Your Money
With interest rates at historic lows today, why invest in high-quality bonds at all? The honest answer is it depends...and maybe you shouldn't.
There are two main reasons to invest in bonds:
- to generate portfolio income
- to hedge against stock market losses
In both cases, there may be alternatives to high-quality bonds. Each alternative has its own risks and trade-offs. This underscores the importance of working with someone who knows which, if any, alternatives are appropriate for you.
Sample income-generating alternatives include lower-quality bonds, dividend-paying stocks, non-traditional assets, and real estate. Another way to hedge stock investing is to hold cash. A strategic cash position will drag on portfolio returns in good times and buffer portfolios in down markets.
Beyond the paltry return of cash savings accounts, Morgan Housel, author of The Psychology of Money, states emergency funds [and safe investments] have an immeasurable benefit. Investors don't have to sell into a down market or borrow at high-interest rates to meet a cash pinch.
At PRESERVE Wealth Management, we plan for three years of client cash flow first. That's our Living Vault (0-3yrs). High-quality bonds and cash play a big role here. Then, we manage risk around that with the rest of the portfolio. That's our Living Vault (4yrs+). High-quality bonds may not even play a role here. Beyond those "living" needs, some clients fund a Giving Vault, which is money set aside to benefit others.
Why invest in bonds?
by Jon Luskin
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