Whether you're pleased or disappointed about the resumption of the Federal Reserve's rate-cutting cycle may depend on whether you are primarily a borrower or a saver. Regardless of where you fall on that spectrum, if you're an investor, now is a good time to review your portfolio and make some tweaks to accommodate — and capitalize — on a lower-rate regime.

The quarter-point rate cut from the Fed in September was the first since December 2024. The central bank followed this up with another one in October, and while it's too soon to call the December meeting, more rate cuts are expected in 2026.

Traders were recently betting that by next April, the federal funds rate (the interest rate that banks charge each other for overnight loans) would sink to a target rate of 3.25% to 3.5%, according to CME Group's FedWatch tool. That's a full percentage point lower than the Fed's benchmark rate in early September — two points lower than when the current monetary easing cycle began in September 2024.

The good news for investors is that lower interest rates are largely positive for stocks — even in the second year of a rate-cutting cycle. Dating back to 1990, the S&P 500 Index has gained an average 11% in price in year two of Fed rate cuts, according to Sam Stovall, a market historian and chief investment strategist at research firm CFRA.

Zeroing in on how the market performs following a pause of several months during a rate-cutting cycle, Ryan Detrick, chief market strategist at wealth management firm Carson Group, found that since 1970, the S&P 500 has been higher nearly 91% of the time in the year following the resumption of rate cuts, returning an average 12.9%.

Of course, a lot depends on the health of the economy and whether rate cuts are occurring when a recession is imminent or underway or when the economy remains relatively healthy. Looking at the 45 rate-cutting campaigns going back to 1954, market strategists at Glenmede, another wealth management firm, found that the average S&P 500 gain over the course of the cycle was 13%; with no recession the average gain was 24.2%, and with a recession it was just 6.6%.

"We look at the economy as still on fairly firm footing," says Detrick. Although there are signs of labor-market slowing, there is also evidence of stronger-than-expected retail sales, he notes. "We have an okay economy being led by very strong corporate earnings growth. A Fed rate cut is the cherry on top, and they are likely to cut well into 2026. That's bullish for equities," he says.

Strong stock sectors for Fed rate cuts

Historically, the sectors that have performed best in the second year of rate cuts include real estate, financials, tech, health care and consumer staples, according to CFRA. That might not be the case this time around: Although Stovall currently recommends investors overweight stocks in the financial and tech sectors (as well as communications services), he has an Underweight rating on health care stocks, and he sees real estate and staples shares merely keeping pace with the market.

It's simply too early to shift into sectors traditionally considered more defensive, says Detrick. He still likes large-cap stocks in the financial, tech and industrial sectors, which have been leaders in the current bull market. "We're sticking with the ones who brought us to the dance," he says.

Nonetheless, it's a good time now, especially if you're nervous about the market's highfliers, to make sure you have some exposure to midsize- and small-company stocks, he adds, as well as international fare.

Lower rates may be the catalyst long-suffering small-cap stocks have needed. Indeed, on the heels of the September rate cut, the Russell 2000 Index, a popular small-cap benchmark, hit its first new high since November 2021 — an interval when the S&P 500 set 89 new highs, according to Stovall.

As interest rates drop, "small-cap companies are likely to benefit disproportionately," note the strategists from Glenmede. That's because more than half of small-cap debt is issued at floating rates. "As interest expenses fall," they say, it "should provide a meaningful tailwind to earnings."

Moreover, small firms should see a more sizable benefit from corporate tax relief, while also being less exposed to the impact of tariffs than large companies, according to Glenmede. And despite the recent rally, valuations remain compelling compared with their blue-chip cousins. "Small- and mid-cap stocks could have a very long runway — well into 2026, we think," says Detrick.

A good way to add more exposure to mid- and small-cap stocks is with the iShares Core S&P Mid-Cap ETF (IJH) and the iShares Core S&P Small-Cap ETF (IJR). Both exchange-traded funds are members of the Kiplinger ETF 20, the list of our favorite ETFs. (Prices, returns and other data are as of September 30.)

Step away from cash

You've no doubt noticed that your cash is earning less. But further deterioration in the economy — continued weakness in the job market, say — could send cash yields to the basement. "The imperative to put cash to work is increasing," say strategists in the chief investment office at UBS Financial Services.

For short-term spending needs, stick with the modest yields on certificates of deposit and money market funds, they advise. For expenses that are one to three years away, consider a bond ladder, with IOUs of staggered maturities.

Cash earmarked for needs up to five years out can be invested in intermediate-term government or investment-grade corporate bonds, according to UBS. Baird Aggregate Bond (BAGSX), a longtime member of the Kiplinger 25, the list of our favorite actively managed no-load mutual funds, yields 3.9% and has ranked in the top half of similar funds in seven of the past 10 years.

Or, recommends UBS, consider a multi-sector bond fund, whose managers can pick and choose among a wide array of fixed-income assets.

One to explore is the Pimco Multisector Bond Active ETF (PYLD). The ETF, with a yield of 5.1% and a total return of 7.0% over the past 12 months, had a hefty stake in securitized assets (think pooled mortgage loans and the like) at last report.

Finally, investors looking to replace regular income from cash, and who can tolerate the higher risk of stocks, can seek out dividend payers, such as those found in the Kiplinger Dividend 15, our favorite dividend-paying stocks.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• Best Stocks to Buy for Fed Rate Cuts
• 5 Core Stocks Every Investor Should Own In 2026 and Beyond
• 7 Best Stocks to Gift Your Grandchildren

What does the Federal Reserve's rate-reduction initiative mean in the short run for your fixed-income holdings?

You'll recall that one year ago, the Fed cut three times, starting by hacking its benchmark overnight funds rate by 0.50 percentage point in September. The year ended with bond markets and fund returns in retreat. It's wishful thinking that cheaper short-term credit and falling money market yields will spark a general bond-buying binge and propel your 2025 total returns toward 10% by year-end.

My judgment is that long-dated bonds are expensive and risky and that we are set for an encore of 2024, when the fourth quarter was a downer, with 19 of 23 fixed-income categories in the red, according to Morningstar.

So I do not expect further advances over the 5% to 8% returns earned through the third quarter. Instead, and pardon the cliché, it looks like déjà vu all over again, with a lot of losses and a few breakevens.

"If you have 6% in the bag already, which is 2% a quarter, I figure now it is sideways or giving a little back" the rest of the year, says Warren Pierson, co-chief investment officer for Baird Asset Management.

Last year, every time the Fed cut, rates on the 10-year note and longer maturities increased, meaning a loss of principal, adds Nick Losey, who manages high-yield and asset-backed securities for Barrow Hanley. (Rates and bond prices move in opposite directions.)

He expects a repeat. Inflation is edging higher, the dollar is weak, and there is no sign of fading economic momentum to the degree that traditionally provokes big flows into Treasury bonds and forces those yields down.

Hang tight

These are not sell signals, just a reality check. Credit conditions are good, yields are respectable, and enough pension funds, banks and insurance companies will keep buying even as individuals withdraw money from bond mutual and exchange-traded funds.

And there is a cavalry of sorts. Bond honcho Christian Hoffmann at Thornburg Investment Management insists that when 30-year Treasuries reach 5%, a herd of buyers will arrive and stanch the sell-off. That may be true, and if you think 5% through 2055 is a fair deal, that is your business. I disagree, and I advise against long T-bonds virtually anytime — and especially now.

Fixed-income thinkers and managers just cannot shake their unpleasant memories of how last fall's Fed rate cuts hurt, rather than helped, bond values.

Morningstar's fourth-quarter 2024 figures tell this story as well as anyone. The four gainers in that list of 23 were floating-rate bank loans and high-yield bonds, which are more correlated with stocks than with Treasuries; ultra-short bonds, which are tantamount to cash and rarely lose any principal under any conditions; and, in a surprise, non-traditional bond funds, which are go-anywhere, actively traded portfolios. All four categories are still in fine shape and are definite keepers.

Municipal bonds also held up in last year's fourth quarter, with some of the smallest losses on the charts. Tax-exempts are well positioned to end 2025 on a better note, even if taxable bonds struggle. The oversupply of municipals that dragged down principal values in the first half is no more.

Also in the past is the overblown (but damaging) fear that the budget-and-tax bill would end or limit the tax exemption. But municipals got so cheap that the buyers returned, so the various muni indexes are back in the green for the year to date.

One fund I like is Baird Strategic Municipal Bond (BSNSX), showing a year-to-date return through September of 3.5% and a tax-free yield of 3.3%.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• The Best Bond ETFs to Buy
• I Want to Retire Next Year. Should I Keep My Money in the Stock and Bond Markets?
• Is Your Retirement Portfolio Too Late to the Profit Party?

The same approach applies to portfolios. Earlier this year, many U.S. investors learned that their mix was off after foreign stocks significantly outpaced U.S. shares … just as the S&P 500 stumbled badly. It quickly became clear that many investors were underexposed to foreign markets and overexposed to the United States.

In a June survey, Schwab Asset Management found that moderate-risk individual investors held just 10% of their portfolios in foreign shares; U.S. stocks, by contrast, made up 61%. In short, investor portfolios weren't diversified.

It was a comeuppance long in the making. For nearly 15 years, U.S. stocks have been the place to be. Why bother to diversify — break up your investments across a variety of stocks, bonds and other assets — when the S&P 500 is beating everything?

"It can be easy to forget the benefits of diversification in a very sharp upward-moving market," says Andrew Altfest, a certified financial planner with Altfest Personal Wealth Management in New York City.

But over time, you'll find that a mix of investments can smooth your returns, strengthen your resolve as an investor, dampen risk in your portfolio and keep you exposed to whichever corner of the market is working at the moment — no crystal ball necessary.

In a truly diversified portfolio, some investments will be in favor while others are on the outs. "You will never own only winners, but you won't get stuck with only the laggards, either," says Jeff DeMaso, editor of The Independent Vanguard Adviser.

A smoother ride

A diversified portfolio can deliver less-volatile returns, which may help you stay the course during turbulent times — and arguably, that's half the battle in achieving your investment goals.

Moderate-allocation funds, also called balanced funds because they stabilize a 60% allocation of assets to stocks with a 40% stake in bonds, have been about one-third less volatile than an all-stock portfolio over the past 10 years.

"When the stock market sells off, investors tend to sell and move into cash. The problem there is, they've divested. So, we always say, stay invested and diversify," says Alessio de Longis, senior portfolio manager and head of asset allocation at Invesco Solutions.

Indeed, diversification isn't a strategy you turn on during rough markets and switch off in roaring bull markets. "It's something you should always have in your portfolio,” says Kristy Akullian, head of iShares investment strategy for the Americas at BlackRock.

Diversification can help ward against risk, too, of which there's no shortage these days. U.S. stocks are trading at high valuations. The economy looks to be slowing. Inflation remains sticky. And uncertainty lingers about the impact of new government policies and geopolitical risks. All of these challenges are chipping away at investor confidence.

Some advisers zero in on risks as a guiding principle for diversifying their clients' portfolios. Worried about a decline in the dollar? Add non-dollar assets — foreign stocks or bonds — to your portfolio. Concerned about an inflationary shock? Fold in a stake in commodities or real estate. A recession? Insert a slug of high-quality bonds or beef up on cash.

"Since I think all of these are potential sources of risk to the stock market, I put a lot of these diversified eggs into my clients' portfolio baskets," says Paul Winter, a certified financial planner at Five Seasons Financial Planning in Salt Lake City, Utah.

Another reason to diversify is that it's impossible to predict which investment will outperform in any given year — so it pays to own a mix of several. "The point of diversification is that you don't know what is going to happen," says Thomas Martin, of Globalt Investments, an Atlanta-based investment firm, but you can be prepared just the same.

The fact is, market leadership can shift dramatically from year to year. Though large-company stocks have topped the charts in many years recently, the winning asset class in any given year is often anybody's guess.

According to the Callan Periodic Table of Investment Returns, a colorful depiction of how asset returns can vary from year to year, small-cap stocks fared best in 2020. In 2018 and 2022, cash prevailed. And emerging markets stocks were the best-performing asset class in 2017; the next calendar year, they were the worst.

While there are rules of thumb to follow, a well-diversified portfolio is "very much an art, not a science," says Winter. For example, you want to own multiple kinds of assets, but that does not mean you own everything in equal measure. "Depending on your overall allocation, you might not need to go super-deep on every category," says Roger Young, a CFP at T. Rowe Price.

The good news: This is a great time to diversify. If, like many American investors, your portfolio is heavily weighted toward U.S. stocks, it's not too late to lighten the load and find opportunities in less-expensive pockets of the market.

"U.S. stocks are near their all-time highs, and that's a lot better time to diversify than, say, back in March 2009," the market's nadir during the Global Financial Crisis, says Winter.

Stocks, bonds and alternative assets are the main elements of a diversified portfolio. But you'll want to make sure you're diversified within those types of investments, too.

In this article, we'll walk you through the ingredients of a good diversification plan, with some timely moves to make now and tips on how to maintain your portfolio. Prices, returns and other data are as of August 31.

Stocks

Stocks can be risky but also rewarding. Over the past 10 years, the S&P 500, which represents more than 80% of the total U.S. stock market, has returned a whopping 15% a year.

But the stock market doesn't move as a monolith — and within your stock holdings, you should assemble a broad mix, considering a number of factors.

Company size

The market can favor companies of a particular size — sometimes for years — depending on economic factors, industry innovations or even just market sentiment.

Over the past decade, thanks to globalization, large companies have ruled, ranking as the top-performing asset class in five of the past 10 years and among the top three performers in eight of the past 10, according to the Callan table.

"The big just got bigger," says Jake Schurmeier, a portfolio manager at Harbor Capital. That makes exchange-traded funds (ETFs) that invest in small and midsize companies, such as the iShares Core S&P Mid-Cap (IJH) and the iShares Core S&P Small-Cap (IJR) — members of the Kip ETF 20, our favorite exchange-traded funds — good diversifiers for the large-cap S&P 500.

Some strategists see an opportunity in midsize-company stocks, especially these days. The middle tier of the U.S. stock market "is uniquely positioned to capitalize on growing demand for American-made goods and infrastructure solutions in a reshoring and energy-independent economic landscape," says Dina Ting, head of global index portfolio management at Franklin Templeton.

Plus, on a price-to-earnings basis, mid-cap stocks now trade at an atypical discount to large caps.

Concentration

Large-company stocks' recent run has included the meteoric rise of tech stocks in general and anything related to artificial intelligence (AI) in particular.

A group that includes Nvidia (NVDA), Microsoft (MSFT) and Apple (AAPL), known as the Magnificent Seven, accounts for one-third of the value of the S&P 500 Index. Thus, what might look like a diversified collection of U.S. stocks is in reality an outsize bet on a dazzling few.

A simple way to mitigate such overconcentration is the Invesco S&P 500 Equal Weight ETF (RSP). In this fund, every company gets an equal share of assets. So, while Nvidia accounts for 8% of the traditional market-cap-weighted index, it makes up just 0.24% of the Equal Weight fund.

Investment style

Professional investors typically hew to a certain methodology. These approaches break down into two broad styles: value and growth. Value managers favor stocks that trade at a discount to various metrics; growth managers prefer companies that are growing faster than average.

The two styles wax and wane at different times, and the cycles tend to last for long stretches. Value won the period from the start of 2000 to 2009. But since then, growth has dominated, though it's worth noting that value stocks held up better during the most recent bear market from January to October 2022.

Because it's difficult to predict when one style is going to outperform the other, even in a bear market, it's important to maintain a toehold in both growth and value strategies.

Chances are, however, that you've got plenty of exposure to growth stocks these days. Consider adding a value-driven fund such as Dodge & Cox Stock (DODGX), a mutual fund that has outpaced the S&P 500 over the past five years, or Capital Group Dividend Value (CGDV), an ETF that has beaten the S&P 500 over the past three years.

Both are actively managed, but index-fund lovers could look at the Vanguard S&P 500 Value ETF (VOOV). The ETF holds its own among a peer group of value-oriented large-company stock funds.

Geography

You need both U.S. and non-U.S. stocks in your portfolio, although many years of U.S. out-performance made that idea unpalatable. That changed in 2025: After lagging the U.S. stock market for nine of the past 11 calendar years, the MSCI EAFE Index, a popular international-stock benchmark, is up nearly 23% so far this year, beating the S&P 500 by more than 12 percentage points.

Most strategists agree that U.S. investors need to boost their exposure to international stocks. The timing is good. A weakening dollar tends to magnify gains in foreign shares (because they translate into more dollars stateside). And foreign stocks are still cheap relative to U.S. stocks on a price-to-earnings basis, even after a strong run so far this year.

Foreign stocks include those in both developed and emerging markets. You can zoom in on a region — Europe, Asia, Latin America, say — or a single country, such as Japan, India, Germany or China. And of course, at every level, you can focus on company size or value or growth approaches.

Start with the Vanguard Total International Stock ETF (VXUS). It's an inexpensive way to get instant exposure to nearly every foreign stock in developed and emerging markets. Morningstar analyst Zachary Evens calls it "wall-to-wall foreign-stock exposure." The fund has gained 23% since the start of the year.

Add an emerging-markets index fund. The iShares Core MSCI Emerging Markets ETF (IEMG) tracks an index of 20-odd developing markets. "A weaker dollar is good for EM stocks," says Richard Cook, a portfolio manager of Cook & Bynum fund. A recent rebound in Chinese stocks — 27% of the index — has helped the fund return 18% over the past 12 months.

Baron Emerging Markets (BEXFX) — a member of the Kiplinger 25, our favorite no-load mutual funds — is actively managed, growth focused, and has gained 19% over the same period.

These days, many strategists, including T. Rowe Price's Charles Shriver, see opportunity in small, foreign companies. They typically trade at a premium to their larger brethren, but not now. And "small-cap international stocks will benefit from domestic economic growth in home countries and are less sensitive to tariffs," he says.

We have our eyes on the Avantis International Small Cap Equity ETF (AVDS) and the Dimensional International Small Cap Value ETF (DISV). The Avantis fund invests in a mix of growth and value small companies, with a focus on valuation and profitability. Over the past 12 months, it has gained 23%. The Dimensional exchange-traded fund focuses on bargain-priced small stocks in developed countries and has returned 25% over the past 12 months.

Bonds

Bonds provide ballast to the stock side of any portfolio, generally speaking, because when stocks fall, bond values tend to rise. That didn't happen in 2022, when a precipitous rise in interest rates pushed both stocks and bonds down (bond prices and yields move in opposite directions). The S&P 500 fell 18%, and the Bloomberg U.S. Aggregate Bond index sank 13%.

It was the worst year ever for bonds, but a few fixed-income sectors held up better. Bank-loan funds, for instance, lost 2% on average; short-term bond funds dipped just 5%. Ergo, in 2022, a diversified bond portfolio would have outperformed the Agg index.

Broadly speaking, there are four major bond sectors: government, corporate, securitized debt (bundled IOUs such as mortgages or auto loans, say, that are sold as a single security), and municipal bonds, which pay income that's exempt from federal and sometimes state taxes.

A diversified bond portfolio will include a mix of sectors. The Agg index, for instance, is diversified as far as sectors go: Government bonds make up just less than half of the index, corporate and securitized debt combined are another 50%, and the rest sits in cash and muni IOUs. But there are more layers of bond diversification to consider.

