Bonds also have a place in your child’s college savings plan. Here the role they can play builds off of both of the topics we discussed earlier: bonds as a potential risk mitigator and bonds as an immunizer for future expenditures. The challenges presented by saving for college are not that different than those faced by Millennials. Both are trying to build portfolio value over a long time period. In this way you can think of children as mini-Millennials. Depending on your risk tolerance, the mix of stocks and bonds in a 529 plan may weight more heavily towards equities initially, but as high school graduation approaches many investors will start to shift into bonds and money market funds to reduce risk. When the child is getting closer to college, you may want to think about using bonds to build a short-term bond ladder. You could invest in bonds that mature at different intervals, such as one, two, three and four years in the future. The principal received at maturity could then be applied to a tuition payment. This is similar to the buying a home example above, but here we are looking at a series of cash payments that you will need to make in the future instead of just one. Again it’s the same immunization concept.
So where does that leave us with bonds? They can potentially play a role in almost any portfolio. From the retiree looking for income, to the adult looking to save for a home, to the recent grad looking to build their portfolio and manage risk. And even to the kid who can’t yet walk yet, but who someday will want to go off to college (where they could even study…bonds!).
Matthew Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog. You can find more of his posts here.
