By Brett Arends
When the world is going crazy it’s helpful to talk to someone sane
You’re over 50 and still working. Or you’re over 50 and you’re retired.
And either way you’ve got a large chunk of your investment portfolio in bonds, particularly U.S. Treasury bonds, because that’s what all the experts told you to do.
And now, with all this turmoil, you’re suddenly getting nervous. Or, maybe, you’re outright panicking. What should you do?
When the world is going crazy it’s always helpful to talk to someone sane, so I reached out to personal-finance guru Christine Benz for some answers.
Benz is the veteran director of personal finance and retirement planning at Morningstar, the funds and financial-services company. She’s a highly respected authority within the industry (and also the author of a recent book, “How To Retire”).
Her take?
The latest turmoil in the bond market shows why investors need to hold cash and short-term bonds as well as longer-term fixed-income investments.
She recommends investors try to focus their bond investments on their own projected spending needs.
And she says people need to be thinking about the risks of higher inflation down the road – which means, among other things, that you need to look at owning inflation-protected Treasury bonds or I bonds, which offer some long-term inflation protection, and you need to avoid panicking and putting too much of your money in cash.
“I feel like this episode underscores the importance of holding cash for near-term bobbles like this and/or holding individual bonds to maturity, or using one of the defined-maturity ETFs,” Benz says.
My take: Cash, or Treasury bills or short-term bonds – such as you can buy through low-cost funds such as the Vanguard Short-Term Bond ETF BSV or Vanguard Short-Term Treasury Bond ETF VGSH – typically pay lower rates of interest than long-term bonds. But they are much less volatile in price. These short-term bond funds have fallen little, if at all, in the bond-market turmoil of recent weeks. Meanwhile, funds that invest in very long, multidecade Treasury bonds – such as Vanguard Extended Duration Treasury Index Fund EDV and Pimco 25+ Zero Coupon Index Fund ZROZ – have fallen 10% or more.
Individual bonds and defined-maturity ETFs are another matter. Technically, they are almost certainly the most precise way of matching bond investments to your own needs, because you buy individual securities that pay defined cashflows for a defined period of time and then return your principal. A series of these bonds is known as a bond ladder. But doing this raises various other questions and issues. Creating a bond ladder is among the reasons why you might want to pay a professional financial adviser.
“If someone wants to be more minimalist, matching instruments to expected spending seems reasonable,” Benz adds. For instance, she says, you could move your bond holdings into three separate funds, based upon your spending needs: “Cash for spending within the next one to two years, a short-term bond fund for a three-to-five-year horizon, and an intermediate-term bond fund for a five-to-10-year horizon,” she says.
My take: A low-cost fund investor who wanted to keep things simple could use, for example, the Goldman Sachs Access 0-1 Year Treasury ETF GBIL to cover spending for the next one or two years, the Vanguard Short-Term Bond ETF BSV to cover spending for years three through five, and Vanguard Intermediate Term Bond ETF BIV for years five through 10.
Benz continues, “Inflation protection also looks extra important now, and points to the value of holding TIPS and I bonds alongside nominal bonds to help protect purchasing power. Or, related to the above, building a TIPS ladder to help supply cash-flow needs while also preserving purchasing power.”
My take: I’ve written about TIPS bonds ad nauseam and I own them personally. As with all other bonds, the longer the maturity the more volatile the price. You have a wide option of low-cost index funds, including the Schwab U.S. TIPS ETF SCHP for a general TIPS fund, and Vanguard Short-Term Inflation-Protected Securities ETF VTIP or the iShares 0-5 Year TIPS Bond ETF STIP for short-term TIPS.
Benz adds, “I would also point out what not to do if you’re concerned about inflation, which is to overallocate to cash. Cash is SO comforting at times like this, especially because yields aren’t bad at all. But higher prices have the potential to gobble up the purchasing power of that interest.”
My take: Cash, Treasury bills and short-term bonds have many merits but long-term returns aren’t among them. Historical data from NYU’s Stern School of Business says that over the past (nearly) 100 years, U.S. Treasury bills have produced measly returns when adjusted for inflation. The median “real” return, meaning the return above inflation, on Treasury bills was just 0.44% a year. That on 10-Year Treasury bonds was about 1.1%. Right now you can beat that on all TIPS bonds with maturities of three years or longer.
Bottom line? In circumstances like this, it’s especially important not only to know what you’re doing and what you own, but why.
-Brett Arends
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04-23-25 1226ET
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