Strategize With Bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Income Investing can help you in four ways.  As you probably know, asset allocation is a main topic of discussion on my radio show.  Your investment funds need to be divided into risk, less risk, and low risk.  The portion allotted to each segment depends on many factors.   As you move through your lifetime from your first day at a full-time job until you go to your reward, bonds play a greater, and greater, and greater role in your portfolio.   For the purpose of this conversation, let’s assume you are just starting out in your work life.  All things considered and being equal, how much of your entire investment capital should be in bonds?  At age 25, most of your money should be at risk, but a small portion should be invested in bonds to diversify the risk of the equities.  Of course, deciding what that ratio would look like will differ on a case by case basis. 

As time progresses and you move closer to your retirement date, risk should be lowered and Treasury Inflation Securities should be introduced to add protection from inflation.  Again, your investment amounts will depend on market conditions, circumstances and any constraints.  As your retirement date is drawing ever closer more bonds should be added to protect your principal.  Such as adding low-risk bonds.  As you reach your retirement, more bonds can and should be added to your portfolio to increase your income.  The addition of bonds into a portfolio will reduce the risk invested in equities. 

Once you have retired, the exact percentage of risk, low risk, and no risk would depend on many circumstances.  Ideally, bonds would provide protection from inflation and taxes and the opportunity for capital appreciation.  The balance between these aforementioned factors can change because of family circumstance, market conditions/macro-economic events.   Fixed income, therefore has four functions; diversification, income, preservation of principal, and inflation protection.  While this would not guarantee outcome, success or accomplishment, during the distribution phase, lasting over 20 years or more, what the managing of risk with fixed income enables maybe better than most sleeping pills.

To summarize how an investment in bonds can help in your financial lifetime:

  1.  First stage, retirement isn’t even on your radar - bonds will help offset any risk your equity investments my face.
  2. Second stage, seeing retirement in the distant future - bonds will add protection against any long term ravages of inflation.
  3. Third stage, actively planning for retirement – bonds can boost your income.
  4. Finally reach retirement – bond investments will help preserve your wealth. ?

 

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