Beware of Bonds
There are different methods to invest using bonds, and many think this may be a smart move.
Using Bonds To Invest
When markets are volatile, like they have been this year, conservative investors tend to try to move more of their accounts to bonds, to reduce risk. (Read more about using bonds to invest in our blog post here.)
The problem with that is that bonds are not risk-free.
Wharton’s finance professor Jeremy Siegel recently did an interview on CNBC and he issued a warning to bondholders.
“Expect inflation to rise significantly over the future years.”
“There’s no free lunch in this, the people that are going to be hurt the most will be the bondholders. Their purchasing power is going to be diminished.”
So, what do you do?
You have the banks with CDs or money markets that are paying hardly anything right now, we call this “yellow” money.
You have the stock market where bonds are the less risky option, we call this “red” money.
But there is another option in the middle, “green” money.
You give up some liquidity in the early years and some upside potential, but you eliminate losses due to market volatility.
There are three green money rules: Protect your principal, retain your gains, and guarantee an income if you choose.
A word of caution – Don’t make a decision in a vacuum.
You always want to look at how one aspect of your financial life affects all the other aspects.
What you do in investments can affect your taxes and it can affect your cash flow, your retirement income.
This is what professor Jeremy Siegel was talking about.
This is significant for people who retired or are entering retirement and are needing to use their portfolio to create a retirement income.
Before you invest using bonds to have less risk, be aware of the effects that could have on your financial future.
Make sure that you are making a decision that is coordinated with all aspects of your financial life to ensure that your retirement hopes, your goals, and your income all remain secure.
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