The one thing certain in the investment world is that there are no certainties. With the stock market crash, investors stopped buying stocks and concentrated on buying bonds. Billions of dollars have been invested in bonds and bond ETFs recently. But if you are thinking of putting all your 401(k) money into a single bond, you could be making a big mistake.
Don’t Put All Your Eggs in One Basket
Putting all your money in one asset basket, however attractive it may look, is a bad idea. You can never predict which asset class will fetch you the best returns in the coming years, so it is better to spread your money across different assets. When you transfer your complete 401(K) into a single asset class, such as bonds, you end up tying yourself down to the performance of one fund. And just because it is currently giving you a good annualized percentage return doesn’t mean that its performance in the coming years will be equally profitable.
Low Interest Rates
The potential of higher capital gains in bond funds, which became popular during the market crash, is pretty limited given the low interest rates. Unless your stock market exposure is excessive and you want to balance your portfolio, concentrating all your investments in bond funds is an unwise decision.
Invest Your 401(k) Smartly
Spread your 401(k) among bond funds and stocks. If you already have a well diversified stock portfolio (small, large, even international), then all you have to do is invest in bond funds. But regardless of whether you have a stock portfolio or not, you need to re-assess your asset mix and the most effective way to do this is to choose a suitable target date retirement fund. The concept is simple. You have to select a target fund with a set date corresponding to the year you will retire. A mix of bonds and stocks will then be automatically generated depending on your age. As you move closer to retirement, the investment allocations will move away from riskier and into more conservative bonds and cash, without any intervention from you.
One of the advantages of target date funds is that they provide instant diversification among different asset classes. If you are hard-pressed for time or do want to get into the nitty-gritty of investments, then such professionally-managed funds are ideal for you. They are also low-maintenance and have smaller minimum investments.