Credit quality

Credit ratings reflect a borrower's financial ability to repay debts. The higher the rating, the more creditworthy the issuer is, and vice versa. That's why investment-grade bonds, rated between triple-A and triple-B, are considered high quality — there's little risk of default. Debt rated between double-B and triple-C is often called junk or high yield — there's a higher risk of default, and therefore yields are higher to attract investors.

Bond portfolios should hold mostly high-quality debt at their core. The Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) are the biggest index-based high-quality bond ETFs. But we prefer active strategies, such as Baird Aggregate Bond (BAGSX) and Dodge & Cox Income (DODIX). Both mutual funds are members of the Kiplinger 25.

Then consider adding lower-quality debt, which can boost the overall yield of a bond portfolio. In late August, for instance, U.S. high-yield corporate debt yielded 6.7%, and bank loans, issued by companies with low credit ratings, yielded 8.6%.

Our favorite high-yield corporate fund, Vanguard High-Yield Corporate (VWEHX), favors higher-quality, double-B junk bonds. But with economic uncertainty ahead, we're partial these days to short-term high-yield bond funds such as the Pimco 0-5 Year High Yield Corporate Bond Index ETF (HYS). Its short-term focus can help dampen default risk, a concern if the economy slows.

Duration and maturity

Investors often confuse duration, a measure of a bond's sensitivity to interest rate moves, with maturity, the length of time a bond will pay interest before it repays the principal. They're not the same, but they are connected.

Maturity plays a part in the calculation of duration. The longer the maturity, the longer the duration and the more sensitive a security is to interest rate shifts.

The typical long-term government bond fund, for example, has an average maturity of 20 years and a 16-year duration. That implies if rates were to rise by one percentage point, the net asset value of long-term government funds would decline 16%, and vice versa. Short-term government bonds have an average maturity of three years and a duration of 2.6 years.

Generally, low-duration bonds are a defensive bet when interest rates are rising, and high-duration bonds stand to benefit most when rates fall. These days, however, even though cuts in short-term rates are on the docket, a fall in long-term rates isn’t guaranteed, says Akullian, the iShares strategist. That's why she favors intermediate-maturity bonds for now.

The iShares 3-7 Year Treasury Bond ETF (IEI) sports a 4.3-year duration. Since the start of the year, it has returned more than 5%. The actively managed Vanguard Intermediate-Term Bond ETF (BIV) favors bonds with maturities of five to 10 years and has a duration of 6.1 years. Its portfolio holds government and corporate debt of medium maturities. So far this year, it has gained 6.4%.

Finally, the Fidelity Investment Grade Securities ETF (FSEC) holds mostly triple-A-rated securitized debt and has a duration of 5.5 years. Its return so far this year is 5.3%.

Geography

For much of the 2010s, foreign bonds sported negative yields. "That's a hard sell," says Schurmeier, the Harbor Capital portfolio manager. But now, foreign bonds offer positive yields, as well as a potential return boost from a weakening dollar. The Vanguard Total International Bond ETF (BNDX) holds high-quality, foreign corporate and government bonds.

Emerging-markets debt offers fatter yields, but these IOUs tend to be more volatile, too, so buyer beware. Our favorite emerging-markets bond fund, Vanguard Emerging Markets Bond (VEMBX), invests in dollar-denominated debt, which becomes easier for developing countries to repay as the dollar weakens.

Alternatives

This catch-all category includes nontraditional strategies that seek to hedge stock and bond market returns, or at least to generate returns that don't move in lockstep with them.

Alternative strategies might focus on gold, commodities, cryptocurrencies, or the debt or equity of private companies. They might employ techniques to limit losses in a downturn but crimp bull market gains. Others balance bets on undervalued stocks by short-selling overpriced names.

"Many alternative strategies weren't even a thing 10 years ago, but they are today," says Winter, the Salt Lake City CFP.

Consider carving out a small slice from the bond side of your portfolio to devote to alternative assets — no more than 5% to 10% of your overall portfolio, says de Longis. One approach to choosing an alternative strategy is to figure out what kind of risk you're trying to hedge against, such as those listed below, and invest accordingly.

Inflation

To hedge inflation, for instance, beyond the protection the stock side of your portfolio may offer, consider commodities. These funds proved their mettle in 2022, returning 16%, on average.

The First Trust Global Tactical Commodity Strategy Fund (FTGC) has outperformed its peers in four of the past five calendar years, with below-average volatility. Neuberger Berman Commodity Strategy ETF (NBCM) boasts above-average returns with below-average volatility, and its expense ratio is below average, too.

Instability

To ward against uncertainty, consider gold. "Gold is a safety net for chaos," says Schurmeier. Trade-war fears have fueled 29% gains in the iShares Gold Trust Micro (IAUM) and the SPDR Gold MiniShares Trust (GLDM, $68, 0.10%) so far this year.

Volatility

To smooth out your returns, consider one of a new breed of ETFs called defined-outcome funds.

One we're eying is the Innovator Defined Wealth Shield ETF (BALT). Using options, the fund provides a 20% buffer on losses in the S&P 500 every three months in exchange for a cap on gains. You can hold the ETF indefinitely. The 20% buffer and cap on gains resets quarterly, in January, April, July and October. The cap set in early July was 2.2% after expenses. Over the past three years, Defined Wealth Shield has returned 7% annualized with less volatility than the Agg index.

Bear in mind that diversified portfolios, in contrast to Tolstoy's happy families, are not all alike. As always, everything depends on your time horizon and your risk tolerance.

"If you're relatively young and are primarily invested in stocks, you might want to make sure your diversification is robust on the stock side, but on the bond side, your small piece in bonds could be a straightforward U.S. investment-grade type of bond fund portfolio," says T. Rowe Price's Young. Similarly, those who are nearing retirement or already retired will want to pay special attention to some inflation hedges.

Over time, your portfolio will need some fine-tuning. Some tweaks are related to age or life stage, says Christine Benz, director of personal finance and retirement planning for Morningstar.

At age 50, for instance, you'll want to de-risk your portfolio a bit around the edges. Tilt toward high-quality, large-company stocks over small-cap fare, for instance. Or favor dividend payers. By your late fifties or early sixties, start shoring up your portfolio with safer assets. On the bond side, for instance, lean into high-quality short and intermediate-term bonds and build up your cash position.

Other adjustments may be tactical, such as investing more in large and midsize companies than in small firms if a recession looms, or favoring short-term bonds over long-maturity debt when interest rates are climbing. Keep the tactical moves to no more than five to 10 percentage points up or down from your overall portfolio targets, says Invesco's de Longis. Any bigger, and you risk derailing your asset-allocation plan.

Finally, review your portfolio asset mix and rebalance, if necessary, once a year. "The more diversified your portfolio, the greater the potential benefits of rebalancing," says Winter. Just don't go overboard. Think of your portfolio like a bar of soap, suggests Benz: "The more you touch it, the smaller it's going to get."

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related content

• 30 Stocks That Could Rally 30% or More
• What Are Bonds and How Do They Work?
• Should You Buy Gold as It Tops $4,000? Here's What the Experts Say

We checked in with Michael Chang, one of two subadvisers behind our favorite junk bond fund, the Vanguard High-Yield Corporate (VWEHX), to get the lowdown. Chang, of Vanguard's in-house bond group, runs one-third of the assets in the fund; Wellington Management's Elizabeth Shortsleeve runs the rest.

Chang concedes that "it's tough to make the case that high-yield bonds are overly attractive today." But in his view, the U.S. economy is healthy, and relative to other parts of the bond market, "high yield offers decent opportunities to generate good income in a market where income is hard to come by." The fund yields just under 6.0%.

The Vanguard High Yield Corporate – a member of the Kiplinger 25, the best no-load mutual funds you can buy – eked past its competition over the past 12 months with an 8.0% return, in part because Chang's portion of the fund was defensively positioned heading into the spring selloff in bonds.

He had a pot of cash and a heavy tilt toward the higher-quality end of high-yield bonds – debt rated double-B and single-B – in defensive sectors such as food and beverage, health care, and utilities. That mix of bonds weathered the April selloff well, Chang says.

Hunting for bargains

Chang and his team of 15 managers, traders and analysts also boosted the fund's performance by snapping up stakes in lower-quality high-yield debt – rated single-B and triple-C – that had sold off, "in some cases dramatically," he says. "April gave us the opportunity that we had been waiting for to invest in some names we liked" but had previously been too expensive, he says, particularly in the retail sector.

Since both he and Shortsleeve became managers of the fund in August 2022, the Vanguard High Yield Corporate Fund has returned 7.9% annualized, just ahead of its high-yield fund peers.

This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• Mutual Funds Are About to Get the ETF Treatment. Here's What It Means for Investors
• A Fidelity Fund Misses Out on Soaring Bank Stocks
• The Kiplinger 25: Our Favorite No-Load Mutual Funds

Yet in today's municipal bond market, many investors walk past what could be the fixed income equivalent of that $20 — especially in the intermediate to long end of the yield curve.

Municipal bonds offer some of the most attractive tax-exempt yields we've seen in more than a decade.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Unlike the past, when munis were primarily a tool for the wealthiest investors, today's environment is opening the door for a broader range of U.S. taxpayers to benefit, as long as they're comfortable with intermediate or long-term strategies.

With a steep yield curve, strong credit fundamentals and yield levels that provide a meaningful income buffer, the case for embracing duration in munis has rarely been stronger.

More taxpayers can benefit from munis

A confluence of volatility in the Treasury market, combined with a robust supply of new municipal issuance, has pushed long-term tax-exempt yields to historically cheap levels.

The yield spread between 10-year and 30-year maturities is now the steepest it's been since 2013, with a difference of nearly 1.5%.

Investors are paid handsomely to invest in high-quality long-dated munis. For those in the highest tax brackets, taxable-equivalent yields on long-term munis are reaching 7% to 8% for residents in many states.

Here's the kicker: Valuations are so attractive that you don't need to be in the top bracket to benefit. Even middle-income investors can find value in municipal bonds, especially when investing through diversified funds that span the full yield curve.

At the shorter end, for a diversified ladder of one- to 10-year munis, the break-even tax rate is around 32%. But for funds with broader exposure — particularly in the intermediate range — the break-even threshold drops, making munis compelling even for those in lower tax brackets.

The break-even tax rate is the rate (federal income tax, the 3.8% Medicare tax and applicable state income tax) at which an investor is achieving the same after-tax return, whether they choose to invest in the taxable market (using the Bloomberg US Aggregate Bond Index (pay wall) as a proxy) or the municipal market (the Bloomberg Municipal Bond Index as a proxy).

The break-even tax rate is shown as a range, as New York, California and many other states have different tax rates based on income levels. Treasury and other U.S. government agency debt being exempt from state income tax is considered.

For California and New York, an additional state tax exemption for the municipal exposure is incorporated into the analysis, given the prevalence of New York and California state-specific municipal bond funds.

Other states assume a national exposure without state tax exemption benefits.

Municipal tax-equivalent yield is calculated using a 40.8% tax rate, which includes a 37.0% top federal marginal tax rate and a 3.8% net investment income tax to fund Medicare.

The California and New York tax-equivalent yield calculation includes the highest state income tax bracket in those states.

(Source: Vanguard calculations using Bloomberg data as of July 31, 2025. Past performance is not a guarantee of future returns.)

Higher income provides a buffer

Some investors remain wary of longer-duration bonds. The scars of 2022, when inflation and rate hikes battered bond prices, are still fresh. But today's yields are a different story. They're high enough to provide a cushion against moderate rate increases.

Think of it this way: If you're earning 4% to 5% in tax-exempt income, a modest rise in rates could dent prices, but the income you collect over a 12-month period can offset much of that decline.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

If you're investing through a mutual fund or ETF, professional managers can take advantage of the steep curve by selling bonds as they "roll down" the curve — capturing additional gains in addition to coupon income.

This dynamic — income plus roll-down — can help smooth returns and shorten recovery times even if rates rise. It's a powerful combination that makes longer-duration munis more resilient than many investors assume.

The sweet spot for munis

Where should investors focus? We believe the most attractive part of the muni market today lies in high-quality bonds with maturities in the 15- to 20-year range.

These bonds sit comfortably within range of intermediate-term strategies, which generally offer a favored balance between yield and duration risk. They avoid the extreme volatility of the longest bonds while still capturing much of the yield of the steeper part of the curve.

Of course, no investment is without risk, but with their current yields, strong fundamentals and income buffer, high-quality munis are the closest thing we've seen to that $20-on-the-sidewalk scenario in a decade.

For investors willing to look beyond the short end of the curve, the opportunity is real — and it might not last forever.

If you're considering investing in munis, you should be aware that although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal alternative minimum tax.

Also, bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.

All investments are subject to risk, including the possible loss of the money you invest.

Related Content

• Financial Analyst Sees a Bright Present for Municipal Bond Investors
• This Boring Retirement Income Source Has Big Tax Benefits
• Why I Trust Bonds, Even Now
• Remembering Bogle: A New Standard for Municipal Investing
• Such Attractive Yields in High-Grade Munis Are Rare and May Not Last Long

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

With fixed-income investments, such as bonds, you put up your money for a specified period and receive interest income during that time, just like making a loan. They performed poorly for over a decade following the 2008 financial market crash. Market interest rates were near zero, and these assets paid little.

Today, interest rates are closer to their historical average, so fixed-income assets, which also include CDs, money-market funds and some ETFs and mutual funds, provide a more reasonable return along with safety.

So find the right balance for you. That depends on your goals and, most importantly, your risk tolerance. The rule of 120 suggests that you subtract your age from 120. That’s the highest percentage you should have in stocks, with the rest in either cash or fixed-income. Another strategy is to have at least five years of living expenses in cash and fixed-income, so you have plenty of time to wait out stock market downturns in retirement.

“If you were losing sleep during all that market volatility, it likely says you’re taking on too much risk and should move into more fixed-income,” says Rosenstrock.

Here are some types of fixed-income investments, offering different balances between return and risk:

U.S. Treasuries

The U.S. government issues Treasuries in the forms of bills, notes and bonds to borrow money from investors.

The Treasury return is often referred to as the risk-free rate, showing the confidence investors feel in the U.S. government to make promised payments.

U.S. Treasuries are available for periods running from four weeks to 30 years. Treasury bills (a.k.a. T-Bills) mature in a year or less; T-Notes mature in two to 10 years, and T-Bonds mature in 20 or 30 years. Currently, Treasuries are paying 4% to 5% a year, and the interest payouts are taxable.

Important: The value of Treasuries can fluctuate, depending on current interest rates. Hold to maturity, and you get all of your principal back. But if you cash out early, the value is what the market says that day. If rates have gone up since your initial purchase, the value of your Treasury will fall. If rates fall, value goes up.

Since interest rate trends are unpredictable, one strategy is to spread your money over Treasuries maturing at different times, known as a ladder. That way, if rates fall after your initial purchase, you have some cash still locked in at higher rates, and if rates rise, your short-term Treasuries will mature sooner, returning money to reinvest at higher rates.

TIPS and STRIPS

There are variations of U.S. Treasuries. Treasury Inflation Protected Securities (TIPS) allow you to earn more interest should inflation go up, but less if inflation falls. The amount you get back at maturity can also be higher than you paid when inflation is high.

Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) do not pay interest income. Instead, you pay a smaller amount upfront, and your return comes from a larger payout at maturity. For example, you pay $6,755 for a STRIP that guarantees a $10,000 repayment in 10 years, roughly a 4% annual return.

One drawback, though, is that you owe income tax on the assumed return each year, even though you don’t receive the ongoing interest income. To avoid tax on this phantom income, keep STRIPS in a tax-deferred retirement account.

Municipal bonds

State and local governments issue municipal bonds to raise money. They are a little riskier than Treasuries, as there is a greater chance that these governments might run into financial trouble and fail to make their promised interest payments.

In exchange, municipal bonds can earn a higher after-tax return on your money because municipal bond interest is exempt from federal taxes (although not from all state income taxes). If you are in the 24% tax bracket, the tax-free payout on a 4% muni-bond is equivalent to a Treasury paying 5.26%.

Corporate bonds

Companies also issue bonds. The safety of the bond depends on the organization behind it. Independent agencies, such as Moody’s and Fitch assign companies a credit rating. Companies with a BBB- or higher credit rating are considered investment-grade bonds. The agencies deem these bonds as more likely to pay their creditors as promised, with the higher the score, the better the company’s creditworthiness. Investment-grade bond yields are averaging a little over 5% on the Bloomberg U.S. Corporate Bond Index.

On the other hand, corporate bonds with a rating of BB+ or lower are known as high-yield or junk bonds. These companies are more likely to miss payments, and if the company encounters serious financial trouble, it may not repay your principal. In exchange, they pay much higher interest rates. The S&P U.S. High Yield Corporate Bond Index earned an 8.89% annual return over the last three years.

“Are junk bonds risky? You bet, but so is the stock market," says Robert Tipp, head of global bonds at PGIM, Prudential’s investment management division. He notes that while losses in junk bonds are possible, a diversified portfolio with bonds from different issuers has historically experienced much less severe annual losses than the stock market.

Preferred stock

Preferred stock is a hybrid of stocks and bonds. Preferred stock shares receive fixed dividend payments, ranging from 6% to 9% a year. However, those payments are not promised by the company, unlike bond interest. If a company encounters financial difficulties, it could temporarily suspend payments. Depending on the terms, the company may catch up on missed payments later or it may not.

On the other hand, preferred stockholders take priority over common shareholders in receiving dividend payments. However, if the company does well, the preferred stock shares do not appreciate in value like common equity on the stock market.

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

Related content

• The '120 Minus You Rule' of Retirement
• CDs vs Bonds: Which Is Better for You?
• TIPS vs I-Bonds

Have you ever heard one of your relatives or friends opine about their favorite investment or way to reduce income taxes and wonder to yourself: "Is this really true?"

This series of 20 most-common financial myths might help you sort out the fact from fiction, or "urban legends," when it comes to investing and consumer finance.

Without further ado, here are myths 11-15:

11. Adding bonds to a stock-oriented portfolio protects my downside during market sell-offs.

At times, bonds do move inversely with stocks, so when stocks are selling off, bonds may rise in value to cushion overall returns in a balanced portfolio.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

But that isn't always the case, and, in fact, stocks and bonds have moved in the same direction many times recently, which is what practitioners refer to as positive correlation.

This occurred in the 2022 calendar year, which was damaging to the traditional 60/40 stock/bond portfolio because the S&P 500 Index experienced an 18.1% loss, and the Bloomberg US Aggregate Bond Index lost 13.0%, according to Callan Institute's Periodic Table of Investment Returns.

Some economists and market watchers believe the higher-rate, higher-inflation regime we're currently in may produce more periods of positive correlation between stocks and bonds, similar to the 1970s-'80s period.

Another related misconception is that all bonds move together in the same direction. That's not true either. In 2008, the 10-year U.S. Treasury bond return was +20.1%, while the Bloomberg US High Yield Corporate Bond index return was -26.2%, a difference of 46.3 percentage points in a single year!

It's important to understand why this can happen. During 2008, a debt crisis unfolded, kicking off the Global Financial Crisis, or GFC. Investors, scared by how quickly the economy was deteriorating, bought U.S. Treasuries as a safe haven, the so-called flight-to-safety trade.

