Investors Nervous About Coronavirus Ask: Should I Put My 401(k) in Bonds?

One personal finance question asked widely online recently was: “Should I put my 401(k) in bonds?”

Well, some — but not the whole enchilada.

If you’re a young investor, and even if you’re anxious about the effects of the coronavirus pandemic, most of your 401(k) should be invested in stocks, with a smaller share in bond funds — mutual funds or exchange-traded funds that invest in a mix of bond types. That’s because while stock prices have more ups and downs, they generally have a bigger payoff over time and are your best tool for saving what you need for retirement. You hold stocks for growth, and bonds for relative stability.

When you buy a stock, you purchase a share of ownership in a company. Bonds are different; they are a type of debt. Think of it this way: When you buy a bond, you are lending money to the company or government that issued the bond. In exchange, the borrower pays you interest on a regular basis. If you keep the bond until it “matures” — in six months, or 10 years, or 30 years — you get your investment back. Because most bonds pay a predictable fixed interest rate, they’re generally considered a more stable investment.

But they’re not risk free, partly because of gyrations in market interest rates. The value of a bond generally depends on prevailing interest rates. When market interest rates fall, the prices of bonds typically rise, and the opposite is true, too. It’s like a seesaw. Sophisticated investors buy and sell bonds in response to changing interest rates, rather than holding them to maturity.

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