Despite recession fears, moving all your money from stocks to bonds is a bad idea if retirement is a long ways off


The Dow Jones industrial average sank 800 points Wednesday after the bond market flashed a warning sign about a possible recession for the first time since 2007. You may be tempted to switch your investments from stocks to bonds. While bonds may be less risky than stocks, they are not risk-free. (Richard Drew/AP)

As I’ve watched my retirement portfolio value swing wildly up and down, I keep hearing in my head the iconic catchphrase from the campy TV show “Lost in Space.”

“Danger, Will Robinson, danger,” the robot says during one episode of the science-fiction series. The robot flails about waving his silver arms warning of impending doom.

It’s been that kind of week for investors.

One day the stock market is up: Dow surges on news that U.S. will delay some tariffs

And then it’s down: Stock losses deepen as key recession indicator sparks new alarm

It’s understandable why you may feel whiplashed and worried that you’re in danger of losing a lot of money as the stock market seesaws following some tweet by President Trump on his ongoing trade war with China.

And now comes the warning that there’s a good chance a recession is coming.

How does your heart not race after reading the following?

For the first time since 2007, the yields on short-term U.S. bonds eclipsed those of long-term bonds,” economic reporters for The Washington Post wrote on Wednesday. “This phenomenon, which suggests investors’ faith in the economy is faltering, has preceded every recession in the last 50 years. It isn’t a sure thing, but it’s one of the more reliable signs that something is amiss in the economy. Recessions typically come within 18 to 24 months after the yield curve inverts.”

I can hear that robot saying, “Danger, danger.”

By Wednesday afternoon #TrumpRecession was trending after the Dow Jones industrial average fell about 800 points or 3 percent.

When there is danger, people naturally flee. The tumbling of stocks and the alarm sounding of a recession have many investors fleeing to safer ground — bonds. Or they are considering making the move.

“A drop in the closely watched 10-year U.S. Treasury bond is a sign that investors are heading away from risk and toward the safety of long-term bonds,” The Post’s Thomas Heath, Taylor Telford and Damian Paletta wrote.

But be careful about reacting out of fear. Bonds may be less risky than stocks, but they are not risk-free.

Several certified financial planners, who volunteer to answer investor questions as part of a program of the Certified Financial Planner Board of Standards, weighed in on the stampede of folks heading to bonds.

Marguerita Cheng, a certified financial planner based in Gaithersburg, Md., says it’s important for retirees to have some bonds in their portfolio because including bonds can minimize the impact of stock market volatility.

However, while having bonds may reduce stock market risk, bonds have interest rate risk, Cheng said.

“Moving entirely to bonds would expose you to longevity risk as they don’t offer the potential to keep up to pace with inflation,” she said. “You don’t want to run out of money just when you need it the most. Moving to bonds may feel comfortable and the right thing to do today, but it’s not in the investor’s best interest. Over time, stocks do appreciate at a faster rate than bonds and inflation. The volatility in the short term can be unsettling. I always tell clients not to panic. Going to bonds to avoid short-term volatility means they could be giving up the opportunity to protect against inflation.”

Read: Here’s one of the biggest threats to having enough money in retirement

Bill Schretter, a CFP based in Cincinnati, says if you need growth greater than 5 percent before inflation, bonds will not help you achieve your goals.

“Bonds have risks, too,” Schretter said. “You can lose your principal with bonds. Bond payments are guaranteed by their issuer. Companies, municipalities and countries can default on paying you. Further, we are at historic low interest rates. As interest rates rise, the value of bonds falls. There are investment strategies that can be initiated to reduce the volatility and loss risk of your portfolio. Knee-jerk responses are rarely profitable in the long run.”

Larry Stein, a CFP based in Chicago, says bonds serve as an important diversification tool for balanced portfolios. But if you have a long time to retirement, say 30 years or more, you may not need to stabilize your portfolio with bonds.

“Typically, when stocks fall, bond prices rise, though at a relatively slower rate,” Stein said. “Bonds tend to stabilize a portfolio to some extent in volatile times. With a 20-year horizon, there’s really no need for bonds, since stocks have historically produced solid, positive returns during that length of time. One of the great secrets of investing is the value of time. The longer the time period, the lower the volatility. Thus, you have less need for bonds.”

Of course, the closer you are to retirement you want to dial down the risk because you’ll be using your money. But even then you still need some growth in your retirement portfolio if the expectation is that you’ll live another 30 or 40 years.

“Bonds are not bad if you have a long time for retirement,” said Nick Holeman, a certified financial planner and senior financial planner at online financial adviser Betterment. “However, they likely should only represent a small portion of your retirement portfolio. Usually, stocks are the main driver of growth in your portfolio, and bonds are there for stability. If you de-risk your portfolio by holding lots of bonds while you are still very young, you will likely miss out on a lot of compound growth. Since your investments won’t be growing as much, you will likely need to save much more of your paycheck to still retire.”

Color of Money Question of the Week

Are you worried about the recession warnings? Send your comments to colorofmoney@washpost.com. Please include your name, city and state. In the subject line put “Recession Danger.”

Live Chat Today — Let’s talk about the stock market

Concerned about a coming recession or what’s happening in the stock market? Join me today at noon (Eastern time) for a live discussion about your investing fears. My guest will be Dan Egan, managing director of behavioral finance and investing at Betterment. Egan has spent his career using behavioral finance to help people make better financial and investment decisions.

To participate in this week’s discussion or read the transcript after it’s over, click this link. I’m live every Thursday from noon to 1 p.m. (Eastern time).

Equifax settlement isn’t good enough

Equifax has agreed to pay at least $575 million, and potentially up to $700 million as part of a settlement with the Federal Trade Commission, the Consumer Financial Protection Bureau (CFPB), and 50 U.S. states and territories. The settlement is the result of a 2017 breach that exposed the personal data for about 147 million people.

Upon court approval, Equifax will set up a “Consumer Restitution Fund” of $380.5 million. But with a potential claims group of millions, many consumers won’t get much money.

Read: Lawyers representing consumers in the Equifax settlement could get up to $77.5 million. Is that fair?

You have an opportunity to tell the court that you object to the settlement if you don’t think it’s “fair, reasonable, or adequate, and you can give reasons you think the court should not approve it,” according to a FAQ on the settlement’s website.

The FAQ describes the steps you need to take to object. Scroll down to question 25 for details. For your concerns to be considered by the court, your letter must be filed electronically or postmarked no later than Nov. 19.

Last week, I asked: What more do you think Equifax should do?

Andrea Fabian of Fairfax Station, Va., wrote, “This settlement is not good for anyone but Equifax. It really lets them off the hook. The only way to make everyone whole in this situation is to give lifelong credit monitoring and assistance if there is a problem. The fact that we have no say over these credit reporting companies having our personal information and making money off us means they should be held to a higher security standard.”

KC Brady of Albuquerque, wrote, “I told the court Equifax should be forced out of business, and their executives prosecuted for criminal negligence and held personally responsible for damages arising from the data breach.”

Tracy Senat of Guthrie, Okla., wrote, “Since our important personal data is now ‘out there’ and will be there for many years to come, I strongly believe that Equifax should provide lifetime credit monitoring at all three services to each person whose data was stolen. That is only fair!”

Read: How the Equifax data breach settlement could be better

“I am part of the Equifax breach and I’m upset,” wrote Lawana Edwards from Chickasha, Okla. “ I feel like for us not getting anything but credit monitoring is a bunch of mess and not fair.”

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