High-yield bonds, aka junk bonds, went the opposite direction because during recessions, highly leveraged companies have difficulty making their debt payments, and high-yield bond defaults tend to rise.

12. When I die, my assets will be distributed to the heirs I list in my statutory will.

Although some assets can indeed be distributed according to the statutory will, many assets do not pass by will but, rather, pass according to beneficiary designations, right of survivorship or terms of a trust.

That's why it's critical for investors to understand how each asset they own will pass to heirs when they die and make sure their beneficiary statements, trusts and similar designations are up to date.

Assets requiring a beneficiary designation will be distributed to the primary or contingent beneficiaries designated on the most recently signed and filed beneficiary form.

This category includes life insurance policies, annuities, traditional and Roth IRAs, SEP and SIMPLE plans, 401(k) plans, 403(b) plans, 457 plans and other retirement or pension plans.

Assets in individual (nonretirement) brokerage or bank accounts do not generally have beneficiary designations, but they can if the owner adds a TOD (transfer on death) or POD (pay on death), respectively, to those accounts.

Revocable living trusts (RLTs) are used by many families to own assets such as real estate to keep those assets from going through probate, which can be costly, public and slow.

If a family has an RLT that owns their primary home, a vacation home, a couple of rental properties, an RV, a boat and their business, all these assets will be distributed according to the terms of the trust when the trustee passes away.

Many types of irrevocable trusts are used in estate planning also, generally providing their own distribution instructions for how assets owned by the trust are to be distributed when the trustee dies.

Finally, many assets are owned jointly by a married couple or partners, as either joint tenancy with right of survivorship (JTWROS) or joint tenants in common (JTIC).

These forms of ownership dictate what happens to the asset on the death of a joint tenant/owner, namely that the surviving tenant/owner now owns 100% of the asset after their spouse or partner's passing.

So be careful — signing and updating your will may not control distribution of many or even most of your assets when you die.

13. Now that inflation has dropped significantly, prices are coming back down to where they were in early 2021, before the inflation spike.

Prior to 2021, the inflation rate was running at only 1% to 2% annually for over a decade, making gradual price increases almost invisible to many consumers.

But as 2021 and 2022 played out, inflation spiked to 9.1% by mid-2022, causing prices for groceries, clothes, appliances, lumber, cars, food and houses to rise significantly.

Most consumers noticed these price increases, which resulted in costs for many items U.S. consumers purchase regularly jumping by about 30% within a short two- to three-year period.

By mid-2023, the inflation spike had receded back to 3% or so, with inflation declining almost as rapidly as it had risen.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

As 2023 came to an end, many consumers were expecting prices at the grocery store and restaurants and top vacation destinations to return to their early-2021 levels, but they didn't.

That's because the inflation rate refers to the rate of change of prices, not the absolute level of prices themselves. An annual inflation rate of 3%, for example, means prices increased by an average rate of 3% during the year, so by year's end, prices are 3% higher than they were at the beginning of the year.

If inflation then dropped to 0% the following year, price changes (i.e., inflation rates) are now flat for the second year, but still 3% higher than they were two years prior.

For prices to drop back to their starting point, the economy would need to see price deflation, meaning a negative rate of inflation (i.e., a reduction of the price level).

Barring deflation, which is unlikely in the next year or two, U.S. consumers are unfortunately stuck with the higher prices associated with the 2021-'22 inflation spike.

That says nothing of the potential inflationary aspect of higher import taxes, aka tariffs, which threaten to raise prices consumers pay by increasing the costs paid on imported goods.

14. The U.S. imports most of its oil from the Middle East (OPEC countries).

In fact, Canada and Mexico are the top sources of U.S. crude oil imports, accounting for about 75% of all oil imported to the U.S. each year.

Saudi Arabia is No. 3 and Iraq No. 7, providing roughly 7.7% of the annual imported total, according to Reuters, based on U.S. Energy Information Administration data.

In 2024, the U.S. produced more crude oil than any other country — about 13.3 million barrels per day. But the type of crude oil the U.S. produces isn't always usable by its own refineries, which is why the U.S. still imports part of its annual supply of oil while, at the same time, exporting some of its own nationally produced crude oil to other countries.

U.S. refiners prefer use of heavier crude oil, but some of the oil produced in the U.S. is light, sweet crude oil, which is generally not compatible with U.S. refining capabilities.

Interestingly, the U.S. is also the world's largest exporter of liquified natural gas (LNG), sending nearly 93 million metric tons to other countries in 2024.

15. Owning real estate is the 'best' way to build wealth because property values increase significantly over time.

While it's true that real estate can be a good investment and does enjoy certain tax advantages, from a pure rate-of-return perspective, it's not always the clear leader as compared to other investments (e.g., U.S. stocks, private equity).

Using the S&P CoreLogic Case-Shiller U.S. National Home Price Index as a proxy for residential home price appreciation reveals an average gain of +4.4% per year over the past 38 years, according to the Federal Reserve Bank of St. Louis.

Drilling down to individual cities, the Case-Shiller Home Price Indexes show the dispersion across various geographies, with average New York City home prices rising +3.6% annually, Chicago +3.7%, Boston +4.0%, Los Angeles +5.3% and San Francisco +5.5%.

Over that same 38-year period, U.S. stock prices have risen an average of +10.5% a year, roughly double the home appreciation rate of Los Angeles, one of the fastest home price growth markets during this period.

To compare private equity and venture capital returns, we employed Cambridge Associates' U.S. Private Equity (PE) and Venture Capital (VC) indexes spanning the past 25 years and compared those returns to the various Case-Shiller Home Price Indexes covering this same 25-year period.

The Cambridge Associates indexes show average annualized PE returns of +12.7% and VC returns of +12.0%. Using Case-Shiller Home Price Indexes over this same period resulted in average annualized home price appreciation of +4.9% nationally — +4.8% for NYC, +3.1% for Chicago, +5.1% for Boston, +6.2% for Los Angeles and +5.3% for San Francisco.

Similar to U.S. stocks, PE and VC returns roughly doubled the home price appreciation rate of Los Angeles and more than doubled the rates of other cities and the national average.

Our point here isn't that real estate is a "bad" investment — it's not — but that home values may not keep up with compound annual growth rates of stocks and PE/VC investments.

Diversification works, and blending real estate with stocks, both public and private, can be a solid, productive and responsible investment strategy for many families.

Besides, we all have to live somewhere, so why not own an appreciating asset that also provides shelter and security for your family?

While some basic principles ring true forever, many "urban legends" of finance don't; in fact, they never did. It's a good idea to research truisms to verify just how "true" they really are. Otherwise, you could be making costly mistakes.

Related Content

• What Happens if You Die Without a Will?
• Tax Advantages of Oil and Gas Investments: What You Need to Know
• Rising Prices: Which Goods and Services Are Driving Inflation?
• Kiplinger Inflation Outlook: Tariffs Affecting Some Goods Prices
• Ignoring Your Old 401(k) Could Be a $130,000 Mistake

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The Federal Open Market Committee (FOMC) began its rate-cutting cycle a year ago with a surprise reduction of 50 basis points (50 bps), or half a percentage point, but it's been on hold since December.

A solid labor market and the impact on prices from tariffs have made the FOMC leery of lowering borrowing costs. But a slowdown in hiring and a large downward revision to previous employment data have both economists and the market expecting more dovish monetary policy going forward.

Importantly, the next Fed meeting will also include a Summary of Economic Projections (SEP), also known as the dot plot, which the FOMC releases four times a year.

"This quarterly update offers the Fed’s latest forecasts for GDP growth, unemployment, inflation, and the federal funds rate, providing a window into how policymakers interpret recent economic developments," writes Giampiero Fuentes, economist at Raymond James. "With most tariffs now fully implemented and imports actively taxed, the SEP will likely reflect updated economic projections."

To recap: The FOMC has held the federal funds target rate steady at 4.25% to 4.50% since its December meeting. It left rates unchanged in July, citing sticky inflation, tariff effects and, as always, the need for more data.

As of this writing, market participants expect the Fed to cut short-term rates by 25 basis points (a quarter of a percentage point) three times before year-end, with the first reduction coming later this week.

Indeed, as of September 15, interest rate traders assigned a 96% probability to a quarter-point cut at the next Fed meeting, according to CME Group's FedWatch. That's up from 85% a month ago.

Odds of additional quarter-point reductions at the October and December meetings stood at 74% and 69%, respectively.

With the Fed set to ease at an increasingly complex time, we turned to economists, strategists and other experts for their thoughts on monetary policy going forward. Please see a selection of their commentary, sometimes edited for brevity or clarity, below.

Fed rate cuts: what the experts say

"We expect a 25 bp rate cut at the September FOMC meeting to be the first of three this year. The increase in the unemployment rate over the last two months and the decline in job growth to below the breakeven rate make supporting the labor market the Fed's top priority. We expect 25 bp cuts in September, October and December and two more next year to 3.0% to 3.25%. We do not expect the FOMC statement to nod toward an October cut, but Chair Powell might hint softly at consecutive cuts in his press conference." – David Mericle, Chief U.S. Economist at Goldman Sachs

"We look for the FOMC to cut policy rates by 25 bps. This will resume the rate reduction campaign commenced last September which has been on hold this year. In the Summary of Economic Projections and the 'dot plot,' we look for the median fed funds forecast to show a second quarter-point rate cut for this year (so two in total for 2025, which was the case in June's SEP) and probably three moves for next year (it was only one before). In the press conference, we suspect Powell will spend time explaining why the Fed sided with the output/employment team in this policy tug-of-war." – Michael Gregory, Deputy Chief Economist at BMO Capital Markets

"The Fed has telegraphed a 25 bp cut at its September meeting. Markets will look to the SEP and press conference to assess the pace and extent of cuts going forward. The macro forecasts in the SEP should look very similar to June. We think the 2025 and 2026 median dots will show 50 bps of cuts each. Risks are for 75 bps in 2025. Powell's characterization of the labor slowdown (cyclical or structural?) and inflation (one-off or sticky?) should provide clues on his expected policy path." – Aditya Bhave, U.S. Economist at BofA Global Research

"The focus in this meeting is going to be less on the decision and more the path forward. The SEP and dot plot will be the market's anchor. Given how much dovishness is already priced, any median path that signals fewer cuts or a slower easing cycle in 2026 would read as hawkish. A split vote or dissent (for 50 bps or even a hold) would underscore internal debate and lift uncertainty around the rate trajectory. And with positioning primed for a steady easing cycle, even a neutral press conference from Chair Powell could disappoint markets and nudge equities toward a dovish-to-neutral repricing." – Daniela Sabin Hathorn, Senior Market Analyst at Capital.com

"Comerica forecasts a quarter-percentage point cut at Wednesday's Fed decision. The Fed can be expected to cut rates further in coming months; the question is how much, not if. If Powell reiterates the 'proceed carefully' language he used at Jackson Hole in the post-meeting press conference, it will signal that he favors a pause in rate cuts at the October decision (barring further deterioration in the economic data). It will be worth watching for a gap between the FOMC statement's guidance, which represents the consensus view of all FOMC members, and Chair Powell's own statements in the press conference, which reflect his personal view." – Bill Adams, Chief Economist at Comerica Bank

"The broad-based rise in consumer prices complicates the Fed's policy outlook. Persistent inflation risks may limit the Fed's ability to pursue aggressive rate cuts. Despite this, we continue to expect a 25 basis point rate cut in September, with at least one additional cut likely before year-end. A larger 50 basis point cut appears increasingly unlikely unless Fed officials perceive a significant recession risk." – Eugenio Alemán, Chief Economist at Raymond James

"With the weakening labor market and inflation seemingly under control, we expect a rate cut starting this week and totaling 100 basis points over the next four meetings through January 2026. The Fed now is looking at a significantly softening labor market as a key concern and priority. The stock market's recent gains are being driven by strong earnings momentum and declining rates as the market starts to price-in the Federal Reserve's expected rate cuts. Just because stocks are at record highs, does not mean a pullback is imminent." – Brian Buetel, Managing Director at UBS Wealth Management

"A 25 bp easing this week is highly likely, but the vote probably will be split three ways. Committee members are still divided on whether rising inflation or unemployment is the bigger risk. That discord will rule out clear guidance on future easing, though markets will still price-in a big shift." – Samuel Tombs, Chief U.S. Economist at Pantheon Macroeconomics

Related Content

• September Fed Meeting: Live Updates and Commentary
• I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your Wallet
• Best Stocks to Buy for Fed Rate Cuts

“Quite the contrary — the 60-40 is not dead,” says Paisley Nardini, a portfolio manager and asset allocation strategist with Simplify Asset Management. “If we say it’s dead, we’d also have to say portfolio diversification is dead, and diversification is more important than ever these days.”

In the recent stock selloff, for instance, a 60-40 portfolio would have lost 4% — less than the 9% decline in the S&P 500 index from its peak through the end of April.

But many 60-40 investors are still nursing bruises from the beating they received in 2022. That calendar year, a balanced portfolio strategy — which had succeeded for decades as interest rates declined and bonds thrived — got crushed as rising interest rates sent stocks and bonds tumbling in tandem.

That’s rare, though. The last year stocks and bonds both fell was 1969. Even so, the wounds fueled a horde of 60-40 doubters, who argued that the portfolio had gotten riskier. And that spawned a variety of strategies to tweak the 60-40 formula.

Most fixes, but not all, involve adding so-called alternative investments to the portfolio. These investment strategies offer investors a way to diversify beyond stocks and bonds.

“A 60-40 portfolio is a two-legged stool,” says Nardini. Adding alternatives — a third leg — can provide increased stability, especially now with the stock market taking a breather and sticky inflation weighing on the bond market.

However alternative strategies come with several caveats. There are numerous approaches, and many are complex. The broad group includes strategies that invest in private stock or bond markets, hedge market returns, or invest in real assets, such as real estate, commodities and even digital currencies. These approaches don’t always behave in predictable ways, and some are best used as tactical tilts rather than long-term holdings.

These days, many mutual funds and exchange-traded funds employ alternative strategies, making them easy for do-it-yourself investors to buy and sell. But they’re pricey, charging an average expense ratio of 1.70% (though generally, alternative ETFs charge less). For context, the typical annual fee of U.S. stock funds and ETFs is 0.91%.

A third leg for the stool. If you are thinking of adding alternatives to your portfolio, focus on the goal you want them to accomplish, and invest accordingly.

“At the very least, you want the third leg to behave differently from stocks and bonds. Otherwise, why are you taking on the risk?” says Nardini.

To help you meet your objectives, we’ve highlighted below some easy ways to add an alternative strategy to your balanced portfolio. Prices, returns and other data are as of April 30.

Enhance income

Real estate investment trusts, or REITs, are one alternative asset class you can hold forever, says Jonathan Lee, a senior portfolio manager at U.S. Bank Private Wealth Management in St. Louis. They pay big dividends — tax rules require REITs to pay out a minimum of 90% of taxable income — and there’s the promise of share price gains, too.

What’s more, REITs are considered good inflation hedges because property values and rents tend to move up with rising prices, says Mayukh Poddar, a senior portfolio manager at Altfest Personal Wealth Management in New York City.

What they don’t offer is lower volatility. Over the past decade, REIT funds have been slightly more volatile than the S&P 500.

Baron Real Estate Income (BRIFX) boasts below-average volatility and an annualized three-year record that beat 93% of its peers. It charges a 1.05% annual expense ratio. The fees for ETFs Real Estate Select Sector SPDR (XLRE) and Invesco S&P 500 Equal Weight Real Estate (RSPR) are considerably lower. Both index-based funds beat more than 60% of their real-estate fund peers over the past three years.

Infrastructure funds are also prized for generating stable income. These funds invest in companies that own, operate, or are involved in the development and service of infrastructure-related assets, many of which provide an attractive income yield backed by secure and sustainable cash-flow streams. Think airports, highways, railroads, utilities and electricity storage.

According to Nuveen chief investment officer Saira Malik, global infrastructure stocks have historically provided a buffer to inflation, too.

Fidelity Infrastructure (FNSTX) is an actively managed fund with a three-year annualized return of 5.2%, which beat 71% of its peers. It yields 1.3%. iShares Global Infrastructure ETF (IGF) yields 2.8%, and its annualized return of 8.1% over the past three years beat 82% of its peers. Both funds held up better than the S&P 500 in the recent selloff and in 2022.

Boost diversification

Managed futures strategies “have the lowest correlation to stocks and bonds,” says Nardini. In a managed futures fund, a professional builds a diversified portfolio of futures contracts in a variety of assets — bonds, stocks, commodities and foreign currencies.

These strategies shine when stocks and bonds are faltering. In 2022, the typical managed futures fund gained 24%. But they dim when stocks soar. In 2023 and 2024, for instance, the typical managed futures fund lost ground or was flat.

And if long-term returns and volatility are any clue, they’re best used during periods when you’re pessimistic about the market’s trajectory and you want to provide your stock portfolio with a cushion against downturns.

Over the past decade, the typical managed futures fund posted a slim, 1.8% annualized return. That just barely beat the Bloomberg U.S. Aggregate Bond index, and it was twice as volatile.

Simplify Managed Futures Strategy (CTA) uses a rules-based strategy to identify price trends and invest in futures contracts in stocks, bonds, currencies and commodities. Over the past three years, the fund’s 9.6% annualized return ranked in the top 1% of its peers. And during the recent selloff in stocks, Simplify Managed Futures Strategy ETF lost 6% (compared with the S&P 500’s 9% drop).

Gold also tends to move up when stocks fall. For instance, iShares Gold Trust (IAU) gained 12.4% during the recent stock selloff. And in 2022, the ETF was essentially flat, with a 0.6% loss, while the S&P 500 lost 18%.

Lower volatility

Alternatives can help a 60-40 portfolio during periods of “big spikes in volatility,” says Megan Horneman, chief investment officer at Verdence Capital Advisors. To hedge stock risk — which accounts for about 90% of the volatility in a 60-40 portfolio — she suggests adding a market-neutral fund. These funds vary in approach, but the common thread is they move to their own beat, independent of the stock market. Low volatility and steady (albeit modest) returns are common characteristics.

One of the steadiest market-neutral strategies is merger arbitrage, which involves buying stocks in soon-to-be-acquired companies after a deal has been announced. The fund earns a profit on the difference between the post-announcement price and the price when the deal closes.

Not all transactions are consummated, however, and longtime managers Roy Behren and Michael Shannon at the Merger Fund (MERFX) have proved that they have a knack for identifying deals that do. Over the past three years, the fund’s 3.9% annualized return beat 67% of its peers. In 2022, the fund was flat, with a 0.7% return. You can buy shares without a load or a transaction fee at Fidelity and Schwab.

Tweak the formula without adding anything new

There are ways to adjust your 60-40 portfolio without adding alternatives.

Rethink your core bond holdings, for a start. The Bloomberg U.S. Aggregate Bond index has a current duration (a measure of interest-rate sensitivity) of a little less than six years. Bond prices and interest rates move in opposite directions, so a duration of six years implies that if interest rates rise by one percentage point, a fund’s net asset value will fall by 6%.

A tilt toward short-term debt (with maturities of one to three years) in your bond holdings can lower the overall interest rate risk of your portfolio and potentially reduce volatility, too, according to a report from Intrepid Capital, an investment management firm in Jacksonville Beach, Fla.

