Q: I am 50 and I'm realizing I should have owned more bonds and less stocks. Should I buy bonds through mutual funds, exchange-traded funds (ETFs), money markets or should I buy them from the government?
A: Many investors who thought the only investments were stocks are getting an education from the bear market.
At the risk of sounding like a broken record (or a financial journalist), the market bloodbath is another example of why bonds fit into your portfolio.
Consider the performance of Vanguard's Total Bond Market exchange-traded fund (BND). Over the past 52-weeks, BND has fallen less than 5%. And the ETF yields about 5% annually, meaning had you bought BND, you'd be flat right now. Not too shabby considering we're in one of the worst bear markets for stocks in U.S. history. Over that same period, the Standard & Poor's 500 ETF (SPY) is down 45% — and it only yields 2%.
Over the long term, diversified bonds generate returns, on average, of 4.93% a year, says IFA.com. You're right, that's far from the 9.5% average historical returns of U.S. stocks. But it sure beats a savings account.
And the risk level of a diversified basket of bonds, as we've been reminded of lately, is much less than the risk of stocks. It's not a bad tradeoff. And that's why nearly all investors should have some bonds in their portfolio to help smooth out the bumps.
Don't get me wrong. Over the long term, stocks are the best bet. But, they can give you an ulcer in the short term, or worse, cause you to take action you might regret later.
As you point out in your question, there are many ways to buy bonds. The easist way is to buy shares in a bond mutual fund or exchange-traded fund (ETF). This method is simple because you buy one investment and you're instantly diversified among many bonds. You can buy bond funds that invest only in super safe Treasuries or bonds issued by municipalities or companies.
There are also bond funds that invest in all types of bonds. Another huge advantage of bond funds is that they handle laddering for you. In another words, they invest in debt securities that mature at different times.
As these investment mature, they are replaced. This laddering reduces some of the interest rate risk you face with bonds. If you don't know anything about bonds, and don't care to learn, then bond funds might be the best avenue for you.
With that said, there are times when bond funds might not be ideal. If you're interested in buying government debt, you can do it yourself for lower fees. If this is what you want to do, sign into treasurydirect.gov.
There are great resources online to learn more about bonds. A good place to start is investinginbonds.com. On the right side of the page, under Learn More, you can learn about different types of bonds and the different ways to invest in them. I recommend reading this site before making your decision.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com.
