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Tue September 20, 2011
Nervous about stocks? Buy bonds!
If you’re spooked by the volatile stock market, you may want to put your money into bonds.
On this week’s Money Matters, financial commentator Greg Heberlein tells KPLU’s Dave Meyer that short term U.S. Treasury bonds are a safe bet.
Historically, stocks always do better than bonds in the long run. But if you’re having trouble sleeping at night because of the turbulent market, or you’re over 55 and worried about locking in your retirement money, consider bonds.
You're buying them for the security, not the profit:
Bonds currently pay extremely low fixed rates. As of 9/19/11, one year Treasuries yield a mere 0.08%, and five year Treasuries yield just 0.85%.
How to buy them?
"Stair-step" your way in, buying some bonds now, more next year, more the year after that. If you sit on cash in between, then sit on it. Figure you’ll lose little if any return while stuffing it under the mattress to get a good night’s sleep.
What kind to buy?
In the coming months, buy bonds that are shorter term, one to three years. The Federal Reserve already has said it will keep historically low interest rates for two more years. As interest rates hiccup ahead, two or more years down the road you’ll have the cash from maturing Treasury bills to buy higher interest Treasuries.
Use the "laddering" strategy:
Laddering is the bond-market term for spreading out maturities over a period of years. Depending on your financial expectations, laddering suggests you buy bonds maturing in various maturities, say three years, five years, seven years, etc. That way you spread out the amount of return you get – longer bonds pay more – and you spread out when the money comes back to you.
Since safety is the goal, buy only U.S. Treasuries:
Stay away from corporate, municipal and foreign issues, which can go bankrupt. Stay away especially from bonds paying substantially higher interest. They are called junk bonds for a reason. All of those types are for investors with huge amounts of cash who are willing to put a small sum at risk. And avoid bond funds, where complicated trading patterns can damage your returns.
What about a bank account?
On the other hand, you could do what Dave did and park some cash in a bank savings account or CD that is insured by the FDIC. Some banks offer one year CDs that pay 1.1% interest. You can also find savings accounts that pay up to 1%. Rates this high are scarce at local banks, but you can find them by shopping around online (bankrate.com is a good place to start). Just be sure not to invest more than the $250,000 limit for FDIC insurance coverage.
“Money Matters” is a KPLU feature covering the economy, investments and more. The feature is published here and airs on KPLU 88.5 during Morning Edition and All Things Considered on the second and third Tuesdays of the month. It also airs on Weekend Saturday Edition.