carefully, and investors shouldn't chase solely after yield. If the interest rate seems too high in the current environment, there's probably a reason to be wary.