With interest rates so low, is there still a role for bonds in today’s retirement portfolio? Traditionally, bonds were used in the past to mitigate risk while still providing yield to your portfolio, but are there other options for today’s environment?
First - What IS a bond?
Often considered The “rock” when the stock market is going haywire, bonds are like "an I.O.U. between the lender and borrower that includes the details of the loan and its payments."1
There are three main types of bonds:
- Corporate bonds
- Municipal bonds
- U.S. Treasuries
(TIPS. Treasury Inflation-Protected Securities are notes and bonds whose principal is adjusted based on changes in the Consumer Price Index. TIPS pay interest every six months and are issued with maturities of five, ten, and 30 years.)
What is the purpose of a bond in your retirement portfolio?
- Income generation
- Capital preservation
- Capital appreciation
- Hedge against economic slowdown
WHY are bond rates so low right now? What affects the price and performance of bonds?
Interest rate movements affect bond value/performance, but there are also three other factors that can affect the performance of a bond:
- market conditions
- the age of a bond
- its rating
What are some alternatives that might be available to me, and how would I know if they are the right investment for my situation?
- Annuities (there are many kinds)
- Business Development Companies (BDCs)
- Precious metals (Commodities)
- Structured Notes
Working with a financial advisor to help you understand what options what would be the best investment strategy help your probability of success in your retirement plan.
1 - https://www.investopedia.com/terms/b/bond.asp
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