Plus, these days, you don’t have to sacrifice much in the way of yield, despite a recent rise in long-term yields. Recently a one-year government note yielded 3.9% and a 10-year bond yielded 4.2%.

Our favorite short-term bond mutual and exchange-traded funds are Vanguard Short-Term Investment-Grade (VFSTX) and iShares Short Duration Bond Active (NEAR). Both funds hold a mix of corporate and government debt, boast short durations, and have better than 4.5% yields.

You can also boost diversification in your 60-40 portfolio simply by focusing on neglected parts of the market, such as health care and international stocks. Both kinds of shares outperformed the S&P 500 from the start of 2025 through March.

“Diversification has been the enemy of portfolios for the past 10 to 15 years,” says Simplify Asset Management's Nardini, “but we see a tailwind in the future for diversifiers in a portfolio.”

Another strategy is to adjust the ratio of stocks and bonds within the portfolio. Jim Paulsen, a longtime stock strategist who writes about the economy and financial markets in Paulsen Perspectives, recently studied the performance of a 60-40 portfolio against a 100% stock portfolio and found that when the 10-year Treasury yield hovers around 4% — though it has been on the rise — a 60-40 portfolio has delivered returns that hewed close to an all-stock portfolio, with lower volatility.

But when the 10-year yield falls below 4%, investors may want to tilt more toward stocks — say, a split of 70% stocks and 30% bonds — because historically, lower yields have generally translated into paltry bond returns. Conversely, if the 10-year yield rises well above the 4% mark — say, in the 6% range, as it did in the ’00s — an even split between stocks and bonds may be in order.

Paulsen admits this approach requires some work, and depending on your tolerance for risk, it may not be appropriate for you. (It also may work best in a tax-deferred account to avoid capital gains taxes as you adjust your portfolio.) But “it may prove profitable,” too, he says.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related content

• The Best REITs to Buy
• Alternative Investments Under Trump: What You Need to Know
• Should You Use a 25x4 Portfolio Allocation?

You’ve got some money in bond funds. You did some shopping, and your fund is throwing off more than 4% in interest. Pretty good, considering inflation ran at 2.4% the past 12 months.

Now you talk to your accountant, who reminds you that you’re in the 32% tax bracket. Oops. Your 4% yield is now 2.7%. Back out inflation and you’re earning just 0.3%. On a $10,000 investment, that’s a return after taxes and inflation of $30. Take your best friend to dinner at McDonald’s.

You can’t do much about inflation, but you can do something about taxes — with municipal bonds. “For years, the only reason to own bonds was diversification,” says Jim Murphy, lead portfolio manager for municipal bonds at T. Rowe Price. But now, they’re good inflation insurance. Some high-yield municipal bond funds and ETFs yield 5% or more. If you’re in the 32% tax bracket, you’d need your taxable fund to yield 7.4% to get the same return after taxes.

Pretty tasty, right? Just remember that your high muni yield comes with a side order of risk.

Muni bonds: The risks

Muni bonds are issued by states, cities and municipal organizations, and their interest is exempt from federal income taxes. If you own a muni bond issued by your state, interest is free from federal, state and local taxes.

The main risk from any high-yield bond is that the issuer defaults and can’t pay interest or repay the principal at maturity. High-yield muni funds pick from bonds on the lower end of credit ratings, which means they're rated lower than Baa (by Moody's) or BBB (by S&P and Fitch). Municipal defaults are rare — about 0.8% since 1970, according to Fidelity Investments. Current bankruptcy law doesn’t allow states to go bankrupt, although cities and other municipal issuers can.

But the price of a muni bond can go down if buyers begin to doubt the issuer's solvency — for example, if companies such as Moody’s downgrade their credit rating. Because just 5% of the total municipal bond market is considered high yield, price drops can be rapid.

Puerto Rico’s bonds were a classic example of what can go wrong. The bonds were highly popular with muni funds because interest from them is tax-exempt in every state. In 2015, prices on Puerto Rico’s bonds fell about 12%, to 68.5 cents on the dollar, on the day the island’s governor declared the debt “not payable.”

All bonds face interest rate risk. Bond prices fall when interest rates rise, and vice versa. If you own an individual bond and hold it to maturity, you don’t have to worry about rising or falling rates. If you own bonds through a fund or ETF, however, you can lose money when rates rise. (Conversely, you can gain if you sell after rates fall).

A muni fund manager has two ways to increase a fund’s yield. She can buy bonds with long maturities, or she can buy bonds with a higher default rate; both strategies tend to make the fund riskier. For example, iShares High Yield Muni Active ETF (HIMU) currently yields just over 5%. The fund sometimes holds as much as half of its portfolio in unrated bonds, according to Morningstar, and it tends to buy longer-term bonds than its peers. Capital Group Municipal High-Income ETF (CGHM) tends to buy shorter-term, higher-quality bonds. Its current yield is just under 4.5%.

If you want to see how munis fare in a rising rate environment, look at how they performed in 2022, when rates rose sharply. The Vanguard Total Bond Market ETF (BND) fell 13%. IShares National Muni Bond ETF (MUB), the largest muni bond ETF, fell over 7%, while First Trust Municipal High Income (FMHI), the largest high-yield muni bond ETF, fell almost 15%.

Municipal bonds: What to buy

Stay away from high-yield munis with high expense ratios. Every dollar you give to your fund company is one you won’t have when you need it.

Two muni ETFs that have expenses below 0.5% and yields above 4%: iShares High Yield Muni Active ETF (HIMU) and SPDR Nuveen Bloomberg High Yield Municipal Bond ETF (HYMB). Two garden-variety mutual funds that fit the bill: Eaton Vance High Yield Municipal (EWHYX) and T. Rowe Price Intermediate Term High Yield (PRIHX).

Typically, the best time to buy muni funds is when the yield of a 10-year high-grade muni bond is about 85% of that of a Treasury security with a similar term. By that measure, munis are as cheap as they have been since the economic recovery began in 2022, according to Nuveen.

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

Related content

• Such Attractive Yields in High-Grade Munis Are Rare and May Not Last Long
• This Boring Retirement Income Source Has Big Tax Benefits
• The Rule of 240 Paychecks in Retirement
• Remembering Bogle: A New Standard for Municipal Investing

Another thing you can learn from investing: Wall Street just hates surprises. When the unexpected arises, the markets can skitter up and down for days and weeks. On particularly volatile days, you could get seasick just watching the market’s moves.

Volatile times don’t mean that the world is ending or that you’ll soon be chipping flints in a cave. Is it easy to invest when the world seems upside down? No. But you’ll panic a lot less if you stick with basic investment principles: Know your goals, be honest about your tolerance for risk, and find ways to soften the blow to your portfolio before investment surprises happen.

Have a plan

First things first. When markets are going wild, it’s sometimes hard to keep in mind that you’re saving for a goal. If you have a plan for your investments, take a deep breath and review it.

If you don’t have a plan for your investments, it’s a good time to make one. What are you going to spend your savings on, and when are you going to spend it? Make a list of your savings goals, estimate how much they will cost, and know when you want to reach them.

Having a plan helps remind you that lousy market news may offer some positives. It may also calm your nerves a bit, especially if your goals are a few years off. Markets generally recover, and with enough time, your portfolio can take a licking and keep on ticking.

Garden-variety bear markets push stock prices down an average 27% and recover their losses in 13 months, says Sam Stovall, chief investment officer at research firm CFRA. Mega meltdowns, such as the 2007–09 bear market, claw an average 51% from stocks and take nearly five years to recover. Thankfully, there have only been three mega bears since the end of World War II, Stovall says.

This is a good time to ask yourself whether you’re really as tolerant of risk as you thought you were when the bulls were running on Wall Street. You may have thought of yourself as a bold investor, but that’s a harder stance to maintain when stocks are falling.

Check in with the mix of stocks, bonds and cash in your portfolio — your asset allocation — to make sure it’s really right for you. The right blend is one that you can stick with through volatile times.

You’re probably not going to beat the S&P 500 index in a rip-snorting bull market, because you’re not fully invested in the stock market.

On the other hand, you might do less badly in a bear market and be more likely to meet your goal.

“Invest on the plan, not on the market,” says Brad Klontz, a financial psychologist. “If your portfolio went up 8% while the S&P 500 was up 12%, you should be 100% okay with that,” Klontz says.

Don’t have an asset-allocation plan? You can create one yourself, based on an honest evaluation of your goals and risk tolerance. You can also use online programs from your brokerage house or get help from a financial planner.

Otherwise, simply invest your money in a target-date fund, which orients a mix of stocks, bonds and cash toward when you plan to tap your investments and shifts the blend appropriately over time.

A playbook for young investors

If you’re young and retirement is a distant dream, you can be fairly confident in a portfolio with 70% or more in stocks or stock funds. You have time to make up bear market losses. Plus, you’ll be adding to your savings over many more years.

Over the long term, stocks have outperformed cash and bonds. In the 88 10-year periods since 1927, the U.S. stock market has had positive performance 94% of the time, says Mark Bass, a financial planner with Pennington, Bass & Associates in Lubbock, Texas. “And that metric is 100% of the time for 20-year periods,” he adds.

Remember, too, that if you’re investing in the stock market through a 401(k) savings plan with an employer match, you have two bear-beating advantages.

First of all, you’ll be adding a set amount to your portfolio every payday. That means you’ll be buying more shares when prices decline and fewer when they soar.

The technique, known as dollar-cost averaging, tends to result in a lower average cost per share. Second, if your employer matches some or all of your contributions, you’ll instantly make up for some of your losses. Free money is rare, and it’s a good thing.

A warning: Don’t simply invest in the hottest of hot funds, despite your young age. Wall Street is littered with golden funds that suddenly turned to lead. Your core stock holding should probably be a plain-vanilla, low-cost S&P 500 index fund.

You’ll own not only some of the hottest stocks in the world but also some dull, dividend-paying stocks as well. And that’s okay: Dividends have accounted for 37% of the S&P 500’s total return over time.

Tips for seasoned investors

If you have fewer than 15 years before retirement, then you’ll probably want to mix more bonds into your portfolio. Bonds can provide ballast because most times they rally when stocks fall.

The stock market tends to be optimistic; bonds are only happy when it rains. When the economy slows, interest rates fall, and though that lowers yields, it boosts the price of bonds. (Bond prices and interest rates move in opposite directions.)

The classic portfolio mix is 40% bonds and 60% stocks. To add even more stability to your portfolio, you can substitute some bonds with cash — money market funds, Treasury bills and the like. Just be prepared for lower returns.

Be ready, too, to rebalance your portfolio periodically to stay on target and keep risk at bay.

For example, let’s say you want to have 60% of your portfolio in stocks and 40% in bonds, and after a year you have 70% in stocks and 30% in bonds. To get back to a 60-40 mix you must sell some of your stocks and reinvest the proceeds in bonds.

It’s a good strategy even in a down market, says Bill Nygren, portfolio manager of Oakmark fund.

“We would encourage people to look at how the market has moved their allocation and rebalance back to what their target was. I think that is a very healthy way to reduce risk in the portfolio, and, more importantly, reduce the psychological risk that you get scared when the market falls,” he says.

How often should you rebalance? Every six to 12 months is what many planners recommend, though rebalancing after a sharp downturn is fine, too. It may help to set a trigger point: If the stock and bond allocation is off target by an amount you predetermine — more than five percentage points off, say, or seven or 10 — then it’s time to rebalance. Some 401(k) plans will rebalance for you at regular intervals, and some brokerages will also do the same (but you may have to opt in for these services).

Watch your withdrawals. If you’re already retired, be mindful of which type of account you draw from to maximize tax efficiency. Tap money in taxable brokerage accounts first, followed by traditional IRAs and other tax-deferred accounts. Roth IRAs and Roth 401(k)s come last. This strategy gives your tax-advantaged accounts more time to grow.

If you are just starting withdrawals in the middle of a market downturn or a bear market, you could be making matters worse. After all, if you withdraw 5% of your stock fund when it’s down 25%, your account is now down 30%. And to recover from a 30% loss, you’ll have to earn 43%.

Financial planners call this the problem of sequential returns. Over the past 30 years, large-company stocks have gained just over 10% a year, on average, according to Morningstar. But that figure doesn’t mean that the market advanced 10% or more each year. The 30-year return includes some really swell years, such as 2019, when the S&P 500 jumped 31.5%, as well as the monster 2007–09 bear market, the worst since the Great Depression.

To mitigate the sequence-of-returns risk, be sure to put aside money in cash so you can sleep at night during those years when the stock market is stinking up the place.

“It’s literally for when the other stuff is going wacky,” says Bass, the Texas financial planner. “For the people who are in withdrawal mode, depending on their temperament, we’ll keep anywhere from two to five years’ worth of withdrawals as their sleep-at-night money.”

What not to do

Don’t try to time the market. This advice applies to market bottoms as well as tops. For one thing, the stock market’s best and worst days are often just a week or two apart. Missing the 30 best days in the past 30 years shrinks the S&P 500’s average annual total return to 1.8% from 10.1%, according to Wells Fargo Advisors.

Don’t buy trendy new funds. Wall Street tends to trot out funds that suit the market at the moment — red-hot tech funds when technology stocks are on fire, and dull-as-dishwater bond funds when the stock market is in the doldrums.

“Wall Street sells what people are asking for,” says John Rekenthaler, former vice president of research at Morningstar.

That’s not necessarily what makes a good investment. And, because it can take a while to bring a new fund to market, the latest products may land just as an investment trend has ended.

Don’t be a hero. Sudden, sharp declines can make investing in stocks or funds more attractive. But most traders will warn you not to buy in a free-fall: “Don’t try to catch a falling knife” is an old trader’s adage. The market can always go lower. Consider placing a special buy order, called a limit order, for stocks or exchange-traded funds at 10% or 20% below where they are now. You can specify that the order is good until canceled. If the order is filled, congratulations. If it doesn’t fill, then the market hasn’t gone as badly as you thought it might.

Don’t peek too often. Resist the urge to constantly check your portfolio in troubled markets. It can lead you down a path to unfortunate decisions, such as selling at the worst time. It can also wreck your mood as you ponder how much more fun you could have had with the money you just lost.

A PRIMER ON VOLATILITY

Just how volatile are different investment types? Here’s a guide.

Cash: Low, low volatility

Short-term investments include bank certificates of deposit, short-dated Treasury securities and money market mutual funds. They come with little to no risk but also offer very low returns.

Three-month Treasury bills, for example, have returned just 2.5% annualized over the past 30 years. But if you need the money soon — say, to buy a car within the next two years — then cash is your friend. You don’t want the stock market to determine what kind of car you buy.

Bonds: Medium risk

Bonds are long-term IOUs issued by corporations, the government or municipal entities, such as cities and states. They are vulnerable to two different types of risk: credit risk and interest rate risk.

Credit risk is the chance a bond issuer will go bankrupt and can’t pay. The greater the borrower’s risk of bankruptcy, the higher the bond’s yield and, generally speaking, the greater the volatility, too.

Companies with a low risk of default, for instance, issue investment-grade bonds rated triple-A to triple-B. The typical yield on investment-grade corporate debt in late April was 5.2%. High-yield bonds, also known as junk bonds, are issued by firms with lower credit ratings — double B to triple C — because they are deemed to have a higher risk of default; recently these IOUs offered better than 7% yields. But high-yield debt tends to trade more in line with stocks, unlike other types of bonds.

Bonds also have interest rate risk. When interest rates fall, bond prices rise and vice versa. For instance, in 2022, when interest rates rose at an unprecedented rate, the Bloomberg U.S. Aggregate Bond index plunged 13%.

Stocks: High volatility

All stocks are volatile, but some are more so than others. Shares in large companies with dependable earnings and dividends are generally lower risk than shares of small start-up companies, for instance.

Investment style can impact volatility, too. Growth funds, for instance, which invest in stocks of companies with above-average earnings growth, tend to be more volatile than value funds, which focus on unloved stocks trading at a discount. Core or blend funds are in the middle in terms of volatility because they hold a mix of growth and value shares.

International stocks have been a bit riskier than domestic stocks, in part because they carry currency risk. A strong dollar tends to dent returns in overseas stocks; a weak dollar, by contrast, tends to buoy foreign shares.

Sector funds invest in slices of the stock market, such as utilities, banks or technology. These funds can enhance portfolio returns, at times. But compared with broadly diversified stock funds, they can be more volatile, too.

HOW RISKY IS MY INVESTMENT?

Statisticians use several risk measures, most of which are widely available. Here are four. All are based on past data points — they’re backward-looking — but they are generally regarded as an indication of future behavior.

Standard deviation

The most commonly used definition of volatility is standard deviation, which depicts how much the return of an investment has varied from its long-term average over a certain period of time. The higher the standard deviation, the more volatile the security has been.

For example, SPDR S&P 500 (SPY), an exchange-traded fund that tracks the S&P 500 index, has a standard deviation of 16.1 over the past five years, which means that over that period, the ETF’s return has bounced up and down from its average return by 16.1 percentage points.

By contrast, Vanguard Total Bond ETF (BND) boasts a far lower five-year standard deviation of 6.3.

Beta

Beta measures the increase or decrease in price of an individual investment (stock or fund) compared with the market as a whole. A fund with a beta of less than one means its price rises and falls less dramatically than the broad market. A beta of greater than one means the security’s price tends to be more volatile than the market.

Alpha

This metric basically measures a fund’s ability to outperform (or underperform) an appropriate index. A fund with an alpha of 2.0 means it beat its benchmark by 2%; an alpha of negative 3.0 means it lagged the bogey by 3%. Ideally, a fund would have a low beta (less than one) and a high alpha (greater than zero).

Sharpe ratio

Devised by Nobel laureate William Sharpe, the Sharpe ratio is a risk-adjusted return. It measures how much excess return an investment has delivered relative to its volatility. (The actual calculation is a little more complex, but this is the general gist.)

The higher the Sharpe ratio, the greater the investment’s reward for the risks it has taken — in other words, the better the fund’s risk-adjusted performance.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related

• The 25 Best No-Load Mutual Funds You Can Buy
• Kip ETF 20: The Best Cheap ETFs You Can Buy
• Analysts' Top S&P 500 Stocks to Buy Now

Still, they may be worth a look, as the worry over rising prices is palpable these days. According to the University of Michigan's April consumer confidence survey, Americans believed that inflation would average 6.5% over the next 12 months. That's the highest reading since 1981, and it's well more than twice the 2.4% rise in the consumer price index (CPI), the government's main inflation gauge, over the previous 12 months.

The angst is understandable. The inflationary impact of the Trump administration's tariff policy is uncertain, and the scars from the 9% inflation rate reached in June 2022 haven't faded. Inflation tends to be sticky — that is, prices that go up often don't go down. Even though the rate of inflation has fallen since its peak, prices are still up a cumulative 24% since March 2020, according to the CPI.

It's no wonder funds that invest in TIPS have seen net inflows of $9.2 billion over the past 12 months, according to Morningstar, the Chicago mutual fund tracker. If you're worried about inflation, read on to see whether TIPS are right for your portfolio.

How TIPS work

The government issues 5-, 10- and 30-year TIPS, which pay a fixed rate on a principal that adjusts in line with changes in the CPI.

As an example, let's look at a recent Treasury issue of 10-year TIPS. The annual fixed interest rate is 2.125%, payable every six months — a rate that's about as appealing as last week's oatmeal. The real attraction of TIPS is that the principal value of your bond can go up (or down) according to changes in the CPI.

