Bonds are generally considered the cushion for retirement portfolios in case of sharp stock fluctuations. While it’s true that bonds have less potential to generate the growth that stocks are capable of, they carry much less risk to your nest egg.
But with U.S. Treasury 10-year bonds yielding only around 2.7% as of 2022, does it make sense to include bonds in your retirement portfolio? Let’s look into retirement portfolio bond strategies.
How Do Bonds Work Anyway?
Occasionally called fixed-income instruments, bonds represent a loan made by an investor to corporate or government entities. Bonds are correlated with interest rates and market conditions, so prices and yields don’t typically dip too much over time.
Bonds are meant to be a little boring. They pay interest regularly to deliver predictable income, come with few risks, and offer security to retirement portfolios. Even in years when U.S. Treasury bonds may lose money, for example, bonds are generally stable over time.
What About Stocks?
When bond yields come in low and don’t return much after inflation, it’s easy to see why investors might opt for higher-return potential stocks. However, the stock market is more vulnerable to market lows and highs.
Stocks can help grow your retirement portfolio, but you also risk significant loss when you invest in them. Unless you have nerves of steel and are comfortable losing some of your nest egg, building an all-stocks retirement portfolio might not be the best option.
Diversify Your Retirement Portfolio
A solid retirement portfolio instead aims for a diversified build that includes bonds for long-term stability and stocks for growth. By securing bond investments, you can still have years of cash flow available even in volatile stock markets.
As you get closer to needing to use your portfolio funds, it’s important that they’re actually available. If the stock market is tougher on investors, bonds make sure that you can tide yourself through rough patches.