Quote:
Originally Posted by booztedgt
I am completely debt free...I'm 29, have about 3 mon of income in savings accounts, and already put in 15% of my paycheck into a 401K (plus $4K for a roth IRA). I've never dabbled into bonds at all; do they pay more than the 4.5%-5% I'm getting out of money market accounts? I'd like to own a home again within the next couple of years...just depends on whether or not I stay in DC. Thanks for all the advice!
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Bonds have two risks
1) interest rate risks (yield)
2) principal risks
As interest rates rise, the principal goes down and the yield goes up.
As rates fall (the current environment), principal goes UP and yield goes down.
What I would look for is the total return (yield+principal changes) to exceed 6%. Intermediate term or short term bonds funds would be best.
My favorate bond fund is T Rowe Spectrum Income RPSIX. It holds 20% stocks and 80% cash and bonds. This is a fund of funds (it holds other mutual funds)
The equity position is in PRFDX, which is dividend paying stocks
The bond position holds high yield, government, corporate, foreign government, emerging markets and real estate bonds. It's long term return is between 6 and 8% depending on 5 or 10 year periods you evaluate.
The risks described above are also compounded by
1) currency risk (you get this with any international investment)
2) equity risk/market risk (fund is 20% equities)
For these risks, an 8% return in bonds is quite good overall. I would be hard pressed to find a single bond fund which has an 8% return over a 5 or 10 year period. If you go with a single bond fund, you will eliminate some of the risks mentioned here, and probably lower return by 1-3% over 5 year periods.
Rates change quite a bit in 5-10 years. 8 years ago I bought a house and rate was 8.125%. 2 years ago I bought a house and rate was 6.125%. Rates are now 5.875% I think on similar mortgage products. I mention this so you know even in short and medium time frames rates change often (they have gone up, they have gone down, then gone back up, then gone back down in 8 years).
And money markets have not historically had 5% yields. So the 3-4.5% yields of money markets now are more normal with risks being taken. Money markets only have interest rate risks (IMO). Bonds have additional risks (principal risks too), for the added risk you can get a higher return.