Even after two favorable monthly inflation reports, cash and bond yields remain high and steady. It continues to be a buyer’s market. Still, readers are often uncertain how best to proceed, particularly with new or rollover money. You may be tempted by a basic broad-based bond market index fund. But you can do better.
Your goal should be two guarantees: high yield to maturity and full recovery of principal. Neither is assured using index-based exchange-traded funds. An actively managed, go-anywhere fund from an ace manager such as Baird, Fidelity or Pimco will out-return the indexes over the years, but there is near-term price risk if managers mistime bets or if hostile reports on jobs or inflation or another trading signal rips into bond values.
If your choices are limited within a 401(k) or other retirement plan, choose a short or ultra-short bond fund option, if possible. If not, stay with cash for now. The inverted yield curve, with short-term yields the highest, remains your friend and makes cash profitable and safe.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Looking ahead at bonds
But if you suspect cash yields will drift down and want to lock in the current rates without near-term price risk, my preference would be to infuse some dollars into individual bonds or into target-maturity funds or ETFs, such as Invesco BulletShares or iShares iBonds ETFs. If you have an account with Schwab, Fidelity or E*Trade, it is neither difficult nor costly to research, compare and buy single bonds. Then you, and not a fund manager or the Federal Reserve, control how much and when you get paid and the timing of repayment of the principal.
Normally the best method is to ladder maturities, arranging for parts (rungs) to mature in succeeding quarters or years so you both cement the best yields along the curve and know you will have money to roll over at specific times. You can use Treasuries, high-quality corporate, bank or utility bonds, municipals, high-yield bonds, or a mix of all of them. You can even request a brokerage’s bond platform to set it up for you.
I went to Schwab’s tool to ladder either Treasuries or certificates of deposit. Given the rate-curve inversion, one-year ladders have higher average yields than longer ones. A step stool of T-bills of three, six, nine and 12 months pays an average 5.25% to maturity; use CDs and you get 5.45% (as of May 31). A five-year ladder works out to 4.76% for Treasuries or 4.98% for CDs.
To beat that, of course, you can buy corporate bonds at a spread of one to two percentage points above Treasuries. If you navigate the bond listings, you can ladder one- through five-year BBB-rated bonds for an average 6% yield to maturity; I could recently order a five-step triple-B assembly from Synchrony Bank, Boeing, Ares Capital, Blue Owl and Boston Properties with an average yield to maturity of 5.98%, with none below 5.82%. It’s possible those bonds might flop around in value, but if your plan is to keep them to the end, that doesn’t matter — even if, say, Boeing were to be downgraded to junk status.
Or, you could use a mélange of BulletShares investment-grade, target-maturity corporate ETFs dated 2025 through 2029 for an average 5.3% — less than a BBB ladder due to its A and AA holdings. BulletShares charge just 0.1% and pay monthly, as oppsed to the semiannual interest payments from individual bonds. What matters either way is that you can roll over the principal on your own terms.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related Content
-
A Comfortable Retirement is About More Than MoneyWhen it comes to a happy retirement, money can’t buy these things.
-
Stock Market Winners and Losers of the 'Big, Beautiful' BillDefense, manufacturing and tech should prosper, while health care and green energy stocks face hurdles.
-
I'm a Financial Planner: Here's How to Invest Like the Wealthy, Even if You Don't Have MillionsPrivate market investments, once exclusive to the ultra-wealthy and institutions, have become more accessible to individual investors, thanks to regulatory changes and new investment structures.
-
Four Ways a Massive Emergency Fund Can Hurt You More Than It HelpsSaving too much could mean you're missing opportunities to put your money to work. Redirect some of that money toward paying off debt, building retirement funds, fulfilling a dream or investing in higher-growth options.
-
Noctourism: The New Travel Trend For Your Next Trip"Noctourism" is a new trend of building travel and vacations around events and plans that take place at night. Take a look at some inspiring noctourism ideas.
-
With Buffett Retiring, Should You Invest in a Berkshire Copycat?Warren Buffett will step down at the end of this year. Should you explore one of a handful of Berkshire Hathaway clones or copycat funds?
-
Eight Tricks to Shop for Glasses if You're Over 50Shopping for glasses often gets trickier — and more expensive — as you age. If you've over 50, take these steps when you set out to buy a new pair.
-
My First $1 Million: Electric Utility Executive, 56, South CarolinaEver wonder how someone who's made a million dollars or more did it? Kiplinger's My First $1 Million series uncovers the answers.
