When Is The Best Time To Buy Bonds?

Bonds, or fixed income securities, are debt instruments issued by companies or the government that pay a certain amount of interest, and the full principal amount at the maturity date. The interest rate for bonds depends on a variety of factors, such as the current market interest rates, the maturity date, and the credit worthiness of the issuer. In general, investing in bonds alone is not enough to help you meet all of your financial goals. However, fixed income securities can help you reduce risk and preserve your principal. This makes them especially handy when the stock market goes south.

Bond Prices And Interest Rates

Many investors think that the price of a bond stays constant, but this is not the case at all. In fact, bond prices fluctuate more than most people realize.

What makes a bond fluctuate? Interest rates. In general, when interest rates go up, bond prices fall; and when interest rates fall, bond prices rise.
When is the best time to buy bonds? When interest rates rise, bond prices tend to fall and the yield rises to match prevailing interest rates. This is usually a good time to buy, especially if you plan to hold them until they mature.

However, trying to time the bond market is about as futile as trying to time the stock market. Instead, you should determine how much risk you’re willing to tolerate and build an investment portfolio that matches your risk tolerance level. Hold more bonds if you are risk adverse, or if you are closer to retirement and can no longer afford the risk.

Rule Of Thumb For Investing In Bonds

There’s a popular rule of thumb that states an investor should have a percentage of his portfolio that is equal to his age invested in bonds. For example, if the investor is 20 years old, then 20% of the portfolio should be in bonds. This is a bunch of baloney! The percentage of bonds in a portfolio has nothing to do with the age of the investor. As mentioned above, a portfolio’s bond allocation should be based on an individual’s risk tolerance level — not age.

6 Comments

Matt SF
December 10, 2008, 1:43

The age to bonds ratio is somewhat outdated to say the least. Considering that most people are living longer and healthcare is so expensive, some financial planners suggest to use a number like 120 minus your current age to set your bond percentage allocation.
As far as best time to buy bonds, it’s certainly not now. The Treasury did another bond issue today that sold at 0.0001% or something extremely minuscule. Scary times.
Miranda
December 10, 2008, 8:35

Thanks for this great primer. I especially like the focus on risk tolerance. Investing is a personal thing, and you should make decisions based on what’s best for you — and what you can handle in terms of risk.
vilkri
December 10, 2008, 12:01

In my mind a bunch of different things matter when you allocate your investments to bonds and other investments. Risk tolerance is one of the most important factors, but so is the time left until you want to reap the benefits of your investments. As for bonds, a very important element of bond investing is the income you get from bonds. When that income turns very low (as interest rates go lower right now) I wonder how investors expect to tap into the income bonds are supposed to generate. If rates hit close to zero, it does not sound like much of an income to me. Besides, the value of the bond can’t get any higher when interest rates are at zero.
Pinyo
January 5, 2009, 16:10

@Matt SF — You’re right. The “120 – Age rule” is the updated version.
@Vilkri — Like Matt said…scary.
Bill
February 26, 2009, 22:37

“120 -age rule.” so, if I’m twenty, I should be 100% in bonds, then, when I near retirement, my percentage of bonds should go down and down and down???? I don’t think so.
Can somebody quote this rule in a way that makes sense?
Pinyo
February 26, 2009, 22:58

@Bill – It’s the other way around. “120 – age rule” means that if you’re 20 years old, 100% of your investment should be in stocks, and if you’re 40 then 80% in stocks/20% in bonds, etc.