Inflation can be a brutal teacher — and its lessons often come at the expense of your peace of mind.
Was anybody really ready when inflation peaked in 2022? While we expect stocks to be volatile, that year proved that even “safe” bonds can take a hit.
For those closing in on retirement, seeing a bond fund drop in value feels like a violation of the basic rules of investing.
We recently heard from a Money Talks News reader, Paul W., who was blindsided by the performance of his bond holdings. Now just three years away from his retirement date, Paul is looking for a way to secure a steady yield without the unexpected drama.
Paul told Money Talks News:
“I have a 401k that contains a stock mutual fund (S&P 500) and a bond fund. I have an emergency cash fund in my local Credit union. When I retire in three years, I’d prefer to not touch my cash fund (except for emergencies). And, for the most part, I prefer to not touch my stock mutual fund.
With that said, in 2022, when inflation was high, my bond fund went down. That was a surprise as I didn’t realize a bond fund could lose money!! Though this year it made 7%-ish, I don’t trust that it will make 7% every year because it’s a fund.
If I transfer my 401k to a self-managed IRA, where do you recommend I put my bond fund to earn 4%-7%?”
Money Talks News founder Stacy Johnson, CPA, is here to help. He worked on Wall Street for a decade and has worked as a financial journalist for more than 30, helping consumers navigate every market cycle from the 1987 crash to the current inflationary environment.
Here’s Stacy’s advice for Paul and others in the same situation:
“You’ve learned an expensive lesson: Both stocks and bonds can lose value, whether or not they’re in a fund.
Generally, bonds and stocks move in different directions: If stocks go down, bonds typically either hold their value or go up. When stocks are rising, bonds often lose value. That’s why they’re typically paired: to hedge against different investment scenarios.
However, it’s entirely possible that bonds and stocks go down at the same time. This is why, in an ideal world, you’re also going to hold enough cash savings (e.g., a money market fund) so you can meet your expenses and wait for better days. Because the last thing you want to do is to be forced to sell stocks or bonds at a loss.
Here’s something you may not know: In your 401(k) or an IRA, you can also have cash. You can hold your emergency savings in a credit union, but you can also have a money market fund right in your retirement account as well.
I have money in several different retirement accounts, and until recently kept all my investments in either stocks or a money market fund: no bonds at all.
Since I’m now 70, I recently invested in a few bond funds for additional income: Money market funds don’t pay as much interest as bond funds. But as you search for bond funds, be aware that the safest funds (high quality, low volatility) don’t pay as well as long-term, lower-quality bond funds. So if I were you, I’d aim for a high-quality, shorter-duration fund that pays around 5%.
To find one, put those words — ‘high-quality, shorter duration bond funds’ — into a web search or AI assistant and read about the various possibilities.”
Add a Comment