Bonds At Your Stage of Life
Your Stage of Life - Nearing Retirement: Investing in Your 50s and 60s
- Investment Goal Conserve capital
(your most likely primary financial goal at this point)
- Investment Horizon Moderate (5 - 15 years)
(how long until you will need to access your money)
- Risk Tolerance Low
(how much risk you feel comfortable taking)
Hopefully by this point the hard work and discipline of saving and investing is creating a solid portfolio that enables you to look forward to financial freedom in your retirement.
As retirement approaches, your investment horizon shrinks. In other words, the closer you are to retirement, the less chance you want to take that you could lose a sizable portion of your investments. You want to more aggressively protect your assets from the stock market’s volatility.
Some issues to consider when evaluating bonds for your portfolio:
- Bonds or bond funds? The bond markets offer investors many choices and sectors, each with a slightly different risk and return profile. As with all investments, diversification is important in your bond investments too. Because many kinds of bonds can only be bought in minimum increments, creating a bond portfolio that includes different issuers, market sectors, maturities and credit qualities can require a significant amount of assets. Bond funds, unit trusts or exchange-traded funds may be a better choice for more convenient and affordable diversification, although they don’t offer the comfort of a single bond’s promise that your principal will be returned on the maturity date.
- Tax-advantaged bond investing. Depending on the country in which you live, there may be tax advantages to certain types of fixed income investing. Consult your financial advisor or tax advisor.
- Managing interest rate risk. The rule of thumb is that when interest rates rise, bond prices fall and vice versa. If you buy a bond with a 5% coupon and interest rates on the same maturity rise to 6%, not only will your bond be worth less if you want to sell it before maturity, but you will also be missing the opportunity to earn higher interest. One way to manage this risk is with laddering - creating a portfolio of bonds with maturities staggered over one, three, five and ten years. When rates are rising, you will have short-term bonds maturing that allow you to reinvest the principal at higher rates. When rates are falling, you will still have the longer-term bonds paying higher coupons.