What Bond Liability Means For Your Retirement Plan
Bond prices are sensitive to interest rate changes, and bond duration is a measure of just how sensitive. For instance, if a increase in interest rates from 2% to 3% caused a bond’s price to fall by 8.5%, the bond would have a duration of 8.5, meaning that a 1% rise in interest rates leads to an 8.5% drop in price.
Do You Need to Diversify Your Bonds?
We spend a lot of time talking about the importance of diversification. We have to look at bonds a little differently; they come with different risks than stocks.
Do You Understand How Bonds Work?
Before we can discuss bonds in depth, it is important that we establish a common understanding of what bonds are and how they work. As a starting point, a bond is a contractual obligation to make a series of specific payments on specific dates.
3 Ways To Incorporate Bonds Into Your Retirement Strategy
Bonds can be incorporated directly into a retirement strategy in three broad ways:
1. An assets-only approach to build a total returns investment portfolio,
2. Matching the duration of bond funds to the duration of the retirement liability, and
3. Holding individual bonds to maturity to generate the desired cash flows to fund expenses on an ongoing basis throughout retirement.
Understanding Bond Returns
Bonds may not be as flashy as stocks, but they form the bedrock of your portfolio, so you should understand how they work.
Which Retirement Spending Strategy Is Right For You?
Deciding on the right retirement spending strategy for your particular situation is both incredibly difficult, and incredibly important. There are huge numbers of reasonable options, but how do you know which is right for you? The answer depends on several factors.
Retirement Spending And Required Minimum Distributions
One final spending rule serves as a reasonably easy way to implement an actuarial method for retirement spending. Actuarial methods generally have retirees recalculate their sustainable spending annually based on the remaining portfolio balance, remaining longevity, and expected portfolio returns.
Diversification Works In A Crisis (But It Doesn’t Work Miracles)
There are a lot of myths about diversification. Today, I want to address a pernicious lie floating around out there that diversification only works when times are good.
How Does Diversification Actually Work?
Diversification is a good thing. Nearly everyone agrees that it’s just about the only free lunch in finance.
But not many people stop and think about how diversification actually helps them, beyond the general “don’t put all your eggs in one basket” argument.
A Simple Way To Keep Your Portfolio In Line
Investing isn’t simply picking the best funds or building your perfect portfolio. Keeping your portfolio in line over the long term is just as important (if not more so).
