Stocks have become expensive, while bonds have become cheaper, prompting a reassessment of investment strategies. Vanguard Group recommends shifting from the traditional 60% stock and 40% bond portfolio to a 40%-60% allocation. Despite stocks generally offering a higher return premium over bonds, the reduced premium now makes bonds more appealing given recent market conditions.
This transition involves selling stocks to invest in bonds or bond funds. Investors should consider four key questions when selecting bonds: 1) Duration: Decide how long you want to invest and match it with fund duration; shorter bonds allow for reinvesting if rates increase. 2) Credit Risk: Balance safety and yield by considering credit quality; high-rated bonds are safer but offer lower returns. 3) Inflation Protection: Consider nominal vs. TIPS bonds; TIPS provide better protection against inflation. 4) Bonds vs. Bond Funds: Funds offer diversification and ease but could have higher costs compared to individual bonds.
The article reinforces the notion that while individual bonds may be suitable for significant investments held long-term, bond funds are generally more accessible and practical for most investors.
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