Plenty of Americans are glum about their personal finances these days, with inflation the No. 1 reason for their pessimism and potentially not having enough money for retirement driving many of their worries, according to Gallup.
But not everything related to finances is gloomy. These days, there’s a glimmer of brightness that investors shouldn’t overlook — bonds.
Bonds have not always been the most enticing of investments, and for a long time, their yield was so small that they added little to the overall growth that many investors wanted to see. But bonds served a purpose even then: They could help reduce risk in your portfolio, balancing out the uncertainty that came with aggressive stock investments. On their own merits, though, bonds didn’t provide much of a return, so many people avoided them or just devoted a sliver of their portfolios to them.
That’s been changing, and if you haven’t given much thought lately to bonds, now is a good time to give them another look. Their yields are much more attractive and offer a good option for investors who would like to realize some return while still minimizing risk.
The Fed helps drive the shift
But why is this happening? What has driven the sudden shift in the outlook for and performance of bonds?
One significant reason for the change has been the Federal Reserve’s effort to fight inflation, that nemesis so many Americans say has them concerned about their personal finances.
The Fed, worried about the cost of everything going up too much too fast, sought to temper inflation’s sting by raising interest rates. High interest rates potentially can help hold down inflation because when it becomes more expensive to borrow money, consumers might opt to cut back on their spending. If they limit their spending, then businesses will be forced to lower their prices to entice those customers back into the market.
But that tactic for trying to check inflation had an additional effect: It created an improved performance for bonds, which may yield 5% or more across the spectrum. Suddenly, bonds, bond exchange-traded funds (ETFs) and bond mutual funds are a more attractive part of the portfolio instead of just an afterthought for diffusing risk.
Doing your bond homework
If you’re contemplating making bonds a larger portion of your portfolio — and you should be — I would add this bit of advice: Do a little homework before you plunge into the purchase of any particular bond, bond ETF or bond mutual fund, much the same way you would when buying a stock.
Think about that for a moment: Most people use discretion when choosing stocks. They don’t just invest money randomly in a company’s stock without at least some investigation into its past performance, what the market is like for the company’s business and whether anything is happening in the world that could impact the stock’s value. Once they do make the purchase, many of those investors will actively track how their stocks are doing, seeking to make informed decisions on when to sell or buy more.
Few people think about that sort of discretion when it comes to bonds. Instead, they often buy a bond ETF and let it sit there. If you want the best return on your bonds the same way you want the best return on your stocks, then you need to do more than that. In the current market, anyone choosing a bond should show similar discretion as they would when choosing a stock, making informed decisions on which bonds make for the more attractive investment. You should look at selecting individual bonds, bond ETFs or bond mutual funds from different sectors and maturities, then allocating appropriately within your overall portfolio.
Active management vs. being passive
Of course, the most attractive investment can change from week to week, which is another reason to take an active approach to your investments. If you are investing today, you want to know what’s happening with the market right now, not what was a good deal a year ago or even a month ago.
At our practice, we believe that active management is more viable than passive. With the market changing so fast these days, it’s more necessary than ever to be engaged and active with your investment strategy.
What’s working well for you can change quickly, so you need to monitor market conditions regularly to take advantage of new opportunities as they arise — or dodge trouble when it appears on the horizon.
Certainly, you can do that on your own, but it pays to find a good financial professional who has the experience and knowledge to assist you with those decisions. Together, you can discover what the right decisions are for you — and when to make them.
Ronnie Blair contributed to this article.
The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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