Column Archive Money Magazine Ask the Expert by Walter Updegrave Get your bond fix - the easy way An experienced investor is confident in his diversified stock portfolio - but where do bonds fit in? By Walter Updegrave, Money Magazine senior editor October 31 2006: 1:54 PM EST Sign up for the Ask the Expert e-mail newsletter NEW YORK (Money) -- Question: As aggressive savers and investors, my wife and I, who are 50 and 48 respectively, have accumulated a significant diversified portfolio of stocks. What we lack are bonds, and I have zero experience in this area. I put some money in a bond fund a few years ago, and it went down immediately. My wife and I are positioned to retire in five to 10 years, so I know we need some bonds to protect us in the event of a market meltdown. But I'm feeling intellectually paralyzed. Help! - Anthony S., Honolulu, Hawaii Answer: I understand perfectly. When you were younger, so much younger than today, you never needed anybody's help in any way. But now those days are gone and you're not so self-assured. Now you find you've changed your mind, you've opened up the door. More from Money Magazine Correcting your credit report gets easier Cut your cooling costs by 30% or more After Obamacare's launch, a look ahead Best Places to Live Current Issue Subscribe to Money Top things to know Why bonds? How bonds work Types of bonds Sizing up risks Buying bonds Mutual Fund Screener Domestic Stock Funds Select to Activate Large Growth Large Blend Large Value Mid-Cap Growth Mid-Cap Blend Mid-Cap Value Small Growth Small Blend Small Value Bear Market Search the full range of fund types Return of at Least: Any 3% 5% 7% 10% 15% 20% Over the Past: All 1 Year 3 Years 5 Years 10 Years Expense ratio less than: Category Average 2% 1.5% 1% .5% More Tools Millionaire calculator Rate of return calculator Asset Allocator

Oops, sorry. That final plaintive plea at the end of your question hurled me into a Sixties time warp and suddenly I couldn't get the Beatles' "Help!" lyrics out of my mind. Not to worry, though. I'm happy to help you get your feet back on the ground - and your portfolio in shape for your looming retirement.

First of all, you should know you're hardly alone when it comes to being mystified by the workings of bonds. In many ways, the bond world is like looking through a Glass Onion where what we think of as economic reality gets distorted.

For example, most of us hate to see the economy go into recession. But the bond crowd, as the saying goes, likes a recession and loves a depression. That's because interest rates tend to fall in a stagnant economy. And since interest rates and bond prices are like two ends of a see-saw, falling interest rates mean rising bond prices - and rejoicing among bond investors (as long as companies and governments keep making those semi-annual coupon payments).

And then there are all those arcane terms: calls, premiums, discounts, coupon, zero-coupon, maturity, duration...it's enough to make you Cry Baby Cry.

Well, relax. There are plenty of ways to get the benefits you need from bonds without having to become a bond expert. That said, learning about how bonds work and what some of the lingo means never hurts. So before you do anything, I suggest you take a look at our MONEY 101 lesson on Investing In Bonds. You might also want to check out a bond site that, appropriately enough, is also called Investing In Bonds. Run by The Bond Market Association, the site has a lot of good tutorials and articles about bonds and plenty of data for people who want to get into the nitty-gritty of bond investing.

But let's Get Back to some specific Help! for you.

Basically, between now and retirement you want to transition to a less volatile portfolio by dialing back the percentage of equities in your portfolio and increasing the amount in bonds. There's no specific figure for how much ought to be in bonds vs. stocks. But as a general rule, I'd say that by age 60 or so, you probably want somewhere between 40 and 50 percent of your portfolio in bonds.

As you age, you can then continue to increase your bond exposure, so that by age 70 your bonds represent 50 to 60 percent of your portfolio and by age 80 maybe 30 to 40 percent.

These are general guidelines. The figure that's right for you will depend on how much risk you're willing to take, what other sorts of resources you have (Social Security, other pensions, income from an annuity, etc.) and how much money you have (if you're really loaded and a short-term setback in the market won't seriously affect how much money you can draw from investments, then you can afford to be more aggressive, if you wish).

But the two most important things to remember are: first, you don't want to go into retirement with too aggressive a portfolio; and second, while there's a place for bonds in your portfolio leading up to and even after retirement, you still want to keep some of your savings in stocks in order to provide some growth to maintain the purchasing power of your portfolio.

Okay, so what should you buy to get whatever amount of bond exposure you feel is right for you?

You could go with individual bonds, but generally that's a hassle and can be expensive unless you're investing, say, $50,000 or more. The exception is Treasury bonds, which you can buy directly from the U.S. Treasury, but even there I'm not sure it's worth the effort for most people, especially if you want to reinvest your bond interest payments.

So for most people I think mutual funds are the investment of choice for bonds. With funds, you could put together a portfolio of your own combining funds with short- or intermediate-term maturities that invest in government or high-quality corporate bonds and maybe even some high-yield bond funds.

But the easiest way to go - and a way I think makes good investment sense - is just to go with a total bond market index fund. You get virtually the entire investment-quality bond market in a single fund. And since you're buying an index fund, the annual expenses are extremely low, which is always a plus but particularly so for bond funds since higher expenses exert a bigger drag on bonds' generally moderate returns.

(For recommendations of specific funds you might consider, see the bond funds in the MONEY 65.

You don't have to pull off this move into bonds all at once. In fact, you're better off making the transition over several years. You can start by putting any new investment dollars into bonds. If it appears this approach isn't going to give you enough bond exposure by the time you're ready to retire, you can always start selling some of your stock funds and plow the proceeds into bonds. You can do this as part of the process of annually rebalancing your portfolio.

To the extent you can, try to confine these moves to tax-deferred accounts like 401(k)s and IRAs so the Taxman doesn't siphon off any profit on the sales. But if you must sell stocks or stock funds in taxable accounts, then look for opportunities to mitigate the tax bite by selling shares that will trigger losses or only small gains.

If you do all this over the next five to 10 years, I've Got A Feeling things will Come Together quite nicely and, financially at least, you'll be Free as a Bird in retirement.

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