Money Fix: Investing in bonds
Bonds of all sorts have not done what the experts predicted. But it pays, as always, to be wary when investing, experts say. Credit: iStock
Ignore the investing noise. After the Fed announced last year it would scale back its easy-money policies, bond prices were supposed to plummet this year. But the Barclays U.S. Aggregate bond index, a broad measure of the U.S. market, is up 4 percent.
"Trying to predict what the bond market will do next has proven to be a fool's errand," says Carolyn Bigda, a writer for Kiplinger's Personal Finance in Washington, D.C.
WHAT'S DRIVING THE BOND BOOM? "Inconsistent signals about the economy, and inflation has been benign," says Andrew Grossman of JHS Capital Advisors in Plainview. Stock market volatility has driven some people to bonds, which can be less risky than stocks, though they also produce lower returns.
WHAT ARE THE RISKS? Interest rates are at historically low levels, and as rates rise, bond prices fall. "Expect some volatility in the bond market as rates move back up to more normalized levels," Grossman says.
But if you own individual bonds and hold them until maturity, "the income stream remains the same, and your principal is returned to you at maturity," says Bill Walsh of Hennion & Walsh in Parsippany, New Jersey. Bond fund owners could see capital losses since bond prices within the fund would fall.
ALL BONDS ARE NOT EQUAL. Bonds go beyond U.S. Treasurys. For example, there are corporate and municipal bonds. Know the pros and cons of each, and be clear why you're buying. Walsh says, "Most bond investors do so to satisfy their income needs with low risk."