Let's say that the CPI increases 3% in the 12 months after issue. The Treasury will then add 3% to your bond’s principal, boosting a $1,000 bond to $1,030, for example, and your interest payment from $21.30 to $21.94. (This simplified example illustrates an annual rate, but remember, TIPS pay twice a year.)

TIPS funds gained an average 3.4% in 2024, making them one of the best-performing bond fund categories — which is also an indication of how awful the bond market was in general.

And that brings us to our first caveat: "They are still bonds," says Thomas Urano, chief investment officer at Sage Advisory Services. Despite all their anti-inflation merits, TIPS prices will go south when the bond market does, at least partway.

If you own individual TIPS to maturity, price fluctuations won't matter much. You'll get your interest and principal as promised. If you sell your TIPS before they mature, however, you'll get whatever the market will pay, which could be more or less than the current rate of inflation.

Consider the following TIPS tips before you buy:

Watch out for falling prices. If we enter a period of falling prices — deflation — then the Treasury would subtract that amount from your bond’s principal value. Deflation is unusual, but not unknown. The CPI went negative in 2009 and 2015. But even if the CPI deflates for the life of the bond, you're guaranteed your full initial principal at maturity.

Understand the real yield. The real, or inflation-adjusted, yield from TIPS is a gauge of future inflation expectations.

For example, if the 10-year TIPS yield is 2.13% and the 10-year Treasury note yield is 4.35%, then Wall Street is expecting an average 2.2% inflation rate over the next 10 years. The TIPS breakeven — the difference in nominal yields between TIPS and Treasury securities of comparable maturities — has ranged between 0.04% and 3.02% since 2023, so a 2.2% real yield is a relatively high return.

Be ready for Uncle Sam to take a cut. Your interest is subject to federal income taxes, though not state or local taxes.

But there’s a catch: You also owe tax on the inflation adjustment to your principal in the year you receive it — even though you don’t realize that income until the bond matures or you sell it. That makes TIPS in general, including TIPS funds, best used in a tax-deferred account.

How to buy TIPS

You can buy individual TIPS in $100 increments for free from the Treasury at Treasury Direct. You can also buy TIPS through your brokerage. Or you might prefer using mutual funds and exchange-traded funds.

Short-term funds invest in TIPS with maturities of five years or less, according to Morningstar. These funds tend to be less volatile than longer-term TIPS funds, says Chun Wang, portfolio manager at the Leuthold Group, a money management firm.

As with all funds, you should prefer those with low expenses — 0.70% or less. Consider T. Rowe Price U.S. Limited Duration TIPS Index (TLDTX). The fund, which charges a 0.21% fee, has outpaced its peers over the past 12 months with an 8.2% gain.

Also consider American Century Short Duration Inflation Protected Bond (APOIX), which charges 0.70% in management fees. The fund has beaten the average short-term TIPS fund over the past one- and five-year periods. (Returns, prices and other data are as of April 30.)

ETFs worth a look include iShares 0-5 Year TIPS Bond (STIP), which weighs in with a 0.03% expense ratio, and Vanguard Short-Term Inflation-Protected Securities (VTIP), which charges 0.03% a year. Both have beaten the average ETF in their category over the past three- and five-year periods.

TIPS funds with a longer-term orientation can be riskier than their short-term brethren.

"They are definitely more sensitive to interest rates," says Sam Millette, fund manager at Commonwealth, an investment advisory firm.

Specifically, these funds are likely to post a bigger loss than short-term TIPS funds during a period of rising interest rates. (Bond prices and interest rates move in opposite directions.) A TIPS interest payment will offset some, but not all, of the pain of rising interest rates. In 2022, for example, the average TIPS fund lost 9.0%.

Still, if you have a longer investing time horizon, then a longer-term TIPS fund is a good choice, says Millette. Schwab U.S. TIPS (SCHP), which tracks a Bloomberg U.S. TIPS index, invests in a full range of maturities. The portfolio recently had an effective maturity of 7.1 years and a duration of 6.4.

Duration is a measure of interest-rate sensitivity; a duration of 6 implies a 6% loss in net asset value if interest rates rise one percentage point. The ETF finished in the top half of its category for nine of the past 10 calendar years (the exception was 2022), and it charges an expense ratio of 0.03%.

Finally, don’t wait until the CPI has already soared to buy TIPS. Remember that TIPS are priced according to what Wall Street expects for inflation over time, not today’s inflation rate. Those who bought TIPS funds during the 2022 inflation spike took a big hit because of the higher interest rates that tend to follow such consumer price surges.

For that reason, says Sage Advisory’s Urano, "TIPS are not a cure-all."

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• TIPS vs I-Bonds
• Why I Trust Bonds, Even Now
• How to Cash in Savings Bonds

Hence my segue into an assessment of the various sectors heading into summer. Despite lagging performance in early 2025, municipal bonds offer clear and present value, with yields as a percentage of Treasury rates that are extremely high.

While a 10-year T-bond yields 4.2%, for example, you can find AA-rated and AAA-rated tax-free issues galore priced to yield as much or more to maturity, for a taxable-equivalent yield in the range of 6% to 7%. This is due to what U.S. Bank bond honcho Bill Merz calls "an incremental blend of a variety of things," including a burst of new muni supply in 2025 that was just in time for mass selling of illiquid municipal exchange-traded funds that cheapened the entire sector.

But now yields are high enough to bring insurance companies back alongside individuals. And if you reckon the world is quasi-boycotting Treasury debt and other U.S. assets, foreigners are not much of a factor in municipals.

Next — and this sounds counterintuitive — I would not avoid high-yield corporate bonds. Yes, this group is more closely correlated to stocks than munis and Treasuries. And yes, in April some of my favorite high-yield funds, such as Fidelity Capital & Income and Hotchkis & Wiley High Yield, got body-slammed while stocks crashed. But unless you think the economy is failing — the first-quarter decline in economic growth is misleadingly negative — the extra yield will still pay for itself.

"Fifty percent of high yield is double-B, while it used to be only one-third," says American Century's corporate bond chief Jason Greenblath. While bank-loan defaults may be creeping higher and CCC-rated bonds are dicey, BB bond credit problems are not.

Most high-yield funds lean toward the stronger layers of the sector. And after the struggles in April, the spread between BB bonds and Treasury yields has narrowed again after spiking to more than 3 percentage points in the April trading panic. But at around 2 to 2.5 percentage points, the extra income is still greater than at the start of the year.

Nice yields, minimal risk

I also see fresh opportunities in preferred stocks, either via funds or in the individual issues of banks, utilities and insurance companies.

The rule is that any $25-par-value investment-grade preferred priced at around $23 is safe to buy and becomes an instant source of extra yield. Various Allstate, Bank of America, JPMorgan, Truist and electric-company preferred shares occupy this zone, for current yields between 6% and 7% and minimal risk.

If you go down in quality to BB, you can find more than 7%. Banks and insurers are in better condition than in 2008, so if the entire economy really does falter, they will not fail or get downgraded to where the value of these obligations takes another whacking.

I’ll note that the stocks and stock funds that did the best during the worst of the unpleasantness are the most bondlike: AT&T, Realty Income, Franklin Low Volatility High Dividend ETF — or pretty much any fund with "dividend" in its name. Nothing is immune from renewed pressure if the political situation, the economic situation or both descend into another, more intractable crisis.

The chance of stagflation and that sell-America theme rule out long-term Treasury bonds unless you can hold to maturity. But the domestically focused high-income standbys that have been dear to my heart for decades are likely to survive.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• Bond Ratings and What They Mean
• Treasury Bills vs Treasury Bonds: Know the Difference
• What's Up With the 10-Year Treasury Bond: Four Financial Experts Weigh In

In April, investors saw the S&P 500 Index decline 18.9% from its February peak. The index has recovered some of its losses, though it remains volatile.

During this volatile period, there has been much attention paid to the fluctuations of the 10-year Treasury bond.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

This instrument is widely recognized as a crucial indicator of the broader economic landscape and plays a pivotal role in the day-to-day operation of the global financial markets.

Its influence extends beyond the confines of government finance, impacting everything from mortgage rates to the overall cost of borrowing. This makes the 10-year Treasury an essential watchpoint for investors, economists and policymakers alike.

A quick primer on Treasury bonds

The federal government issues Treasury bonds to finance its operations, with maturities ranging from four weeks to 30 years. Ten-year Treasury bond investors are paid interest semiannually, known as the coupon rate, and receive their principal back at maturity.

During the bond’s holding period, however, investors may notice that the fair market value of their Treasury bonds fluctuates.

Usually, these movements are in response to interest rate changes. The key point for investors to remember is that bond prices and interest rates move in opposite directions.

As a bond’s maturity approaches, these fluctuations tend to be less dramatic.

What happened in April?

Since the stock market began its sharp drop in early April, the price of 10-year Treasury bonds has also declined. This development is curious, since during times of economic uncertainty, investors often seek the safety of Treasury bonds.

This increased investor demand should have resulted in higher, not lower, Treasury bond prices.

According to Steve Preikschat, client portfolio manager at Janus Henderson Investors, “Tariffs and the associated inflation risks are the primary culprits of the move higher in 10-year Treasury rates, (resulting in lower valuations) as investors demand higher yield compensation for lending capital in this uncertain environment.”

Erika Oquist, Janus Henderson Investors’ fixed-income specialist, further explains, “If the market is anticipating higher inflation, today’s 10-year Treasury coupon payments may not look so attractive in a few years. This sentiment has dampened demand, driving valuations lower.”

Next steps for investors

Our advice to bond investors is similar to what we’d recommend for stock investors: We think the best course of action is to remain patient and avoid making any rash decisions.

As Oquist points out, “Despite the fluctuations observed in April 2025, the fundamental attributes of Treasury securities in providing stability and safety in investment portfolios remain unchanged.”

Preikschat adds, “The silver lining of the move higher in 10-year Treasury yields (lower prices) is that today’s yields are extremely attractive for investors looking to add to their bond holdings.”

Both of our in-house fixed-income experts remain bullish on the benefits of properly diversified portfolios.

Despite the recent drop in prices, bonds have squeezed out about a 1.73% return so far in 2025 (as of May 13), as measured by the Bloomberg U.S. Aggregate Index, which tracks a basket of government and investment-grade corporate bonds.

In fact, bonds have performed exactly as advertised in 2025, buoying portfolios during a difficult period for stocks.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

According to Oquist, “Portfolios should be built for the long term, and that includes both growth-oriented investments as well as safer investments to help manage the risks and uncertainties inherent in the financial markets.”

Final words

Eventually, this recent bout of volatility in both the stock and bond markets will pass (although no one really knows when).

Ben Rizzuto, wealth strategist at Janus Henderson, recommends that investors “review their financial plan and remind themselves of the goals they created for the future. This exercise can often help investors transition from a short-term, emotional mindset to a calmer, more future-oriented outlook.”

For investors who have not created a financial plan, Rizzuto suggests now is a great time to do so.

Our experts agree on one thing — investors who exercise patience are likely to benefit over the long term.

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a financial professional. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information. Janus Henderson is a trademark of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.

Related Content

• How Does the 10-Year Treasury Yield Affect Mortgage Rates?
• Why the 10-Year Treasury Yield is so Important Right Now
• With High Yields, Do Treasury Bonds Belong in Your Retirement Portfolio?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

High-grade municipal bond yields, particularly at the long end of the curve, are near their highest levels in over a decade, according to the Bloomberg Municipal Bond Index through May 8.

And the ratio of the tax-equivalent yield on 30-year AAA-rated munis vs U.S. Treasuries is currently sitting just above 90%, according to Bloomberg's Evaluated Pricing Service as of May 8.

That means many muni bonds are practically offering tax exemption at little or no cost to investors.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

The combination of high outright yields at that ratio to Treasuries doesn’t happen very often — and when it does happen, it typically doesn’t last long.

The perfect storm: What drove munis to these levels

The reasons are technical in nature:

• Increased supply. Tax-exempt muni issuance in the first quarter of 2025 was 23% above the record pace set the previous year, according to Bloomberg through March 31, putting pressure on municipal yields.
• Treasury market volatility. In early April, the combination of high volatility in the Treasury market and moderate bond-to-equity rebalancing pushed rates for high-grade bonds up significantly at the long end of the curve.

Those headwinds have left munis relatively cheap compared to other fixed-income asset classes and have pushed their total yields up to a high-water mark.

However, as we head into summer, the typical seasonal patterns suggest that supply will decrease and demand will rise, driven by coupon and principal reinvestments.

Despite the recent technical pressures, muni credit quality remains intact at high levels. In recent years, state and local governments have applied excess fiscal stimulus wisely, building rainy-day funds and buffers for turbulent conditions.

Moreover, we expect municipal revenue sources to be largely insulated from any direct impact from tariffs.

In short, we’ll soon be entering a traditionally strong period for munis, with the added appeal of exceptionally cheap valuations and solid credit fundamentals.

Long-dated high-grade munis have become especially attractive of late. The chart below highlights the excess tax-equivalent yields that munis are offering vs Treasuries in the long end of the curve.

This differential has grown significantly since the end of last year. Not only are these opportunities rare, but they are also short-lived.

The investment case in brief

Munis are in good position to deliver strong returns this year, with tax-equivalent yields close to 7% on an after-tax basis, and provide a ballast in the event of an economic downturn, according to the Bloomberg Municipal Bond Index yield and Vanguard calculations as of May 8. (The municipal tax-equivalent yield is calculated using a 40.8% tax bracket, which includes a 37% top federal marginal income tax rate and the 3.8% net investment income tax to fund Medicare.)

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

Given the current yields, valuations and technical tailwinds, longer-dated high-grade munis represent a sweet spot in the market.

Conditions are likely to shift in the coming months, so investors may want to consider seizing this investment opportunity before it’s gone. And remember that all investing is subject to risk, including possible loss of principal. (Read another timely take on muni bonds in the article Financial Analyst Sees a Bright Present for Municipal Bond Investors.)

If you’re considering investing in munis, you should be aware that although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as to the federal alternative minimum tax.

Also, bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

Related Content

• Remembering Bogle: A New Standard for Municipal Investing
• GOP Eyes Taxes on Municipal Bond Interest: What You Need to Know
• This Boring Retirement Income Source Has Big Tax Benefits
• Five Considerations About Municipal Bonds if Tax Cuts Sunset

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The Federal Reserve’s prolonged near-zero interest rate policy and aggressive bond-buying programs — designed to resuscitate economic growth — effectively suppressed yields, leaving investors starved for cash flows.

However, the bond market landscape has changed significantly, giving investors new opportunities to generate meaningful income. We see this clearly in the municipal bond market.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Investment-grade municipal bonds are providing notably attractive taxable-equivalent yields for investors in high tax brackets, and sharp fund outflows in early April, resulting from the recent trade policy shocks and tax season, have created an even brighter entry point for investors.

Liberation Day and market reaction

Even before municipal rates increased abruptly in April, investment-grade municipal bond yields appeared attractive. As of March 31, the Bloomberg Municipal Bond Index’s 6.50% taxable-equivalent yield for top taxpayers had been surpassed only 3% of the time over the past 15 years.

Additionally, real yields, or yields after adjusting for inflation, rivaled levels not seen since 2013 and were strongly positive, in contrast to the negative real yields seen in 2021 and 2022.

The market sell-off after the tariff threat announced on April 2, which President Trump called Liberation Day, has only increased the attractiveness of this opportunity.

Following the tariff threat and the resulting global market turmoil, municipal funds experienced significant outflows, the most seen in several years, which sent yields for high-quality municipal issuers soaring by nearly 100 basis points in just three days, mirroring moves seen during the onset of the COVID pandemic in early 2020.

The timing also coincided with tax payment season, when municipal funds have witnessed outflows in the past.

The combination of these factors has created an excellent opportunity for investors to lock in high levels of tax-exempt income at a time when the credit fundamentals of municipal issuers remain broadly strong. The index taxable-equivalent yield climbed to 6.86% as of May 14.

Municipal bond relative value: An even greater opportunity

While the historic appeal of municipal yields is evident, our relative value analysis demonstrates a compelling case for municipals.

One relevant valuation measure shown in the chart below is the municipal/Treasury yield ratio, which helps assess the value of municipals relative to taxable fixed-income bonds.

The 10-year AAA municipal/Treasury yield ratio has averaged 67% over the last two years but rose well above this average during the last month, driven by the recent municipal fund outflows. A higher ratio indicates increased relative value for municipal bonds.

While the ratio has started to decline, normalizing from the dislocated peak seen in April, at 74% it is still particularly attractive compared to the average over the last two years.

Another traditional valuation metric to consider compares municipals vs equities, using the taxable-equivalent yield of municipal bonds in relation to the stock market's earnings yield.

The current earnings yield of the S&P 500 Index is about 4.5%, based off the forward price-to-earnings ratio at roughly 22 (investors are essentially paying $22 for every $1 of corporate earnings, resulting in an earnings yield of 4.5% ($1 divided by $22)).

Due to the extended period of low interest rates over the past 15 years, it has been uncommon for municipal bond taxable-equivalent yields to exceed the earnings yield of the S&P 500 Index.

The chart below illustrates that, until recently, the last time municipal bonds had a valuation advantage over equities this significant was in 2002.

Conclusion

Municipal bond instruments, no longer hampered by suppressed yields, offer high-tax-bracket investors an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

Municipal bonds present a compelling value proposition with taxable-equivalent yields near 7%, outpacing inflation and rivaling equities on a risk-adjusted basis.

While economic and policy uncertainties persist, the convergence of rising real yields and sound credit fundamentals suggests that municipal bonds should be a strategic cornerstone in portfolio construction to provide tax-advantaged income and wealth preservation. (Read another timely take on muni bonds in the article Such Attractive Yields in High-Grade Munis Are Rare and May Not Last Long.)

A&M Private Wealth Partners, LLC is an SEC-registered investment adviser. Please note that SEC registration does not denote any particular competence or ability and no inference to the contrary should be made. For complete information on the services we provide and our fees, please review our Form ADV at adviserinfo.sec.gov, call 561-437-6738, or mail us at 3825 PGA Blvd, Suite 1005, Palm Beach Gardens, FL 33410.

The information contained in this article reflects A&M’s views as of the date of this publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. A&M has obtained the information from various third-party sources believed to be reliable, but such information is not guaranteed. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. A&M is not responsible for the consequences of any decisions or actions taken as a result of information provided in this newsletter and does not warrant or guarantee the accuracy or completeness of this information.

Past performance is not indicative of future performance. The information in this report is for informational purposes only and should not be relied upon as the basis of an investment or liquidation decision. Nothing in this report shall be construed to be a solicitation to buy or offer to sell any security, product or service to any non-U.S. investor, nor shall any such security, product or service be solicited, offered or sold in any jurisdiction where such activity would be contrary to the securities laws or other local laws and regulations or would subject A&M to any registration requirement within such jurisdiction. See www.ampwp.com/disclosures.

Related Content

• GOP Eyes Taxes on Municipal Bond Interest: What You Need to Know
• This Boring Retirement Income Source Has Big Tax Benefits
• Five Considerations About Municipal Bonds if Tax Cuts Sunset
• Remembering Bogle: A New Standard for Municipal Investing

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The best way to drive inflation out of the system is to hike short-term interest rates. Rates had been sitting close to zero from 2009 to 2022, with the exception of a brief period around 2018. Then the Federal Reserve started to increase rates relentlessly — to more than 5% in just two and a half years. The antidote worked, up to a point. Inflation dropped from 8% in 2022 to 4.1% in 2023 and to 2.9% last year. But the Fed’s target is 2%, and it’s having a tough time getting there.

