Retirement mistake no. 4: Believing all bonds are safe
Sep 8th 2009 12:00PM
Updated Dec 4th 2009 3:14PM
Retirement mistake #4 is believing that all bonds are safe.
While all men and women are created equal, the same is not true of bonds. Many retirees learned this lesson the hard way.
Here's a golden rule that will keep you out of "bond hell": If a bond offers a higher return, it always means you are assuming more risk. There are no exceptions to this rule.
Here are some tips to keep your bond portfolio safe:
- Don't buy individual bonds. Remember WorldCom? It had great ratings before it filed for bankruptcy, leaving its bond holders holding the bag.
- Don't put unquestioned faith in municipals. True, municipal bonds have a low default rate. However, in 1991, more than $8 billion municipal bonds defaulted. In 2008, the town of Vallejo, Calif., filed for bankruptcy.
- Buy low-cost bond index funds. Vanguard's Total Bond Market Index Fund (VBMFX) is a good choice. It invests in more than 3,000 bonds representative of the broad, U.S. investment-grade market and has a low expense ratio of only 0.22 percent.
Bonds should be the ballast of your portfolio. Make sure they can float.
See all ten of the biggest money mistakes a retiree can make.
Dan Solin is the author of the newly published book, The Smartest Retirement Book You'll Ever Read (Perigee Books 2009). His prior books include the New York Times bestsellers, The Smartest Investment Book You'll Ever Read and The Smartest 401(k) Book You'll Ever Read. See SmartestInvestmentBook.com. Read more about Dan Solin.