Allocating Your Bond Investments
How you allocate your investments depends on considerations, such as what you’re saving for, how much you’ve accumulated in your portfolio, how much more you plan to invest, how long before you plan to make withdrawals, how much you need to withdraw, and your tolerance for risk.
What you are saving for is one of the most important considerations. If you’re 35 years old and saving for retirement, your bond allocation will be very different than if your 55 years old. If you’re saving for your daughter’s wedding and she’s already engaged, your allocation will be very different than if you’re saving for your five-year-old’s college education.
For instance, if you are saving to buy a sailboat or a second home in the near future, you probably want to invest in bonds with maturities that match your time horizon. For very near-term expenditures, short-term bonds or cash equivalents are typically your best alternative.
One of the most significant risks long-term investors face is that their investment portfolio won’t keep pace with inflation. Before even considering withdrawals, you need a rate of return at least equal to inflation for your funds to maintain their value in real terms over time. If you expect your portfolio to grow in value in real terms, you need returns that are higher than inflation.
Stocks are inherently more risky than bonds, but they also offer the potential for greater returns. If you can keep your money invested for the long term, you can ride out market fluctuations like stock market ups and downs. But when it comes time to withdraw money for items like a new house, your child’s college education, your daughter’s wedding, or for annual retirement expenses, you may want investments that are less risky.