“American inflation looks increasingly worrying,” said a headline in The Economist in February. President Trump was elected, in part, to stop prices from rising so much, and he has been trying. With Elon Musk, he has cut government employment and programs, but prices don’t react quickly to fiscal changes unless they’re so extreme as to cause a recession — an almost certain way to end inflation with a cure as bad as the disease. The president also wants to drive down energy costs by increasing domestic oil drilling, but oil prices are determined by global forces.

Consumers are concerned, and if they start to think that inflation is rising, they will drive up prices by buying goods ahead of further anticipated increases. The most recent University of Michigan Survey of Consumers found that expectations for inflation over the next year jumped from 3.3% in the previous month’s survey to 4.3% — the highest reading since November 2023 and the second consecutive month of unusually large increases. A big reason is the threat of higher tariffs, which would raise the cost of goods that Americans buy — not just imported goods, but U.S.-made products as well.

Stocks to buy when inflation is rising

So, the fool’s paradise may be ending. Inflation of 3% may not sound like much, but it means that the dollar loses half its value in 24 years; at 4%, it happens in just 18 years. In such a scary environment, is there a way to protect your investments?

The surprise answer is to buy stocks. Consider the worst period of inflation in U.S. history, 1977–81, when the CPI rose at an annualized average rate of 10%. The S&P 500 stock index returned an annualized 8% — a bit below the norm but much higher than returns on long-term U.S. Treasuries, which fell by an average of 1% a year, including interest payments and price declines.

The reason stocks do better is that businesses can counter their own higher costs by raising prices. With inflation averaging about 5% between 2022 and 2024 and the Fed aggressively boosting interest rates, the S&P 500 has produced an annualized return of about 9%.

In an article I wrote in this magazine 19 years ago, with inflation rising, I recommended stocks of companies that appeared to have the power to raise their prices without much resistance. One example was Coca-Cola (KO, $71), which has risen from its price back then of $22 a share while paying a dividend that has jumped by two-thirds (the yield is now 2.9%). I still like Coke; no one can make Coke but Coke. (Securities I like are in bold; prices are as of February 28.)

Other stocks in this category are technology businesses that sell distinctive services by subscription — charging small amounts each month for cloud storage, for example. Apple (AAPL, $242) and Alphabet (GOOGL, $170) are excellent choices.

A non-tech stock that raises prices with impunity is Public Storage (PSA, $304), a real estate investment trust that provides a more mundane kind of storage — for cartons and furniture you don’t want to keep at home. Once you have stored your earthly possessions with Public Storage, moving them to escape a 5% price increase is annoying and onerous. The stock has returned an annualized 11.7% for the past five years.

Another category for inflationary times includes stocks that earn a fairly consistent proportion of a growing pie. Unfortunately, these franchise companies — such as advertising agencies, insurance firms, realtors and ticket sellers — are undergoing upheavals now. Still, there are stocks I like. One is Live Nation Entertainment (LYV, $143), the giant concert producer. Another is Chubb (CB, $285), an insurance company specializing in high-income clients.

How to invest in commodities

Prices of commodities typically rise in inflationary times, but buying leveraged futures contracts comes with severe risks: Transaction fees are high, and a sharp dip can wipe out all of your capital. Also, I have a bias against putting money into things (lumber, pork bellies, gold) rather than people and ideas.

Instead, invest in commodities through natural-resource funds that let you take advantage of human ingenuity as well as the prices of goods rising with inflation. An attractive choice is Vanguard Materials (VAW, $197), with an expense ratio of just 0.09%. The exchange-traded fund’s portfolio is headed by Linde (LIN, $467), a U.K.-based company that sells industrial gases, such as nitrogen and helium, and has a market capitalization (price times shares outstanding) of $221 billion. The stock has doubled in less than five years.

Also consider iShares North American Natural Resources (IGE, $44), an ETF whose portfolio leans heavily toward oil and gas stocks, such as EOG Resources (EOG, $127), but also owns such intriguing companies as CRH (CRH, $103), an Ireland-based producer of building materials such as granite and sandstone.

What about Treasury inflation-protected securities?

What about TIPS, or Treasury inflation-protected securities, which pay a guaranteed real rate of interest plus an inflation kicker that rises with monthly changes in the CPI? At an auction in February, 30-year TIPS were sold carrying a real rate of about 2.4%, the highest since 2001. If inflation averages 3% until maturity, your annual return will exceed 5%.

But TIPS markets are remarkably volatile. In a time of above-average inflation, I would stay away from bonds and bond funds — except those with very short-term holdings. The problem is that when interest rates rise with inflation, the bonds you bought at a lower fixed rate lose their value.

Better to stick with stocks, even though you’ll have to be content with lower returns than in times of stable prices. In fact, one of the best ways to ride out inflation is simply by owning a representative chunk of the market through SPDR Dow Jones Industrial Average (DIA, $438), an ETF known as Diamonds. Many of the Dow’s 30 components are built for inflationary times, among them Nike (NKE, $79) and insurance giant Travelers (TRV, $258). Also, the Dow leans more toward value-oriented stocks, which do better during inflation, than toward growth-focused issues.

Inflation will never be an investor’s friend, but it doesn’t have to be an enemy either. Keep cool and carry a diversified portfolio.

James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns none of the securities mentioned here. You can contact him at JKGlassman@gmail.com.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related content

• Protect Your Retirement Income from Inflation
• TIPS vs I-Bonds
• Best Stocks to Buy Now

Since then, indexing strategies have grown exponentially, particularly within ETFs. If an investor felt their manager was not meeting their expectations of index-or-better returns, there were many substitutes that could.

Municipal bonds, a fragmented asset class, was slower to mature in the passive trend. For a long time, many considered the concept of “municipal indexing” an oxymoron.

Because with nearly 1 million bonds in this market, every buy decision within a portfolio presents a large benchmark-relative overweight and therefore benchmark-relative risk.

Even Vanguard offered only active strategies for municipals for decades.

However, recent improvements in technology, data, systematic trading and risk analytics have enabled a more effective set of conditions for municipal indexing to be successful.

Flows have acted accordingly. Assets in passively managed municipal ETFs stand at $118 billion, nearly tripling over the last five years.

Over this time, the number of ETF products hasn’t expanded as rapidly. Instead, the rise in assets is attributable to incumbent products becoming larger, more diversified and more liquid.

Just as it did for other asset classes decades ago, indexing is now setting the “Bogle standard” for municipal investing: Do not settle for less than index-level returns!

Investors now have a variety of at-scale passive municipal strategies at their fingertips across investment-grade state and national exposures.

Regardless of vehicle (mutual funds, ETFs, direct bond purchases and SMAs), high earners should recognize the evolution of this market, with this new standard for municipal investing, and reassess their expectations for investment outcomes.

Our clients should now be asking for more from their municipal investments, unwilling to compromise for anything less than index-or-better returns.

A few last thoughts to round out the picture:

• We use the phrase “index-or-better returns” to capture the idea that active managers are still highly valuable in this fragmented market, but investors should require such managers to outperform over full market cycles net of fees.
• Some managers will deliver excess beta within supposed investment-grade strategies and call it alpha. Be discerning, look at benchmark-relative drawdowns and ensure the strategy is what you think it is.

All investing is subject to risk, including the possible loss of the money you invest.

Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.

Related Content

• Five Considerations About Municipal Bonds if Tax Cuts Sunset
• How to Survive Market Mayhem
• Four Ways to Invest in Quantum Computing

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

One option reportedly on the table that could affect millions of U.S. households? Eliminating or limiting the tax exemption on municipal bond interest.

This potential change is raising alarm in the $4 trillion municipal bond market, long considered a cornerstone of U.S. public finance and a popular investment choice for many so-called “regular” investors.

Is this the last year muni bond interest will be nontaxable at the federal level? Read on to learn more.

Municipal bond tax exemption on the chopping block?

Municipal bonds, also known as "munis" (debt securities issued by state and local governments to finance public projects), typically offer tax-exempt interest income at the federal level. (That interest is also often tax-free at the state level if your state issues the bond.)

So, the federal government forgoes anywhere from $32 to $42 billion annually in estimated revenue due to the muni bond interest exemption.

Stephen Moore, an informal economic adviser to former President Donald Trump, has been vocal about taxing municipal bond interest.

Moore argues that targeting muni bonds aligns with Republican goals of "widening the tax base" and is "politically feasible" because it primarily affects high-income investors who benefit most from the exemption.

"You want to impose taxes on the wealthy? This is an effective method," Moore told Bloomberg.

Moore has additionally suggested that eliminating or capping the exemption could help offset the cost of extending TCJA provisions without increasing overall tax rates.

And while lawmakers are discussing eliminating the tax exemption, other approaches are reportedly under consideration. For example:

• Targeting Specific Bond Types: The tax preference could be changed for specific categories of bonds, like private activity bonds and Build America Bonds.
• Phased Approach: A gradual reduction of the tax exemption to mitigate market disruption.

Meanwhile, U.S. House Budget Committee Republicans have identified this move as a potential revenue source, estimating it could generate approximately $250 billion over ten years.

Impact on muni investors

The potential impacts of any change to how bond interest is taxed could be far-reaching. The municipal bond market is a core component of financing public infrastructure projects across the United States.

On its website, industry coalition group Municipal Bonds for America (MBFA) states, “Today, roughly 75% of the infrastructure in the country is financed by municipal bonds, accounting for 4 million miles of roads, 16,000 airports, and 900,00 miles of water pipelines.”

Municipal bonds have also long been a popular choice for individual investors looking for stable, tax-advantaged income. Data show that individual households own approximately 66% of outstanding municipal securities.

According to MBFA, muni bonds are predominantly held by individual investors, with about 72% owned directly or through mutual funds. The majority of these individual investors are over 65 years old.

The organization also points out on its website that a notable portion (reportedly about 40%) of municipal bond interest is paid to households earning less than $200,000 a year. Still, as MBFA reports, businesses, including insurance companies and banks, own approximately a quarter of muni bonds.

That widespread ownership underscores the potential impact of tax changes on taxpayers who may rely on these investments for stable, tax-advantaged income.

If muni bond interest becomes taxable, investors would need to include the interest in their taxable income. That would likely increase their federal, state, and local tax liabilities and push some individuals into higher tax brackets, increasing their overall tax burden.

On a related point, Brian Egan, chief policy officer for the National Association of Bond Lawyers noted to the National Association of Countires (NACo): ”Municipal bonds have long been seen as a way for Americans to conservatively pay for their retirement, to get tax certainty later in life. Taking away this tool would create yet another disruption on the investor side.”

Additionally, if the tax exemption were eliminated, bond advocates argue the consequences could be far-reaching, including:

1. Higher Borrowing Costs: Removing the tax exemption would likely increase borrowing costs for state and local governments by as much as 35% to 40%, according to some estimates.

2. Market Disruption: A potential sell-off could further increase yields and borrowing costs and strain state and local government finances.

3. Infrastructure Impact: Increased borrowing costs could hurt funding for critical infrastructure projects.

The Tax Policy Center reports that repealing the muni bond tax exemption could lead to less investment in state and local infrastructure. “Alternatively, state and local governments would need to increase local taxes or cut spending to maintain infrastructure spending,” the TPC states.

Not surprisingly, several industry groups are mobilizing to protect the tax-exempt status of municipal bonds. For example, the BDA, the National Association of Bond Lawyers (NABL), and the Public Finance Network (PFN) have each launched advocacy efforts to preserve the exemption.

The Government Finance Officers Association’s (GFOA) policy statement on tax-exempt status of bonds includes the longstanding industry principle that “no federal tax should be imposed, either directly or indirectly, on the interest paid on state and local government obligations issued to provide services to the public.”

Trump Tax Plan and bond tax exemption: Bottom line

As Congress debates how to fund its next round of tax cuts, municipal bond interest remains "in play," as Moore reportedly described it to Bloomberg.

However, it’s important to note that no specific legislation has been introduced yet in Congress to repeal the muni tax exemption.

Right now, congressional Republicans are working to advance President Trump’s tax agenda. But key differences between the House of Representatives and the U.S. Senate (both of which are led by Republicans) appear to be creating hurdles.

Both chambers are racing to finalize their plans, with major TCJA provisions set to expire at the end of 2025, and the debt limit at risk as early as this summer.

• The House passed a sweeping budget resolution (“one big beautiful bill,” according to President Trump) that includes about $4.5 trillion in tax cuts over the next decade.
• The Senate plan is smaller in scope, with a $340 billion price tag.

Still, for the millions of American households invested in municipal bonds, the coming months will be a time to stay informed and consider how potential changes might affect their financial futures.

Related

• Are Bonds a Good Investment for the Trump Era?
• What Are Bonds and How Do They Work?
• The Fine Print: What Trump Isn’t Telling You About His Tax Plans

For example, if you are the executor of an estate, you may be required to obtain a medallion stamp to authorize the transfer of securities from the original owner’s account to beneficiaries.

If securities are held in a living trust, the trustee may have to obtain a medallion stamp to transfer them to the trust’s beneficiaries.

You may also need a medallion stamp to transfer a brokerage account to another person, such as a family member, or to an account of your own with another firm.

A transfer of ownership for a certificate of deposit also typically requires a medallion stamp.

And if you’d like to give someone securities, you may need a medallion stamp to process the transfer — particularly if you’re giving physical stock certificates rather than electronic shares. In that case, you’ll be required to sign the back of the certificate and provide the medallion stamp to authorize the transfer.

If you think you need a medallion stamp, start by looking up the transfer agent, which is responsible for recording changes of ownership and other shareholder records for publicly traded companies, mutual funds and other entities. (Find the transfer agent’s name by going to the website of the company that holds the asset you’re transferring and searching the investor relations section.)

The agent will provide you with the necessary forms to make the transfer.

Then find out whether your bank or credit union is authorized to provide a medallion stamp. If it can, you may be able to get a stamp at no cost, although some will provide stamps only to customers who have had an account for a certain amount of time — say, six months.

If your bank doesn’t offer medallion stamps, you may be able to get one at another bank, typically for a fee ranging from $10 to $50, depending on the institution and the complexity of the transaction.

The Securities Transfer Association, a trade association for transfer agents, provides guidance on finding an institution that participates in the medallion signature guarantee program.

Applying for a medallion stamp

You must apply for a medallion stamp in person, so make an appointment at your financial institution or one that provides the service.

Generally, you’ll need a government-issued photo ID, the completed securities transfer form and account statements or stock certificates if you’re transferring physical securities.

For transfers involving a trust, you may need a copy of the trust agreement, power of attorney documents and/or a death certificate. Depending on the type of transaction, the institution may ask for additional paperwork, so make sure to request a list of required documents in advance.

In most cases, the review of a medallion stamp application will take two to five business days, although the time frame will vary depending on the complexity of the transaction.

Medallion stamps have no standard expiration date — transfer agents typically determine the period during which the stamp is valid. Check how long you have to complete the transfer once you’ve obtained the stamp. If there’s a delay, you may have to reapply for a medallion stamp guarantee.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related content

• How to Add Treasury Bonds, Bills and Notes to an IRA
• How Do I Gift Stocks?
• 7 Best Stocks to Gift Your Grandchildren

Case in point: Uncertainty surrounding the Trump administration's tariffs and trade policies has rattled markets. The S&P 500 briefly entered correction territory in early March – this after soaring more than 23% in 2024, marking the first back-to-back years of 20%+ gains since the late 1990s.

For those who spent the past few years asking, "Why own anything but big growth stocks?", the market is serving up an answer.

Tech giants like Nvidia (NVDA), Apple (AAPL) and Amazon (AMZN) fueled the latest bull market, leading many investors to question the need for more conservative assets like bonds. But as volatility rises, those same investors may start to rethink their allocations.

"I think we got spoiled over the past 15 years," says Charles Weeks, CFP Board Ambassador and founding partner of Barrister. "Some investors forgot what it's like to suddenly lose 30% in six months."

So, is this bonds' time to shine? Or will inflation and a cautious Fed limit their appeal?

It's probably time for many investors to reacquaint themselves with bonds while also remembering another investing truth: tune out the noise and let reason – not emotions – guide your decisions.

Getting reacquainted with bonds

To understand their potential value right now, it helps to start with the basics. Bonds are loans to governments, agencies or corporations that pay regular interest and return principal at maturity.

They offer a steady income stream, with U.S. Treasury bonds considered the safest and corporate bonds carrying more risk but offering higher potential returns.

A key factor in bond investing is the relationship between interest rates and bond prices.

"Think of it like a seesaw," Weeks explains. "When interest rates rise, bond prices fall. When rates drop, bond prices go up."

That's why bonds struggled when rates climbed. But with the Fed cutting rates three times at the end of 2024 – and signaling the potential for two more rate cuts this year – they have become a more attractive option.

When it comes to bonds, Weeks urges investors to consider the yield curve and duration.

A steep yield curve suggests higher long-term rates, while an inverted curve can warn of economic trouble. Duration measures how much a bond's price moves when rates change. The longer the duration, the more sensitive it is.

For investors seeking stability, bonds provide reliable income and act as a hedge against stock market swings. While they lack the excitement of soaring stocks, their ability to smooth volatility could prove especially valuable in the years ahead.

The case for bonds in the current market

"Bonds are quite attractive now for a variety of reasons," says Scott Ward, CFP Board Ambassador and Wealth Advisor for Compound Planning. "First, they can offer investors competitive yields."

So far this year, bonds have done spectacularly well as a diversifier and a risk-off safe haven. Morningstar reports that core bonds have outperformed stocks.

With inflation stabilizing – at least for now – bonds have regained appeal. Weeks points out that money market funds are yielding around 4%, providing a solid place to park cash. If the Fed lowers rates further, bond investors could see price appreciation.

At the same time, the Trump administration, which has frequently noted the country's debt problems and committed to slashing costs, has a strong incentive to bring the 10-year Treasury yield lower to ease government borrowing costs.

Still, the economic landscape is uncertain. Tariffs could drive inflation higher, eroding bond returns, but if inflation continues to cool, rate cuts could boost bond prices.

But even as market conditions shift, bonds remain a steady force in portfolios.

"Taken together in a diversified portfolio, bonds can provide shock absorption during volatile periods," Ward says.

Weeks agrees, making the case that "There's always a reason to have bonds, even for younger investors. When stocks zig, bonds often zag, helping smooth volatility."

While some investors may chase short-term gains, bonds' true value lies in income, diversification and downside protection – qualities that could prove especially valuable in the years ahead.

How to gain exposure to bonds

Investors can buy individual bonds across various sectors and hold them to maturity, but for most, that's impractical. Bond funds, including ETFs and mutual funds, offer the easiest and most diversified way to gain exposure.

"For most investors, ETFs and mutual funds are the best way to own bonds," Weeks says. "Unless you're buying U.S. Treasuries or T-bills directly, I wouldn't recommend purchasing individual corporate or municipal bonds due to default risk."

Even highly rated corporate bonds carry the risk of unexpected events, such as accounting scandals. While municipal bonds were once considered extremely safe, some local governments have defaulted.

