David@valuealigned.com
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Berk's Blog

Rapidly Falling Bond Prices: How to Avoid Getting Baked

According to many investing experts, there’s a time-tested recipe for reducing risk within your retirement account: Simply invest 60% in stocks and 40% in bonds.

I’m no professional baker, but I do know a thing or two about finance. And this recipe will most likely yield nothing but lost opportunity – manifested in a too-small portfolio.

bond-prices

Bond yields are inverse to their prices, which have been growing since the ‘80s. After such a long period of increase, prices can’t get much higher, meaning that they’re likely to fall rapidly – and you’re likely to lose the money you have within 40% of your investments.

 

How Bond Yields Have Changed

In the past, the 60/40 recipe may have helped reduce risk during stock market declines. But one of the ingredients has changed significantly.

After a 30-year bull market, bond prices can’t go much higher. That means that prices are likely to drop rapidly in the very near future. Unless you sell soon, you may face a loss.

There are several kinds of bonds – and some produce better yields than others. But the point is that you shouldn’t have to choose between brown sugar and white when all you really need is an egg.

 

The One Investing Ingredient You Need

In the investing world, the “egg” you need is stocks of great companies. By investing in them, you can help avoid the deleterious effects of inflation on your retirement account.

Whether you’re five years from retirement – or 35+ years away – you need to calculate the amount of money you will need to maintain your lifestyle many years down the road. And you need to develop a strategy that can help you achieve that, starting now.

 

Investing in Stocks of Great Companies

Ruth Davis Konigsberg elaborates on the traditional retirement investment strategy in “Why I Won’t Own Bonds in My Retirement Portfolio.”  Please read the article and consider whether you could use a new recipe for retirement investing success.

Also, check out the Last Chance Checklist to help guide yourself. And don’t hesitate to contact me at 732-800-2375 or david@www.valuealigned.com.

 

Image Credit: snowbear | morguefile