To many investors, there's no safer place for their money than in bond funds. At some point, this kind of advice became commonplace which helps explain why this particular option has remained popular over the years.
Still, the truth is that bond funds aren't some silver bullet you can simply depend on no matter what. Instead, a lot of investors may - unfortunately - find out the hard way in the very near future why this type of strategy isn't the way to go. Instead, you should be relying on a laddered portfolio of individual bonds.
Why You Need to Build a Laddered Portfolio of Individual Bonds
In case you're unfamiliar with this strategy, building a laddered portfolio of individual bonds is when you invest in a portfolio of bonds that all have different dates of maturity.
By doing this, you ensure that your money is ready to survive in a rising-rate environment. That's because, as bonds mature, their proceeds get reinvested in bonds that have higher yields.
There's definitely a big difference between investing in individual bonds in a ladder and investing in a short-term bond fund. The most important one for the purposes of this piece is that there is no guaranteed maturity date when the initial principal is returned along with any interest that was accrued. This makes it an impractical tool when trying to see returns during rising rates.
Only Use Quality Investment-Grade Bonds (if You Have to)
That being said, I appreciate that everyone is in a unique situation, and there may be no one-size-fits-all solution we can advocate for every investor. This is also true because who knows what the future holds?
Maybe, for some of you or at some point, it will make sense to invest in bonds. If this becomes absolutely necessary, then just be sure you put your money into investment-grade bonds.
Never Touch Depressed Bonds and Sectors
No matter what, though, I have to advocate strongly against investing in depressed bonds or sectors. Not that I ever think you should do it, but leave it to speculators and market professionals.
The Fed Plans to Hike Rates at Least Twice This Year
Keep in mind, too, that the Federal Reserve has come out and spoken about the sense of uncertainty that permeates the entire globe. Just last week, when touching on this very subject, they also announced that they would be hiking rates, at least, twice this year as well.
While inflation may remain on the low side for the rest of 2016, business and export investment is also most likely going to stay low as well. However, there are signs of potential price increases in the near future.
Hopefully, the above has helped spell out for you why bond funds should have no place in your investment portfolio. While there may still be people at the moment, who think these assets are great, economic factors the world over are about to prove why a laddered portfolio of individual bonds makes so much more sense.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in a loss. While bonds may provide an assurance of predictable return, there is a risk of default of particular issuer and there can be no assurance that an investment mix or any projected or actual performance will lead to the expected results shown or perform in any predictable manner.
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