No. of Recommendations: 3
I think another thing worth mentioning is never to buy a bond or bond fund with a negative prospective real return.
Which is almost all of them in the recent era.
There is no reason to take on return-free risk. Disregard out-of-date advice that hasn't adjusted to the times.
All this is good advice. Never buy anything with almost-certain projected negative real returns.
I just want to caution, don't buy bonds for UNcertain positive returns either. A lot of junk bonds and funds looks good if you consider only the last 10-15 years' performance. But that is because unltra-low interest rates helped not only with the interest rate risk but with default risk as well. That won't be true if interest rates are normal.
To recap, bonds have these risks:
Interest rate risk: risk that REAL interest rates will rise. Mitigation: keep some cash or close-to-0 duration bonds (like floaters).
Inflation: risk that inflation and hence NOMINAL interest rates will rise. Mitigation: same as above but better yet, buy some stocks (broad index ETFs/funds, of course :-))
Default: risk that your bonds won't pay 100c on the dollar. Mitigation: buy AAA (typically < 4% default, good recovery in default) or slightly worse investment grade bonds, avoid junk bonds, buy treasuries unless Trump will be president (he was OK with US defaulting, big surprise!)
Liquidity: only a theoretical risk now, that your bonds won't find buyers when you want to sell. But the GFC proved that bond funds DO provide liquidity even when individual bonds do not, even under stressful conditions. So just make sure to NOT buy bespoke bonds or bond funds.
Maturity: risk that you lock up your money longer term and can't take advantage of short term rate fluctuations. Mitigation: spread durations in your bonds or bond funds.
All well-known to everyone here on the board, of course. Bonds are for ballast, stocks are for speed, don't chase yield, yada yada.
My hidden agenda is to just get y'all thinking about fixed income as a viable alternative (not in terms of returns but in terms of intangibles) to stocks. This is a recent development for most of us, after the long "Greenspan put" era from 1995 to 2021. (Bernanke did try raising rates in 2004-5 but backed down quickly and went back to his helicopter.)