Weeks prefers bond ETFs over individual securities for this reason. "Think about Enron – it was once a market darling, then turned out to be one of the biggest frauds in history. Why take that risk when you can diversify with a fund?"

Experts say how much an investor should allocate to bonds depends on risk tolerance, time horizon and financial goals. Older and more conservative investors typically hold more bonds, while younger investors might allocate as little as 10% to fixed income.

Ultimately, uncertainty is just a part of investing. Trying to time the stock or bond market rarely pays off. Instead, focus on your own financial needs and not on what a president may or may not do next.

Related content

• Stocks to Buy for a Trump Presidency
• These 3 ETFs Are a Great Bet for the Trump Presidency
• How to Survive Market Mayhem

Over the past two years, that wasn't a problem. The financial markets were uncommonly calm, and the dreaded recession was a mirage, so you could scarcely go wrong with sound dividend- and interest-paying assets.

Stocks, including high-yield categories such as energy infrastructure, grew without interruption. Fixed income was a breeze, with 4% to 5% yields on cash and short-term equivalents, or 6% to 8% from high-yield bonds, floating-rate bank loans, and newcomers such as exchange-traded funds investing in collateralized loan obligations.

Even shares of long-suffering dividend king AT&T (T) posted a two-year 53% total return.

But in 2025, I sense serenity is giving way to a creeping climate of chaos. Besides the DeepSeek freakout and tariff attack on Canada and Mexico, investors face a debt-ceiling crisis, indications that the Federal Reserve will not cut interest rates again until at least the summer, and a steepening yield curve that stands to send the bond markets into reverse.

A bond slump would also hurt stocks because the correlation between the two grows closer by the day. In talks with strategists and portfolio managers, I hear more about fear, volatility and "uncharted waters" than I do about fresh opportunities and undervalued assets.

Yes, there are challenges. But let me quote the brilliant Baird Funds commentator Michael Antonelli, who just penned this pearl: "If you spent the last decade worrying about the national debt or politics, how did that help you grow your money?" The answer: It did not, and it will not.

So, despite the hazards I enumerated – and the specter of a Treasury default or near-miss is number one – I still resist surrendering to the urge to stash money under the mattress or, worse, to chase gold or other alternatives that yield zero.

My three-day rule remains valid: Do not sell anything due to a news event for three trading days. By then, the knee-jerk sellers are done, and rational or opportunistic buyers return to action. Four other protocols to help you through 2025:

Trust the dollar

Regardless of trade, China, conflict in the Middle East, or inflation, the buck will remain the world’s refuge.

Global capital inflows to the U.S. are rising. The Invesco DB U.S. Dollar Index Bullish Fund (UUP) is a straightforward way to ride the dollar's exchange rate.

Shoot for high yield, low duration

The safest debt investments pay well despite having the least price sensitivity to long-term interest rates.

I like the CrossingBridge Low Duration High Income Fund (CBLDX). Most bank-loan or CLO funds qualify. Target a 6% yield with little price movement.

Explore domestic energy

Oil and gas firms intend to return surplus cash flow to shareholders rather than overproduce and depress prices. It is reasonable to place at least 5%, if not 10%, of an income portfolio in pipeline and infrastructure holdings.

Plains All American Pipeline (PAA) and MPLX (MPLX), both limited partnerships, are my two favorite energy stocks.

Consider municipals

Cities and states are cash-rich, and municipals are also less vulnerable to the antics of the "bond vigilantes" who orchestrate serious Treasury sell-offs.

New 10- to 20-year, AA-rated tax-frees have current yields of around 4%, or a tax-equivalent yield of roughly 5.3% for someone in the 24% federal income tax bracket.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related content

• How to Hedge Against Trump's Tariffs
• Why ETFs Are a Great Bet for the Trump Presidency
• Best Low-Volatility ETFs for When the Market Is a Roller Coaster

T. Rowe Price Floating Rate (PRFRX), our favorite bank loan fund and a Kiplinger 25 member since 2022, yields 7.2%. "The coupon rate on bank loans has never been higher," says fund manager Paul Massaro. "That leaves a cushion for bank loans to endure even more Fed cuts and still deliver high income."

Over the past 12 months, Price Floating Rate has gained 8.7%, outpacing 67% of its peers. By contrast, the Bloomberg U.S. Aggregate Bond index returned 1.3%.

In truth, bank loans can do well whether interest rates are rising or falling, within parameters. When rates are rising (and bond prices, which move in the opposite direction, are falling), these securities typically hold up better than the broad bond market because their interest payments adjust upward, too. In 2022, the Fed raised rates four times, and the typical bank loan fund lost 2.5% – but the Bloomberg U.S. Aggregate Bond Index fell 13% (Price Floating Rate lost 0.7%).

When interest rates fall, bank loans don’t necessarily sour, as long as the cuts aren’t draconian and the result of a struggling economy. Despite the Federal Reserve's one-percentage-point cut in short-term rates in 2024, for example, bank loans still beat "almost everything in fixed income," says Massaro. As long as the pace of rate cuts remains modest in 2025, he adds, Price Floating Rate should perform relatively well.

Massaro and his team of analysts dive deep to find quality loans trading at a discount. Over the past decade, the fund's annualized return of 4.7% beat 85% of its peers.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related content

• Best Bond ETFs to Buy
• When Is the Next Fed Meeting?
• The Best Bank ETFs to Buy

Should you consider crypto? It depends on where you are in life and what your financial situation is. The general rule is, don’t gamble with any money you can’t afford to lose.

Cryptocurrency is way out on the risk curve. It’s volatile. You can make a bundle or lose it just as fast. Some people have made their fortune; some have lost millions. Most folks have come out somewhere in the middle.

It is somewhat like buying lottery tickets or going to a casino. Maybe you’ll get lucky, and unless you’re very poor, losing $50 once in a while won’t imperil your financial future. A small stake in crypto won’t either. But making big bets can be perilous.

If you’re young, you can wait out the crypto market. Sooner or later, it will probably go up. Older people don’t have that luxury. When you’re retired, you’ll need a steady, reliable income to replace your former wages or business earnings.

Though some merchants do accept certain cryptocurrencies, most often, the only way you can get money out is by selling it. If you need to cash in when the price is up, you’ll do fine. But if you must sell when the price is low, you won’t. That’s the problem. Most cryptocurrencies are extremely volatile and experience wide price swings.

Reducing risk while keeping up with inflation: Stocks and bonds

People in or near retirement need to have their investments, savings and future income keep up with inflation without exposing themselves to excessive risk and volatility. It takes a balanced approach.

Here are some more appropriate investments for people in their 50s and older, starting with options that are higher on the risk scale and then moving on down to lower-risk possibilities.

Individual stocks. Having some money in common stocks can make sense, provided you can withstand volatility. While the stock market has performed spectacularly in recent years, far outpacing inflation, you have to have the stomach to bear sharp declines. (Remember 2020?) The law of gravity in the stock market hasn’t been repealed! Many financial experts recommend caution today because the major stock indices are at all-time highs.

Don’t overdo it. The right equity allocation depends entirely on your situation. Stick to a smart allocation over time.

Mutual funds and ETFs. Another way to reduce risk is to invest in stock mutual funds and ETFs instead of individual stocks. You can also achieve risk reduction by concentrating your holdings in stocks that may pay substantial dividends so that you’ll have a stream of income even if the market plummets.

Bonds. Bonds are less risky than stocks and pay out more income than most stocks. They’re worth considering, but they have drawbacks too. With individual bonds, you’ll get your principal back if you hold them to maturity, assuming the issuer (a corporation or municipality) remains solvent. That’s called credit risk. U.S. Treasury bonds have virtually no credit risk, but they pay lower rates.

Most people instead invest in bond funds but their price is not guaranteed. When interest rates rise, the price per share of a bond fund will fall. That typically won’t affect dividend payments, but it can be unnerving.

Lowest-risk options: Bank CDs and guaranteed fixed annuities

Guaranteed vehicles, in contrast, are very low-risk because both income and principal are guaranteed. What you see is what you’ll get, which is why they’re popular and useful from both financial and peace-of-mind viewpoints.

They include bank certificates of deposit and CD-type annuities, officially labeled multi-year guarantee annuities (MYGAs). With each, you get a guaranteed interest rate for a certain term. The biggest risk is that if you need to cash in a CD or MYGA before the term has concluded you’ll pay a varying penalty, which may be substantial. Some CDs and most MYGAs do offer penalty-free partial withdrawals.

Though similar in many ways, CDs and MYGAs have some significant differences. Bank CDs are guaranteed by the Federal Deposit Insurance Corp. (FDIC). MYGAs are not. But annuities are backstopped by annuity guaranty associations in every state. Coverage limits vary.

CDs in nonqualified accounts create taxable income every year. Nonqualified annuities offer tax deferral as long as you don’t take withdrawals from them, and you can defer interest distributions as long as you like. Any withdrawals of interest from an annuity before age 59½ are normally subject to a 10% IRS penalty.

Both CDs and annuities can also be very suitable for an IRA or Roth IRA.

Have your cake and eat it, too?

Can you get market growth potential without risking your principal? Surprisingly, it’s possible.

Fixed index annuities, first introduced in 1995, protect you from any losses but offer upside potential and can guarantee income too. Like any other vehicle, they have pros and cons.

Fixed indexed annuities credit interest annually to your account based on annual changes to a market index, such as the S&P 500 or Dow Jones Industrial Average. You receive an interest credit when the index value increases.

When index value decreases, even if the market dives 30%, you’ll lose nothing. Your principal and all previously credited interest are always protected, even if the stock market crashes.

But you don’t usually get all of that increase. You normally get only part of it because the annuity upside will be limited by a cap or participation rate percentage. So, you can have part of your cake and eat it, too.

Many indexed annuities let you purchase an optional income rider that guarantees a certain future lifetime income. These annuities are complex, and finding one that fits your needs takes more careful consideration than with a MYGA, which is straightforward.

If you’re considering investing in a cryptocurrency, evaluate your situation first. Do you need to take the risk it entails? Have you considered the alternatives? If you do decide to invest, limit your risk with a modest stake if you’re in your 50s or older.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356.

Related Content

• A Personal Journey Through Cryptocurrency's Ups and Downs
• Should You Own Crypto if You’re Retired?
• Fixed Index Annuities as Retirement Tools: Pros and Cons
• How Are Annuity Withdrawals Taxed?
• Why Annuities Sometimes Sound Too Good to Be True

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Traders will sooner or later take profits, but do not mistake an ordinary correction born of overexuberance for real trouble until and unless heavy selling metastasizes and lasts longer than a couple of weeks. And that is unlikely as strong economic growth, capital investment, company earnings and steady consumer spending persist in negating any rational case for a switcheroo to a bear market.

Plus, as banks and money market funds pay less and less, high-dividend-yielding stocks, led by financials, utilities, and most sectors of real estate investment trusts (REITs), will see big inflows of cash.

Banks make wider profit margins on lending when they cut depositors' rates, and one result of that is higher dividends. Several banks have just announced nice dividend boosts, including JPMorgan Chase (JPM) and Fifth Third (FITB). And the busy season for all dividend raises (not only from banks) lies ahead in December and January; 8% and 10% increases are likely to be common.

But my view is mixed and murky with fixed-income (and floating-rate) debt and credit. Here is where you will see winners and losers. High-yield IOUs and tax-exempt bonds are fine, and so are shares of high-interest-rate nonbank lenders.

But I am extra wary of long-term Treasuries and mortgages, and I’m especially wary of passive, total-market-style bond index funds. I would rather accept 3% to 4% from T-bills than trust that government bonds will rally at the longer end of the yield curve.

A good-news-is-bad-news conundrum for bonds

The problem is that many bond traders and fund managers are hardwired to regret sweet economic growth and other positive business and financial news.

As the Fed lowers interest rates to goose the economy, more than a few fear sticky inflation or even another bout of higher readings, notwithstanding all the favorable monthly trends. That explains why the Fed cut sent long-term Treasury and mortgage yields higher, not lower– which sliced bond and bond-fund values. The Vanguard Long-Term Treasury ETF (VGLT) fell 1.3% in a week and a half, while the iShares 20+ Year Treasury ETF (TLT) coughed up 1.6%. This is the wrong place to be.

So why, then, would municipals and high-yield bonds be different? With tax-exempts, it is a net-yield calculation compared with cash – and 3% to 4% tax-free looks better and better as the Fed prepares to trim another 0.5 percentage point from cash returns. Plus, municipals' results lagged earlier in 2024 due to oversupply. But demand is heavy now, and so the returns for munis are improving.

As for high yield, the fortunes correlate closely with stock performance and economic vigor. Both short-term high-yield bonds, as supplied by the PGIM Short Duration High Yield ETF (PSH), and longer-term high-yield funds, such as the Fidelity Capital & Income (FAGIX), yield 5% to 6% with stable-to-rising net asset values.

Again, while Treasury and other taxable bonds had a rough 10 days after the initial Fed cut, Fidelity Capital & Income boosted its net asset value more than 1%, and the fund shows a 9.4% year-to-date return through September 30.

As I often say (and history is on my side), yield rocks. We are about to hear it rock even louder now.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• What A Fed Rate Cut Means For Savings
• Best Stocks to Buy for Fed Rate Cuts
• When Is The Next Fed Meeting?

Bonds offer a unique set of benefits that can provide stability and income, serving different roles based on an investor’s goals and risk tolerance. Understanding how bonds fit into a portfolio and selecting the right bond fund requires an understanding of its intended purpose and the strategies that underpin successful bond investing.

The role of bonds in an investment strategy

Bonds primarily serve two essential roles within an investment portfolio. First, they act as a stabilizer. When equity markets become volatile, bonds provide a stable counterbalance, helping to mitigate overall portfolio risk. This stabilizing effect is crucial, especially during periods of economic uncertainty when stock markets may experience significant fluctuations.

Bonds also provide a steady source of income through coupon payments. This income can be especially beneficial for retirees or those looking to fund living expenses. For younger investors, bond income can be reinvested to further grow their portfolio.

Differentiating bond strategies

When building a bond portfolio, it’s important to keep in mind that the fixed income asset class encompasses a wide variety of security types — each with very different and unique risk and return profiles. Bond funds that invest in securities, such as Treasuries, government-agency mortgage-backed securities (MBS) and investment-grade (rated AAA-BBB) corporate bonds, are more likely to offer investors modest levels of income and returns but rank highly for their dependability, especially during economic or market stress.

On the other hand, bond funds that invest in things like high-yield or “junk” bonds, bank loans and non-government guaranteed commercial and residential mortgages offer enticing levels of income but may lead to unpleasant surprises during market downturns.

Selecting the right bonds

With so many options, what steps should you take to select the right mix of funds for your risk tolerance and return objectives? First, we recommend building a good, high-quality foundation. Investing at least 75% of your bond allocation in traditional “core” bond portfolios will help anchor an asset allocation and prevent the risk of unpleasant surprises. Pay extra close attention to the credit rating breakdown of a fund’s investments. If more than 5% to 10% of a fund’s assets are invested in securities rated below investment grade, it may carry too much risk.

Once you’ve got your portfolio’s quality ironed out, it’s important to understand a fund’s exposure to interest rate risk. For this, look for a measure called “duration.” As a rule of thumb, 1% change in interest rates will result in price fluctuation roughly equal to the fund’s duration.

Remember, however, that bond prices and yields are inversely correlated. To better understand, let’s consider a real-world example. If a bond has a duration of six years and interest rates rise 1%, the price of that bond will fall by roughly 6%. On the flip side, if yields fall by 1%, the price will increase by 6%.

Also, don’t forget to factor in the starting yield. In the above example, let’s assume the bond yielded 5%. An investor’s total returns would be about -1% and 11%, respectively. Many investors have been spooked by rising interest rates and are still heavily invested in short-term bond funds and even money market funds. With historically elevated yields, however, we believe it’s a good time to add duration to your bond portfolios. Funds benchmarked against the Bloomberg Aggregate Bond Index (aka the Agg) are likely to offer the best combination of quality and duration.

Finally, you should understand the tax implications of picking different types of bond funds. For example, municipal bonds are often exempt from federal and sometimes state taxes. This makes them an attractive option for taxable portfolios. However, for many investors, placing bonds in tax-advantaged accounts like IRAs can help minimize the tax impact of the income generated.

Current market outlook

Looking ahead, the outlook for the bond market appears quite favorable. In recent years, rising inflation has led to higher interest rates, which in turn caused bond prices to fall. However, with inflation stabilizing and even moderating, the outlook for bonds is improving. Economic data is also showing signs of moderation as the unemployment rate has edged up to 4.2% — the highest level since 2021. With the Federal Reserve having cut rates this September, the current yield environment offers a strong foundation for bond returns, and any decrease in rates would likely further enhance these returns.

Choosing the right bond fund involves understanding the stabilizing role of bonds, prioritizing high-quality securities and staying informed about market conditions and risks. For those considering bond investments, we recommend this research-driven approach — and keeping these principles in mind can lead to more informed and successful investment decisions.

Johnson Investment Counsel cannot promise future results. Any expectations presented here should not be taken as any guarantee or other assurance as to future results. Our opinions are a reflection of our best judgment at the time this material was created, and we disclaim any obligation to update or alter forward-looking statements as a result of new information, future events or otherwise. Johnson Investment Counsel is not responsible for the accuracy or relevance of any unapproved content originated or inserted by the publisher of this article, such as hyperlinks and potentially other data.

Related Content

• Types of Bond Fund Yields and What They Mean
• What Is a Debt-To-Equity Ratio and How Can Investors Use It?
• Bond Basics: What the Ratings Mean
• What Is a Hedge Fund And Should I Invest In One?
• What's the Difference Between a Bond's Price and Value?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

That said, it's understandable if folks don't quite trust politicians to be on the up and up when their personal fortunes might appear to be in tension with their duties as elected representatives.

Perhaps this is unfair; even cynical. But to modify a famous quote from Upton Sinclair, it's difficult to get a person to understand something when that person's salary depends upon the person not understanding it.

Take, for instance, the uproar around President Donald Trump, who said shortly before announcing a reversal on reciprocal tariffs that it "is a great time to buy stocks."

The reversal sparked a historic stock market rally and has some high-profile Democrats questioning if anyone in the Trump administration profited off the announcement.

Disclosure rules are supposed to help mitigate this problem. Thanks to these requirements, the public can follow what members of the House and Senate are doing with their investments.

Before we go further, please note that this activity shouldn't be used for trading purposes.

After all, insider buying and selling at publicly traded companies is voluminously disclosed and analyzed, but it doesn't really tell us much. That's because insiders – the executives and board members who know what's going on – can sell for any number of legitimate reasons, from paying tuition to portfolio diversification.

When it comes to stocks, insider buying is actually a more useful piece of information. And even then, it's not exactly a screaming buy signal.

Using insider activity among members of Congress as the basis for some kind of trading system is not a rigorous idea.

With those caveats out of the way, it is indeed interesting to see which stocks, bonds and private investments are most popular with members of the House and Senate. Perhaps more interesting is how certain pols churn their portfolios, which is to be avoided if you're a retail investor.

Have a look at the below table to see which politicians were the most active traders by volume over the past 90 days, according to data from Capitol Trades.

