Too Young For Investing in Bonds?

9 May, 2009  |  Written by  |  under Investing, Personal Finance Articles

I recently saw some debate on another personal finance blog about an issue that has crossed my mind several times over the years.  The issue is:  is there such a thing as being too young for investing in bonds?

I’m totally on board with the idea of diversifying your holdings, but come on, bonds seem like an investment your grandmother would make!  To be fair, I’m still about 30 years away from retirement, so it seems like I should be risk-seeking at this point to a large extent.  But, by one “rule of thumb” that I’ve heard about (your age as the percentage of bonds) I should have over a third of my holdings in bonds already!  Really? I just can’t see that with so much time left until retirement.

I am specifically thinking about my 401(k) — and there is a difference between owning bonds and owning shares of bond mutual funds.  When it comes to bond funds, they have not been immune to the economic times we are in either (See Older Investors Should Examine the Risks in Bonds).  So, it seems to me that younger investors might just as well go ahead and have the potential upside of a higher risk investment, rather than limit their return to bonds and still have some downside when the economy goes down.

Now, I could see maybe a third of my portfolio in index funds — maybe.  Assuming that the current economic recession lasts less than ten years, and we go back to the historic trend of “ever upward”, investing in index funds seems like a decent strategy for part of my portfolio.

In any event, it seems to me that I could still be in higher-risk funds now and start re-balancing my investments ten years or so before retirement and still be o.k.  However, I’d love to hear some of our readers’ thoughts on this issue.

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2 Responses so far | Have Your Say!

  1. SaveIt  |  May 10th, 2009 at 10:16 am #

    Great post SpendIt. I agree with you regarding bonds. But, I don’t think that I agree with you regarding Index Funds. I think that they are a great way to invest in equities.

    I like to invest in an S&P 500 Index fund and a Russell 2000 index fund. I think that this provides some diversity between large cap stocks and small cap stocks.

    The other great thing about index funds is their low management fees. Picking a winning mutual fund is a crap shoot. You might as well get low management fees.

    SaveIt - Gravatar
  2. SpendIt  |  May 10th, 2009 at 4:40 pm #

    I’m not saying I don’t like index funds, I was just saying I’m not sure if I want 30-40% of my money in index funds right now. I like the idea of some money in index funds, and fully agree that the low management fees are a plus.

    SpendIt - Gravatar

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