You should never outgrow your sense of adventure—except in how you invest as retirement comes into view. That’s when you trade the risk of aggressive growth for the security of predictable income that will last and help you plan the kind of retirement for which you’ve worked and dreamed.
A stock-focused portfolio is ideal when you can tolerate more risk for more gain—and have the time to bounce back from any performance dips. As you approach retirement, bond-tilted investments ease back on “changeable” growth and lean into stability.
You may wonder why a bond works the way it does—so let’s take a look under the hood.
What is a bond?
Companies or other institutions essentially sell their debt to buyers in the form of bonds. Basically, you, the buyer, are making a loan to the issuer, who pays you interest over its term with the promise of paying back the loan’s face value when it matures.
Let’s look at some of the terms in that sentence with which you should be familiar if you’re going to invest in bonds:
- Interest rate—The percentage of the bond's face value that it pays in interest each year.
- Term—The amount of time until the bond reaches maturity.
- Face value—The amount the bond will pay when it reaches its maturity date.
- Maturity date—The date the issuer promises to pay you back.
How do I invest in bonds?
Bonds can be purchased individually or as shares of a bond mutual fund. Many investors prefer mutual funds because they offer professional management and convenient, low-cost diversification.
What are my risks?
Although bonds are generally more stable than stocks, they are still investments that carry risks, most notably interest rate and credit.
- When overall interest rates rise, so do the rates of new bonds. While the rates of existing bonds don’t change, they do become less appealing to buyers, resulting in a price decline. Typically, interest-rate risk has more of a value impact on longer- than shorter-term bonds.
- Credit risk varies from issuer to issuer and represents the chance that you won’t get your payments on time. Issuers are just like the people you can and can’t trust to pay you back the $20 they borrowed: U.S. Treasury bonds have virtually no credit risk, while high-yield bonds issued by entities with poor credit ratings have relatively high credit risk. There is a plus to uncertainty: In exchange for the greater credit risk, you generally get access to higher interest rates.
Look to bonds when the future is in sight.
Stocks and bonds have a place in every portfolio—but how you balance them changes with where you are in life. Whether you’re just starting out, in the middle of your journey, or approaching retirement, the best place to turn to help you find the “happy medium” is your trusted advisor.