Investors use bonds to add stability to their stock portfolio. Bonds offset the inherent volatility of stocks with their predictable returns and relative security.
There are several ways to determine the proper stocks to bonds ratio in your portfolio ? some are quite complicated. However, many analysts agree that something in the range of 70/30 to 60/40 works as well as any for pre-retirement investors.
The ratio you choose depends on how conservative or aggressive you are as an investor. The higher the stock component, the more aggressive your portfolio will be.
Once you have decided on a ratio of stocks to bonds, the next decision is how to structure the bonds portion of your portfolio.
It would be a simple matter to dump all of your money in U.S. Treasuries and be done with it. That would certainly be the safest course of action. However, your bonds need to work for you in addition to providing stability and treasuries are very low-yield products.
Municipal bonds or munis offer a tax-free return, which can be very attractive. However, they are difficult for individuals to buy because they come in very large denominations.
Your best shot for munis is probably a mutual fund, but watch out for the quality of munis the fund buys and pay close attention to fees.
Another alternative is corporate bonds. Highly rated corporate bonds pay attractive yields, but may be difficult to find. Again, a good mutual fund may be your best alternative.
If you need to fund a goal in x number of years for a certain amount, a bond virtually guarantees your principal will be available on the maturity date. With a mutual fund, you don?t know what the value of your account will be in x number of years.
There are several ways to determine the proper stocks to bonds ratio in your portfolio ? some are quite complicated. However, many analysts agree that something in the range of 70/30 to 60/40 works as well as any for pre-retirement investors.
The ratio you choose depends on how conservative or aggressive you are as an investor. The higher the stock component, the more aggressive your portfolio will be.
Bond Ratio
Investors in retirement may want to consider an even higher ratio of bonds, since your primary goal will be preservation of capital. However, you still need enough presence in stocks to counteract inflation.Once you have decided on a ratio of stocks to bonds, the next decision is how to structure the bonds portion of your portfolio.
It would be a simple matter to dump all of your money in U.S. Treasuries and be done with it. That would certainly be the safest course of action. However, your bonds need to work for you in addition to providing stability and treasuries are very low-yield products.
Bond Portfolio
Some of your bond portfolio (20% - 35%) can and should go to treasuries, but you may want to consider other higher yielding options.Municipal bonds or munis offer a tax-free return, which can be very attractive. However, they are difficult for individuals to buy because they come in very large denominations.
Your best shot for munis is probably a mutual fund, but watch out for the quality of munis the fund buys and pay close attention to fees.
Another alternative is corporate bonds. Highly rated corporate bonds pay attractive yields, but may be difficult to find. Again, a good mutual fund may be your best alternative.
Bond Funds
Bond funds offer all the benefits of mutual funds: professional management, liquidity and low minimum investments. At the same time, they don?t have fixed maturity date as a bond does.If you need to fund a goal in x number of years for a certain amount, a bond virtually guarantees your principal will be available on the maturity date. With a mutual fund, you don?t know what the value of your account will be in x number of years.