News

Should You Be Looking at Bonds Rather Than Stocks?

With the S&P 500 index having dropped 18% this year, conventional wisdom has it that you should take advantage of the opportunity to buy stocks at bargain prices.

But at least for investors over 60, you can make a case for buying bonds — bonds you will hold to maturity, that is.

Stocks can bounce back at any time. But they also could produce zero return for the next 10 years, as they did from 2000 to 2010.

Some of that would simply represent a reversion to the mean. The S&P 500 has returned an annualized 13.94% over the past 10 years, above the 10.5% return the index generated from its inception in 1957 through 2021.

Zero return for stocks over the next decade would represent a problem for older people, who might want to cash out some of their stock money at that point.

Fully Weighted on Stocks

Plenty of older people are fully weighted in stocks after the outsized gains of the past 13 years and are overweighted in cash. I’m one of them.

We’re overweighed in cash because we didn’t want to put our fixed-income allocation to work in safe bonds that yielded under 2% when the Federal Reserve’s official rate was near zero.

I personally had the bulk of my nonretirement cash holding in an online savings account yielding just 0.5% over the past couple years.

Scroll to Continue

But now, with inflation raging and the Fed raising rates, you can get safe bonds and certificates of deposit with yields exceeding 3%. So it’s tempting to start going back into bonds. You don’t even need to make a long-term commitment. Three-year Treasurys recently yielded 3.21%.

If you hold the bonds until maturity, you don’t have to worry about bond prices falling. You’ll get back par value for the bond, unless the U.S. government defaults on its debt, which is extremely unlikely.

Diving Into Treasurys

You wouldn’t be the only one taking a plunge into Treasurys. During the four weeks ended May 25, investors sent a net $20 billion into mutual funds and exchange-traded funds that concentrate on ordinary Treasurys, according to Refinitiv Lipper, as cited by The Wall Street Journal.

Looking at CDs, as of this writing on June 9, their rates haven’t yet reset in reaction to the 8.6% rise in consumer prices reported the same day.

So as of June 9, a three-year CD offered by BMO Harris on Fidelity Investments’ web site yielded only 3.15%. That’s less than the three-year Treasury.

But CDs generally yield more than Treasurys, as the former are a bit more risky. So watch for CD yields to rise. The CDs are riskier because they’re insured by the Federal Deposit Insurance Corp. as opposed to Treasurys being fully backed by the U.S. government.

You also might consider double-A corporate bonds. A three-year note offered by Apple (AAPL) – Get Apple Inc. Report recently yielded 3.39%.

So for some of us, bonds aren’t a bad investment choice at this point.

What's your reaction?

Excited
0
Happy
0
In Love
0
Not Sure
0
Silly
0

You may also like

Leave a reply

Your email address will not be published. Required fields are marked *

More in:News