So you are a recent retiree that would like to draw between 3% and 4% per year from your portfolio and leave some to the kids when youâ??re gone. Youâ??ve gotten off on the right foot: decided to use index funds instead of taking a flyer on individual stocks or other actively managed schemes, and settled in with a traditional 60% stock, 40% bond mix. So far, so good.
But these arenâ??t normal times for interest rates or the bond market. Yields on fixed income are at extremely low levels, which mean future returns will be lower on bonds than weâ??ve become accustomed to. If interest rates rise back to average levels, bond prices in the near term could fall and returns for fixed income could be sharply negative. And the longer the bond, the worse the decline could be. Should you make bond changes, and if so, which ones?
The typical response from investors when bond returns donâ??t meet their requirements or expectations is to â??reach for yieldâ?, that is, buying longer term (10 years or more) maturities, or bonds with lower credit qualities (less than investment grade, BB or lower), or both. Sure, riskier bonds carry higher yields and higher expected returns, but is that the best path to take?
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