BrettArends

Do you own too many bonds?

If you are retired, or near retirement, the question probably sounds crazy. After all, aren’t you supposed to have most of your money in bonds? Aren’t they the safe investment for those who can’t take on too much risk?

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Such is the conventional wisdom, after all. One popular rule of thumb says you should have the same percentage of your portfolio in bonds as your age — 60 percent at 60, and so on. Many portfolio advisers follow variations of this. So do so-called target-date funds, which automatically shift your portfolio toward bonds as you grow older.

Investors — including tens of millions of baby boomers now slouching toward their golden years — have taken the advice to heart. Over the past four years, they’ve poured more than $800 billion into mutual funds that invest in bonds, according to the Investment Company Institute, while yanking more than $250 billion from those that invest in stocks. And they’ve done well, especially recently, as bonds have boomed.

But is the conventional wisdom right? My concerns stem from two sources. The first is a point already well-established: Anyone buying bonds at recent prices is getting what looks like a pretty lousy deal, thanks to piddling interest rates. The yield on 10-year Treasury bonds recently fell below 2 percent. Corporate-bond yields have also collapsed.

And overall, these own more bonds rules of thumb seem to ignore the price you pay for investments. Bond prices right now are extremely high, and any sustained uptick in inflation will crush them; this is exactly what happened in the 1970s. Today, even inflation-protected Treasury bonds — once among my favorite investments, especially for retirees — look dangerous: The long-term bonds offer meager returns, by historical standards, while the short-term bonds effectively guarantee a loss of purchasing power.

But there is another problem with bonds that concerns me. To put it simply, if you are like most people, you already own a ton of bonds — or bond-like investments, at least — that you don’t even think about.

Those investments? Social Security and your home. Many people, when they retire, put these mentally to one side, ignoring them as they focus on how much extra income they want.

Higher Math

For the stock market as a whole, dividend yields are relatively low right now — around 2 percent for Standard & Poor’s 500, compared with a historical average of 3.8 percent. But even at lower rates, dividends can sweeten returns, especially if shareholders reinvest the dividends in more of the same company’s stock. Here’s how some high-dividend stocks have fared since the market bottomed in March 2009, after the financial crisis.

Procter & Gamble