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Choose bonds very carefully

By Jennie L. Phipps ·
Thursday, January 16, 2014
Posted: 4 pm ET

Seventy-six percent of people saving for retirement in 401(k)s and other workplace plans told retirement planning firm State Street Global Advisors that their plan is in the same or better shape than it was five years ago, before the economic meltdown, and 79 percent said they were able to continue to contribute the same amount or even increase their contribution levels during these economically tough years.

But there has been one fairly dramatic change -- 49 percent said they are investing more conservatively than they did five years ago. In many cases, they are doing so by preferring fixed-income investments over equities. About one-third of the respondents told State Street that they were choosing bonds because they believed bonds would protect their portfolios from inflation. That's a mistake. Actually, inflation reduces the value of future interest and principal payments that bonds offer.

Investment adviser Benjamin Sullivan, a Certified Financial Planner for Palisades Hudson Financial Group, is warning against jumping willy-nilly into bonds as a hedge against the possibility that the value of equities will decline. He points out that if interest rates were to rise 4 percent, the value of a 10-year bond would fall 40 percent. Instead of buying intermediate or long-term bonds, Sullivan suggests that nervous savers choose short-term bonds. While the yields are modest, short-term bonds reduce volatility, preserve cash when you think you'll need it in the short term, and offer long-term savers money to invest aggressively when the equity market turns down and prices fall.

Sullivan also warns investors away from foreign and junk bonds. "Bonds are for protecting your wealth, not for risking it," he says.

In particular, he's looking favorably at money market funds, short-term corporate and municipal bond funds, floating-rate loan funds and funds that pursue absolute-return strategies. "Although these investments will earn less in the short term than a riskier bond portfolio, rising interest rates will not hurt your principal value nearly as much," he says.

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January 18, 2014 at 11:21 am

Isn't the interest earned on EEE Savings bonds exempt ?

January 18, 2014 at 10:43 am

Yeah, I agree, this was a fairly amateurish article. The first thing the author should know, before getting into any specific projections of losses and some of the odd things written there, is bonds aren't the same thing as bond funds.

January 18, 2014 at 10:11 am

I have to agree with Frank and Lee.....Whoever the "Expert" writing this article is.....He should have taken a long vacation instead. Some people's mouths work, but it's not hooked up to their brains.

January 18, 2014 at 9:58 am

Another poorly written article. No clue as to what types of bonds are being referred to in the article. I own a significant number of Series EE bonds and the interest rate paid is a hell of a lot higher than the pitiful interest you get from a bank these days on savings accounts and CDs.

Lee Nysted
January 18, 2014 at 9:57 am

A blatant lie........."He points out that if interest rates were to rise 4 percent, the value of a 10-year bond would fall 40 percent." Rates on 10 year notes are at nearly 3% today. A rise to 4% over a long period of time would do very little damage to any portfolio. A quick rise and the return would be negative 10 to 15 % for only a year. Tell the truth. Pfd. shares and corporate rates and muni rates are substantially higher that 4% now. Bonds have outperformed stocks for many years. Stocks are up less than 5% for the last 15 years.

January 18, 2014 at 8:42 am

You can't purchase savings bonds at banks or credit unions. They are only offered online as this service was discontinued several years ago due to the lack of interest in the product and the reduction in rate.

January 18, 2014 at 8:34 am

I recently went to the Bank to purchase some bonds, and was told that banks no longer sell bonds, that you must do this over the internet.

January 18, 2014 at 7:18 am

You can purchase bonds at a bank they have a low return and I would think at the rate we are going they wont keep up with inflation

January 18, 2014 at 6:17 am

Are the bonds safe to purchase? The way Federal Government Budget is going make one wonder if you should purchase bonds

January 18, 2014 at 6:14 am

I was not aware that you still can purchase bonds is so where can you purchase them