Ask Stacy: Should I Shun Stocks and Buy Bonds?

Photo (cc) by zoonabar

Here’s a recent reader question – maybe you’ve wondered about it as well:

I’m thinking of putting my 401K money (192,000) into Vanguard Intermediate Term Fund. Also $15,000 of savings into Vanguard Total Bond Market Fund. I am 72 and not willing to take a big risk with my money, but it is making under 1 percent now and I feel I need to venture out a little more. Can you give me a heads up if I am going in the right (fairly safe) direction? Thanks for any advice. – Carol

Carol isn’t alone in shunning stocks and buying bonds – bond investing has been outpacing stock investing for years.

Everyone knows the risks of investing in the stock market – the value of your stocks, or stock mutual funds, can evaporate in days; even minutes. But buying bonds also carries risk. The risk of bond investing: if interest rates go up, bond prices will go down. Think of a see-saw, with bond prices on one end and interest rates on the other. The farther out the maturity date of the bonds, the greater the price swing. So the lowest risk bonds (or bond funds) would be short-term, followed by intermediate, then long-term.

According to this MSNBC article from August, there are experts who predict a bond bubble is forming – in other words, that interest rates are too low, bond prices are too high, and sometime soon that trend will reverse: interest rates will shoot up, bond prices will go down, and bond investors will be creamed. Here’s part of the article:

Bill Gross of giant bond firm Pimco said that Treasuries had some “bubble characteristics” in December 2008 when 10-year yields neared 2 percent. Nouriel Roubini, who gained near celebrity status after calling the crash, warned of a bubble about the same time. In a letter to his Berkshire Hathaway shareholders last year, Warren Buffett compared the “U.S. Treasury bond bubble of late 2008” to the Internet and housing bubbles.

Here’s another dire warning from Wharton professor Jeremy Siegel and Jeremy Shwartz, director of research at Wisdom Tree Investments, also from August, from this article in the Wall Street Journal:

The possibility of substantial capital losses on bonds looms large. If over the next year, 10-year interest rates, which are now 2.8%, rise to 3.15%, bondholders will suffer a capital loss equal to the current yield. If rates rise to 4% as they did last spring, the capital loss will be more than three times the current yield. Is there any doubt that interest rates will rise over the next two decades as the baby boomers retire and the enormous government entitlement programs kick into gear?

There are, of course, other experts who disagree. They say that bonds are still the place to be. In fact, there are some who believe that since deflation is a greater risk than inflation, bonds are the only place to be.

So what’s the bottom line? Well, here’s my opinion: because interest rates are near zero, ultimately the path of least resistance is up, and that could put your bond mutual fund investment in jeopardy. Moving from a money market fund that pays less than 1 percent into an intermediate term bond fund will increase your income. But as rates rise, that extra interest you’ve earned will be offset by declining principal.

That being said, I don’t think rates will rise in the very near term – the economy is simply too sluggish. But if you’re investing in bond mutual funds, I’d be careful: Sooner or later, rates will rise, and that “safe” bond investment may not be so safe after all.

To stay as safe as possible, stay in your money market fund, despite the low rates. In other words, do nothing: that’s idea number one. But here’s idea number two: rather than keeping all of your money in the money market, keep half there and put the rest into the intermediate fund. That way if rates go down or stay the same, the fund will benefit. If rates go up, your money market will pay more. Either way, one investment wins. But my favorite idea is this one – divide your money into thirds: one-third in money market, one-third in intermediate bond fund, and one-third into a fund that offers big, blue-chip stocks that pay dividends. I’m talking about stocks like AT&T, Exxon Mobil, Chevron, Procter & Gamble, Johnson & Johnson, Verizon Communications, PPfizer, General Electric and Merck. These stocks aren’t terrifically risky. The fact that they pay dividends will help keep them from falling as much as other stocks in bad markets, give you some income and, when the economy ultimately improves, could make you some money.

Granted, investing in stocks – even in ones like those I mentioned – entails some risk. But so does staying in money market and making nothing, and so does going into bonds when interest rates could easily increase sometime in the future.

For more on my philosophy on investing, see Why You Should Buy Stocks and Houses Now. To see what stocks I currently own, see my personal portfolio.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
13 Affordable Products for a Better Night’s Rest
13 Affordable Products for a Better Night’s Rest

These Amazon products can help you finally catch 40 winks — or more.

12 Ways to Never Pay Full Price for Anything
12 Ways to Never Pay Full Price for Anything

Stop paying retail prices. Here are plenty of ways around that.

8 Things I Always Buy at Costco
8 Things I Always Buy at Costco

From bacon to birthday cakes, here are my favorite deals at the popular warehouse store.

Brace to Pay More for These 26 Prescriptions in 2020
Brace to Pay More for These 26 Prescriptions in 2020

More than 600 drugs — including these commonly prescribed meds — have seen price hikes so far this year.

How to Get the Best Possible Deal on Car Insurance
How to Get the Best Possible Deal on Car Insurance

This is the last article on understanding and shopping for car insurance that you’ll ever need.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

Am I Eligible for My Mother’s Social Security Benefit?
Am I Eligible for My Mother’s Social Security Benefit?

Can an adult daughter tap into her late mother’s benefit?

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

Is This Treatable Condition Causing Your High Blood Pressure?
Is This Treatable Condition Causing Your High Blood Pressure?

Researchers say too many doctors are overlooking this potential source of hypertension.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have all of these documents that are crucial to their golden years — especially during a pandemic.

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

9 Small Expenses That Are Bleeding Your Budget Dry
9 Small Expenses That Are Bleeding Your Budget Dry

Keep more of future paychecks by eliminating these budget-busting unnecessary expenses.

11 Huge Retirement Costs That Are Often Overlooked
11 Huge Retirement Costs That Are Often Overlooked

Does your retirement budget account for all of these costs?

7 Tricks to Cleaning Your Bathroom Faster
7 Tricks to Cleaning Your Bathroom Faster

These tips can get your bathroom sparkling with little time and no elbow grease.

7 Bank Accounts With Extra Perks for Seniors
7 Bank Accounts With Extra Perks for Seniors

These accounts offer exclusive discounts and other perks — including interest — to older customers.

11 Generic Products You Should Buy at Costco
11 Generic Products You Should Buy at Costco

Not all generics are worthwhile, but these are among the best from Costco’s Kirkland Signature brand.

20 Amazon Purchases We Loved in 2020
20 Amazon Purchases We Loved in 2020

These practical products made everyday life a little easier last year — and will do so in the new year, too.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.