Top 3 Bond Investing Mistakes - Ep. 137

Feb 28, 2019

This week’s theme is investing in bonds.

Bonds will likely be a critical component for your investment portfolio in retirement, so this week I’m sharing with you what I’ve learned from working with clients over the last 11 years, and buying and selling upwards of $100 million dollars worth of bonds.

Today, I’m going to share with you the 3 biggest mistakes that I see over and over and over again when I review people’s bond portfolios. When I talk to prospective clients, I have the opportunity to look under the hood of their portfolio, and when I see people make blunders with their bonds, it usually falls into 1 or more of 3 categories:

1. Owning bonds that are too risky
2. Reaching out too far for income, and
3. Having too much or too little in bonds

Let’s break down each one of these:

1. Owning bonds that are too risky. Think General Motors or Puerto Rico bonds. Credit quality or in other words the likelihood of default are very important factors when selecting bonds. If you buy individual bonds and the issuer files bankruptcy, you can kiss your money goodbye in most cases, so its important to keep a close watch on credit quality. Bonds have ratings to indicate their quality or likelihood of default, so watch those ratings carefully, especially if you own individual bonds.
2. Reaching out too far for income. Here’s what I mean by that - you might buy a bond that’s maturing in 30 years because it’s paying you 6% or 7% a year in income, but when rates climb higher, you can expect that the bond price will drop - and it could drop by 10-20% or more, so don’t be tempted to reach out too far into the future for income.

 

• Having too much or too little in bonds. We talked about this yesterday when I gave you some guidelines to consider when building your bond portfolio for retirement. By far, what I see most often is that a retiree has too little in bonds and too much in stocks. So be sure to look at your overall mix of stocks and bonds and ask yourself if you could afford to lose 25-30% or more in the next recession because you had too much in stocks.

 

That’s it for today. Thanks for listening! Tomorrow we’re going to talk about my favorite way to invest in bonds - the bond ladder.

My name is Ashley Micciche and this is the One Minute Retirement Tip.

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