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
10 Foods That Can Keep for Years
10 Foods That Can Keep for Years

These are some of the longest-lasting groceries you can buy.

8 Retailers That Offer Free Prescription Drug Delivery
8 Retailers That Offer Free Prescription Drug Delivery

You won’t have to leave the safety of home to get prescriptions if you use these pharmacies.

5 Ways to Avoid Taxes on Social Security Income
5 Ways to Avoid Taxes on Social Security Income

Here’s how to minimize and delay the chunk that Uncle Sam claims.

7 Surprising Benefits of Staying in Shape After Age 50
7 Surprising Benefits of Staying in Shape After Age 50

Improving your overall physical health is just one reason to stay fit as you age.

Can My Wife Use My Social Security Benefits While Letting Hers Grow?
Can My Wife Use My Social Security Benefits While Letting Hers Grow?

Your self-discipline in not uttering three little words helps determine whether you can use a key claiming strategy.

View this page without ads

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

Get Started

Most Popular
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.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

9 Deep Discounts Available on Amazon This Friday
9 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

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.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

7 Surprising Features That Boost Your Home Value
7 Surprising Features That Boost Your Home Value

You can add value to your home without hiring a contractor to do expensive renovations.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

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.