Bonding Time

Bonding Time

March 19, 2024

Review the Potential Benefits of Bond Funds in Your Investment Strategy

When investing for retirement, many people choose a strategy that primarily includes stock funds. Although they represent a higher degree of risk, they offer the most potential for growth over the long term. During these times of economic uncertainty, however, you may be questioning your tolerance for risk. Will interest rates rise again, stay the same or start to fall? How will the stock market react? Having an appropriate exposure to bond funds can help ensure you’re properly diversified no matter what happens.

A portfolio that includes an appropriate mix of both stock and bond funds is a smart retirement plan investment strategy.

Similar to stock funds, bond funds are collections of bonds that are managed by a professional fund manager. They can provide investors with a steady stream of income, diversification and lower risk than stocks. Here’s a closer look at the key benefits of bond funds:

  • Steady income. Bond funds can be a good option for those who are close to (or in) retirement and want to preserve their capital and generate income through a fixed rate of interest. The interest payments can help supplement other sources of income, such as Social Security, pensions or annuities.

  • Diversification. Bond funds can help diversify a portfolio by reducing the overall volatility and exposure to stock market fluctuations. Bonds tend to have a low or negative correlation with stocks, meaning they often move in opposite directions. This feature can help smooth out the returns and reduce the risk of losing money in a market downturn.

  • Lower Risk. Bond funds are generally less risky than stocks, as they have a lower chance of defaulting or losing value. Bond funds are also regulated and transparent, making them easier to understand and monitor. However, bond funds are not risk-free and can still lose value because of interest rate changes, inflation or credit quality issues.

There are different types of bond funds that suit various risk profiles and investment goals. Some of the common types of bond funds are:

  • Treasury Bond Funds. These funds invest in bonds issued by the U.S. government, which are considered the safest and most liquid bonds in the world. They have very low default risk, but also low yields. They can be good for capital preservation and hedging against deflation.

  • Corporate Bond Funds. These funds invest in bonds issued by corporations, which are riskier but offer higher yields than Treasury bonds. They can be good for generating income and diversification, but they also have higher default risk and are sensitive to economic conditions.

  • Inflation-Protected Bond Funds. These funds invest in bonds that adjust their principal and interest payments according to the inflation rate. They can be good for preserving the purchasing power of money and hedging against inflation, but they also have lower nominal yields and higher volatility than nominal bonds. International bond funds. These funds invest in bonds issued by foreign governments or corporations, which can offer potentially higher returns and diversification through exposure to different economic regions. However, they also have higher currency risk and political risk than domestic bonds. When choosing bond funds for your retirement savings portfolio, consider your risk tolerance, time horizon, income needs, tax situation and overall asset allocation. You should also compare the fees, performance, ratings and holdings of different bond funds to find the ones that match your criteria and objectives.

Informational Sources: Comprehensive Guide to Investing in Bond Funds (SmartAsset, August 17, 2023); What is a Bond Fund? How it Works, Benefits, Taxes, and Types
(Investopedia, April 18, 2022)

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Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. Investment Advice and 3(38) Investment Fiduciary services offered through Diversified Financial Advisors, LLC, a Registered Investment Advisor. 3(16) Administrative Fiduciary Services provided by PISTL Service Corporation. Discretionary Trustee services provided by Printing Industries 401k Trustees. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. 

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