Q. I don't know how to invest in bonds. I am in my late 40s. My portfolio primarily consists of equities (individual stocks and mutual funds), but I also own a rental house and have a growing amount of cash equivalents in CDs and money market funds. I should probably start steering some investments away from equities and into bonds as I get older.
Bond funds have interest rate risk, and when the economy picks up we can expect interest rates to rise, causing a loss of principal. I remember how badly people got burned in bond funds in the 1990s. I don’t want to put money in a "fixed-income" investment that is certain to lose principal when interest rates rise. Does this mean I should consider buying individual bonds? How does one choose which bonds to buy? —G.G., Austin, TX
A. No, you probably shouldn’t consider individual bonds. They have interest rate risk, too. If interest rates rise and you are holding a bond that yields 4 percent, the value of that bond will decline. How much it declines will depend on how far from maturity it is— the longer the maturity, the greater your possible loss if you sell.
While individual bonds have the same interest and credit risk issues that bond funds face, there is a significant difference. If you own an individual bond, it has a maturity date. That’s when you get the original face value of the bond back.
You’ve got two basic choices here. Neither is attractive. You can be safe and invest very short term at the expense of having a pathetic yield. Or you can take risk and get a somewhat less pathetic yield by investing long term. You will, however, face the kind of risk bond investors faced in the ‘70s.
Today, for instance, government money market funds yield virtually nothing. Long-term corporate bond funds yield about 5.8 percent.
Unless you have a large portfolio and investing knowledge, you are better off investing in a bond fund. A rising number of exchange-traded fixed-income index funds is making fixed-income fund investing more attractive by reducing fund costs. The expense ratio for the Vanguard Total Bond Market ETF, for instance, is only 0.14 percent.
Q. I am 57 years old and want to purchase a $150,000 to $200,000 term life insurance policy benefiting my wife. Where should I go to search for affordable policies? Also, how many years should I look to lock in for such a policy? —D.P. by email from Austin, TX
A. If you go to insure.com or selectquote.com, you can get online quotes keyed to your age and medical condition. The quotes will also be for a variety of term periods such as 10 or 15 years. The term of the policy should be determined by the period of time that you expect to need life insurance coverage.
Remember, the main purpose of life insurance for most people is to replace all, or part, of earning power in the event of death. So at 57 you might need to consider college tuition for children, mortgage payoff amounts, and a substitute for Social Security benefits between the time your children leave home and your wife is eligible for benefits.
Your need for life insurance will decline as you get closer to retirement. It’s a pretty good bet that you should have outgrown your need for life insurance by the time you are 67 because you’ll probably be retired.
One possible wrinkle here, which would require talking with a life insurance planner, is that if you are eligible for a corporate pension, you could build cash value in a universal life policy now with the goal of taking a single-life pension benefit. The idea would be to have the life insurance to replace the pension income when you die. You’d do this because the pension benefit for a single life is higher than a joint and survivor pension benefit. This works best for people with plenty of room for saving.
Research has shown that while most people in their 30s and 40s have far too little life insurance, some people in their 50s are overinsured— they have more insurance than needed to protect their families’ standard of living.