Bonds... Tame Bonds

The bond: dependable, persevering — maybe a tad dull. Amazing how a recession can bring dullness back into style.

The whipping given to retirement accounts around Northeast Ohio by the current economic downturn has brought the bond — which typically offers more stable, albeit lower returns — back into vogue. Though his firm deals mostly in equities, Douglas S. MacKay, chief investment officer and CEO of Hudson-based asset management firm Broadleaf Partners LLC, says he has seen somewhat of a shift in his clients’ attitudes toward bond allocation.

“More people seem interested in having a [higher] percentage in bonds,” MacKay says.

Azim Nakhooda, chief investment officer and partner at Cedarbrook Financial Partners LLC in Mayfield Heights, says older investors, especially those in their 50s and 60s, should start looking at bond investments if they haven’t already. “They probably wouldn’t buy [equities] because they’re just too fearful,” he says. “They should be looking for yield. They should be looking to get paid while they wait [for the market to rebound].”

While bonds might not make for the most exotic addition to a 401(k) account, there are things investors should know before putting their money into a bond investment. First and foremost, there is a difference between investing in a bond fund and investing in individual bonds.

Individual bonds can be largely lumped into three groups: corporate bonds, municipal bonds and treasuries, MacKay says. Corporate bonds are company-backed debt sold to investors; municipal bonds are debt instruments issued by a state, county, city or other municipality in order to raise money; and treasuries are short-term, U.S.-backed debt.

Bond funds, meanwhile, are made up of a collection of different bonds rolled into one investment. The bonds in the fund might be of different maturities.

“You never quite know what you’re buying,” he says. MacKay recommends buying individual bonds or a bond fund which lumps together bonds of similar maturity dates in order to bring more continuity to the investment.

Still, bond funds could be a good buy for younger investors, MacKay says. Young investors have exposure to the consistent income stream bond funds produce. They are riskier, but having decades to go until retirement enhances the power of the generally consistent bond income.

As to how much of your portfolio should be invested in bonds, MacKay doesn’t buy into the old rule of thumb that recommends matching the percentage of bonds to your age. “I think that’s a little too much,” he says.

MacKay cautions against loading up on bonds, because inflation might overrun the bond’s return, especially when factoring in the fees paid by an investor for the bond or bond fund. “We have 70-year-old folks living off their portfolio,” he says. “People are worried about government spending [leading to higher inflation rates]. People are interested [in bonds], but they’re worried about inflation coming back to ’70s [levels].”