Stocks politicians are buying and selling

Look past the municipal debt and investments in limited liability companies, and you can see that pols are pretty normal when it comes to their buys. Top-rated Dow Jones stocks, mega-cap tech names and reliable and rising dividend-payers routinely make the list of our representatives favorite names.

Both sides of the aisle like many of the hottest stocks, including Apple (AAPL), Amazon.com (AMZN), Oracle (ORCL) and Broadcom (AVGO) these days – but then so does pretty much everyone else.

Interestingly, as much as Representative Ro Khanna (D-Calif.) is associated with tech investing, a number of his most recent biggest buys were stalwart blue chips such as JPMorgan Chase (JPM), the nation's biggest bank by assets, and Warren Buffett's Berkshire Hathaway (BRK.B).

Meanwhile, in addition to buying shares in speculative artificial intelligence (AI) firm BigBear.ai Holdings (BBAI), Representative Lisa McClain (R.-Mich.) also picked up Air Products and Chemicals (APD), which happens to be one the best dividend stocks for reliable dividend growth.

Related content

• Investing Freebies: Perks You Get for Owning These Stocks
• The Most Tax-Friendly States for Investing
• Can Stocks Picked by AI Beat the Market? Three Stocks to Watch

To recap: the worst bout of inflation to hit the U.S. economy since the Carter and Reagan administrations compelled the central bank's rate-setting committee to raise the short-term federal funds rate to a 23-year high. It has been sitting at a target range of 5.25% to 5.5% for more than a year. Inflation peaked more than a year ago but remains sticky, making the rate-setting committee, the Federal Open Market Committee (FOMC), cautious about easing too soon. 

However, the Fed has a dual mandate. In addition to stable prices, it is supposed to support maximum employment. And, alas, the lagged effects of restrictive monetary policy are beginning to show up in the labor market. Fed Chief Jerome Powell has always said the FOMC would be data dependent, and he acknowledged risks to the jobs side of the mandate at the July Fed meeting. Powell doubled down on his dovish turn at Jackson Hole in August.

Unless it's an emergency, the Fed doesn't make changes to policy without telegraphing them well in advance. A rate cut at the next Fed meeting isn't a certainty, but it would be a shock if the FOMC stood pat. 

A rate cut is coming

"History back to 1990 supports the idea that an initial Fed rate cut of 50 basis points signals an imminent recession (2001 and 2007)," write Nicholas Colas and Jessica Rabe, co-founders of DataTrek Research, in a note to clients. "Initial cuts of 25 basis points (1995, 1998, 2019) do not carry that baggage. Powell and the FOMC know this history."

Colas and Rabe expect a quarter-point cut, or 25 basis points (0.25%), at the next Fed meeting. However, a cut of 50 basis points (bps) remains very much in play. 

As of September 16, interest rate traders assigned a 61% probability to 50 bps of cuts, according to CME Group's FedWatch Tool, up from 50% the previous session. Meanwhile, the probability of a quarter-point cut fell to 39% from a coin flip.

It's also important to know that market participants might have a bit of a blind spot as they head into the next Fed meeting. After all, we're set to get a new Summary of Economic Projections (SEP), also known as the dot plot. This collection of forecasts from Fed governors and presidents tends to upset the market's previous assumptions.

The bottom line is that regardless of how much the Fed cuts at its next meeting, the race is already on to predict the trajectory of future reductions to borrowing costs. 

With the Fed set to pivot, we turned to economists, strategists, investment officers and other experts for their thoughts on monetary policy going forward. Please see a selection of their commentary, sometimes edited for brevity or clarity, below.

Fed rate cuts: what the experts say

"We interpret comments from Fed officials just ahead of the blackout period to mean that the FOMC is more likely to cut by 25 bps than 50 bps. We think a 50 bps cut would be a sensible precaution against further labor market softening, but the Fed leadership has communicated a sufficiently dovish reaction function for the bond market to price cuts between 25 bps and 50 bps for several meetings, which also lowers borrowing rates and eases financial conditions today." – Jan Hatzius, chief economist at Goldman Sachs

"The Fed has the green light to cut 25 bps given that the August CPI report was in line with expectations. It's possible that some will be disappointed that there wasn't a lower-than-expected inflation reading, which might have given the Fed more room to cut 50 bps, but most of the Fed speakers have already telegraphed their desire to start slowly and not begin with a jumbo cut. Going forward, the risks are clearly weighted toward slowing growth and a deteriorating labor market, and that's why there are still four 25 bps cuts priced in with only three meetings left in the year (i.e. implying at least one of the three meetings would have a 50 bps), but if the economy continues to slow – and not drop into an abrupt recession – the Fed will be able to cut at a measured, 25 bps-per-meeting pace." – Chris Zaccarelli, chief investment officer at Independent Advisor Alliance

"The Fed probably should cut 50 bps next week … 

As the Fed themselves have said, inflation risks are moving into the rearview mirror, and they do not want to see further labor market weakness. Though strong wage growth suggests the bottom has not yet fallen out of the labor market, jobs creation has declined quickly. In an environment where policy is already restrictive by around 200 bps, moving more quickly towards neutral is a highly reasonable stance, in our view.

... but unless we see a downside surprise on inflation, my base case is that they'll cut 25 bps." – Lauren Goodwin, economist and chief market strategist at New York Life Investments

"Following the payrolls report last week, we updated our Fed call. We now expect the Fed to cut rates by 25 basis points (bps) per meeting starting next week and until March 2025. After these cuts, we think the Fed will be more gradual and resort to one cut per quarter. We still see outsized recession-like cuts as unlikely unless the economy materially deteriorates." – Antonio Gabriel, global economist at BofA Securities

"August's CPI report cemented market expectations that the FOMC will ease by 25 bps at its next meeting. The implied probability of a 25 bps move jumped to 83% from 66% shortly after the August core CPI print. We think investors are now well positioned for September's meeting, but we still see a strong chance of 50 bps cuts in both November and December." – Ian Shepherdson, chairman and chief economist Pantheon Macroeconomics

"Stable producer prices should drive investment and that will drive the economy. It is time for the Fed to cut, but they may well take it slow and steady. That seems to be their operating model. A 25 bps cut in September is the most likely outcome." – Scott Helfstein, head of investment strategy at Global X 

"The Federal Reserve is set to start shifting policy and lower rates at their next meeting. The big question will be whether the Fed cuts by 25 bps or 50 bps, and it'll likely come down to Chair Powell as to whether they go big to get ahead of clearly slowing labor market trends." – Sonu Varghese, global macro strategist at Carson Group

"The Fed is weighing the stickiness of service price inflation on the one hand against the softening of the job market on the other hand. The tradeoff makes them more likely to cut rates by a quarter percent at next week's decision than make a larger half-percent cut." – Bill Adams, chief economist at Comerica Bank

"Inflation trends will give the Fed the opportunity to pivot toward the employment mandate for the rest of this year. Given the stickiness of services inflation, the Fed will likely cut by 25 bps in the upcoming meeting and reserve the potential for more aggressive action later this year if we have further deterioration in the job market." – Jeffrey Roach, chief economist at LPL Financial

"Sticking the landing on rate policy is important to the Fed, but so is controlling the narrative and maintaining the central bank's credibility. With that in mind, there was nothing in the August inflation report that was likely to sway policymakers from the measured quarter-percent cut that they've been guiding expectations toward for some time." – Jim Baird, chief investment officer at Plante Moran Financial Advisors

"We find ourselves at a point where the markets are pricing in an aggressive policy rate cutting cycle, which to us appears to be overdone relative to what the Fed has suggested would be appropriate and relative to the underlying economic conditions at this stage. So, while we're quite certain that the Fed will commence with its rate cuts at its next meeting, there are several significant unknowns that cloud the extent and speed of rate cuts. From election/policy uncertainty for 2025, U.S. debt/Treasury supply dynamics and a particularly impactful period for volatile seasonal factors in economic data, there is a good deal we don't now know about the year ahead." – Rick Rieder, chief investment officer of global fixed income at BlackRock and head of the BlackRock global allocation investment team

Related Content

• Stocks With the Highest Dividend Yields in the S&P 500
• Analysts' Top S&P 500 Stocks to Buy Now
• Are Palantir and Dell Buys on Being Added to the S&P 500?

Together, that’s a double leg up for bond market total returns. “I think this is one of the best times to put money to work in the bond market in 20 to 25 years,” says Thomas Urano, a managing partner at Sage Advisory. 

So now is a good time to revisit your core bond portfolio. You can always start with a broad bond index fund, such as iShares Core U.S. Aggregate Bond (AGG, yield 4.5%), an exchange-traded fund that tracks the benchmark considered to be a barometer of the bond market. But “each investor has their own goals and risk tolerance,” says Invesco’s Jason Bloom. “Our view is that investors can do better — much better — than just owning the Agg.” 

In fact, most active bond fund managers outpace the U.S. Aggregate Bond index over the long haul on average, according to fund-tracker Morningstar. Our favorite active core bond funds, Baird Aggregate Bond (BAGIX, yield 4.2%), Dodge & Cox Income (DODIX, 4.7%) — a member of the Kiplinger 25, our favorite no-load mutual funds — and Fidelity Total Bond (FBND, 5.2%), have each outpaced the Agg over the past one, three and five years. That’s why we prefer starting with an actively managed core bond fund — let an expert do the heavy lifting. 

But it may pay to complement your core holding with tactical tilts of exposure to certain bond sectors to enhance performance. We’ll walk you through some simple ways to optimize your portfolio for current market conditions by leaning into bond sectors that are attractive now. 

Of course, if you own shares in an active intermediate core bond fund, your manager may be making some of these moves already, so consider any shifts in terms of your overall portfolio. We’ve also included model portfolios, built by Elya Schwartzman at fund firm BondBloxx, as an example of how the pros might enhance yield or lower your portfolio’s sensitivity to interest rate shifts. (Yields and other data are through July 31, unless otherwise noted.) 

Mix up the ingredients

To beat the Agg, you’ll want the flexibility to beef up some sectors in your portfolio and de-emphasize others, depending on the market environment. The main ingredients in an investment-grade bond portfolio are Treasuries, corporate debt and mortgage-backed securities, with a dash of government-linked IOUs and asset-backed securities (such as bundled credit card and auto loans). 

Start with Treasuries. For now, it makes sense to emphasize Treasuries with maturities between one and 10 years. Although price declines from interest rates moving higher are largely in the rearview mirror, many bond experts still favor short- to medium-term government bonds, which are less sensitive than long-term debt to interest rate swings. 

But the yield curve remains inverted, which means shorter-term notes yield more than their long-term counterparts. And when rates start to fall, bond analysts expect yields to dip more on the short end. “We favor short-term because we like the high current yield and safety,” says BondBloxx’s JoAnne Bianco. “And intermediate-term bonds can still capture potential price returns when the Federal Reserve reduces interest rates.” 

Funds worth exploring include the SPDR Portfolio Short Term Treasury ETF (SPTS), which currently yields 4.6% and has a duration (a measure of interest-rate sensitivity) of 1.8 years. That implies if rates fall by one percentage point, the fund’s net asset value will rise by 1.8%. Or consider the Schwab Intermediate-Term U.S. Treasury ETF (SCHR), which yields 4.3% and has a duration of five years. 

Reach for yield within high-quality corporate debt. “Adding to your exposure to triple-B corporates is a good way to enhance long-term returns,” says Bianco. Corporate bonds rated triple-B are still investment grade, but offer better yields than higher-quality corporate debt and have better long-term returns, too. The trade-off is higher volatility. Over the past decade, triple-B corporate debt was 10% more volatile than the broad corporate-debt market. 

If you can stomach the added volatility, consider the iShares BBB Rated Corporate Bond ETF (LQDB), which yields 5.3%. The fund has returned 7.1% over the past 12 months. 

Pad the quality of your bond portfolio with a bigger dose of mortgage-backed and asset-backed securities, which offer compelling yields. Mortgage bonds may get a boost when rates fall and the home-loan refinance machine picks up again, says Sage Advisory’s Urano. The Vanguard Mortgage-Backed ETF (VMBS) charges just 0.04% in expenses, yields 3.8% and boasts an average triple-A credit rating. The fund has returned 5.1% over the past year. 

Many bond experts like asset-backed securities these days, especially credit card and auto IOUs. “They’re high-quality, triple-A-rated bond investments, and the maturity range is less than three years,” says Urano. Few funds focus exclusively on such securities, but we like the look of the Virtus Newfleet ABS/MBS ETF (VABS). The active ETF is small ($9 million in assets), but it invests in high-quality, short-term asset-backed and mortgage securities. Over the past year, its 8.3% return topped 92% of all short-term bond funds. It yields 5.0%. 

Venture beyond the Agg

One trick that winning intermediate-term core bond fund managers often use is to dip into the junk-bond market, which isn’t represented in the Agg. These low-quality corporate securities come with a higher risk of default and are more volatile. But over the past decade, they have returned 4.6% annualized, beating the 2.6% gain in investment- grade debt.

 “Many people shy away from high-yield debt because they are risk-averse in their bond portfolio,” says Bloom. But “historically, over the economic cycle — recovery, expansion, slowdown and recession — high yield is the only sector that has outperformed in every phase.” 

Stem the risk in junk bonds by keeping your stake small — say, 3% of your bond portfolio — and focusing on double-B-rated debt, the highest-quality tier of high-yield bonds. The iShares BB Rated Corporate Debt ETF (HYBB) holds only double-B-rated debt, yields 6.2% and has returned 10.0% over the past 12 months. The broad high-yield benchmark has done better, with an 11.0% return, but with higher volatility.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Model portfolios for bond investors

Related Content

• Best Bond ETFs To Buy Now
• What to Do About Bonds Now: A Fresh Look at Fixed Income
• What Are Bonds and How Do They Work?

Many of its provisions were only temporary and are slated to sunset after 2025. If that occurs as scheduled, the effects will again be extensive, headlined by a considerable boost in the portfolio advantages and appeal of municipal bonds for many investors. Here are five things to keep in mind:

1. A potential reversion to higher marginal tax rates would be positive for muni bond demand.

In a higher-tax environment — and with higher tax-equivalent yields — demand for munis is likely to spike, making now an opportune time to invest before a potential run-up in demand.

The TCJA reduced the top marginal tax rate on individuals to 37% from 39.6%. If the TCJA sunsets after 2025, the highest marginal tax rate is expected to return to 39.6%.

The tax-equivalent yield on a muni increases as tax rates rise — making the tax exemption on munis more valuable for individuals who pay higher taxes. For example, the tax-equivalent yield on a tax-exempt muni yielding 5% is 7.93% at a 37% tax rate — but increases to 8.27% at a 39.6% tax rate.

2. The number of taxpayers subject to the alternative minimum tax (AMT) would increase dramatically.

The TCJA enacted a higher AMT exemption and an increase in the income at which the exemption begins to phase out. If the TCJA expires after 2025, it is estimated that the number of taxpayers paying the AMT would increase to 7.6 million in 2026 from current levels of about 200,000.

Certain Private Activity Bonds (PABs) issued in the muni market are subject to the AMT, muting the tax benefits for investors who are subject to this tax. With the potential for a major expansion of the AMT on the horizon, investors must remain vigilant about security selection, as we anticipate spreads on PABs, such as some airport bonds, would widen relative to other munis that are not subject to the AMT.

3. A potential lifting of the state and local tax (SALT) cap could benefit demographics — and issuer credit quality — in high-tax states.

Prior to the TCJA’s enactment, there was no limit on the amount of state and local taxes that taxpayers could deduct from their federal taxes. However, under the TCJA, a SALT cap was imposed, limiting the federal deduction to $10,000 for all tax filers.

The SALT cap disproportionately affects taxpayers in high-tax states. The cap’s end would lower the tax burden of residents in those states and could reduce any tax-driven incentive for residents to move elsewhere. The positive impact on the states’ demographics would support the longer-term credit quality of the muni issuers within their borders.

4. If discussions around changes in tax law signal a threat to the muni tax exemption, we could see accelerated issuance ...

Past tax law deliberations often have hinted at the potential for a rollback of the federal tax exemption for muni interest.

Under the TCJA, muni issuers lost the ability to advance-refund — refinance at a lower rate — tax-exempt bonds with proceeds from another tax-exempt bond issuance prior to the original bonds’ call date. As the TCJA legislation came together, some speculated that the impact on muni issuers would be even greater, with not-for-profit borrowers, such as private colleges, hospitals and charter schools, losing the ability to issue tax-exempt bonds.

5. ... But elimination of the tax exemption is highly unlikely.

Heading into this year’s election, we could hear fresh talk of a potential change to the muni tax exemption to help subsidize other elements of tax law change.

But the exemption is critically important to state and local governments, schools, hospitals, electric utilities, water and sewer systems, airports and toll roads that fund the nation’s vital infrastructure. Additionally, the exemption’s cost to the U.S. Treasury is quite modest — about $40 billion annually or $400 billion over 10 years — compared with the $4.6 trillion estimated cost of extending the TCJA for 10 years.

Because the exemption is essential to financing U.S. infrastructure, we do not believe its elimination is likely. However, in that extreme scenario, current tax-exempt munis, if grandfathered into the exemption, would become significantly more valuable — with considerable benefit for current investors.

As the prospects for TCJA’s wind-down become clearer, we will likely see asset prices start to respond to changing views regarding munis’ appeal. Every good planning discussion anticipates the future in enough time to get ready for it. That means that now is the time to revisit a muni strategy — and plan the portfolio adjustments needed to take full advantage if tax law takes a turn.

GWP-3742527PM-O0724W

Related Content

• Three Reasons I Like Municipal Bonds
• Bond Basics: Pick Your Type
• TIPS vs I-Bonds
• Best Bond Funds to Buy

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

For many of us, 4% is perfectly fine — especially if your personal inflation experience is diminished. That often varies with whether you rent or own and what you pay for car and property insurance. 

But if 4% is inadequate, or you remain inclined to take risks, the combo of falling yields and retreating expectations for inflation in the bond market stands to reward higher-coupon and higher-dividend holdings. (Those market expectations for inflation run lower than what consumers refer to as the cost of living and so can accelerate a decline in interest rates.)

Consider the week of July 29, when the Fed’s brass said it is about time to cut rates, and bad tech-company results then bludgeoned 1500 points off the Dow Jones industrial average and 1000 from the frothy Nasdaq composite. 

But beneath the red on those indexes, the markets emphatically and unambiguously supported low-risk, high-dividend names such as AT&T, Realty Income, Verizon, and the regulated electric and water utilities. (High-growth, lower-dividend utilities and real estate investment trusts did take their lumps, though.) 

Bonds’ big move. The bond market, meanwhile, rallied sharply. Among the gainers were our most esteemed actively managed bond funds, including Dodge & Cox Income (DODIX) and Fidelity Strategic Income (FADMX), which saw healthy upticks in net asset value atop their ongoing 4.7% and 5.3% distributions. 

Readers can stand by these multisector bond funds, as well as high-yield and short-duration funds I’ve previously recommended, such as exchange-traded funds BlackRock Flexible Income (BINC, $53) and PGIM Short Duration High Yield (PSH, $50) and mutual fund RiverPark Short Term High Yield (RPHYX). 

The Fed does not control the market rates that feed into their payouts the way it does with bank deposits and money funds, so the distributions, which currently run 5.7%, 9.1% and 5.4%, respectively, will not shrink much, if at all, in the near term. And easier credit terms stand to bolster the business prospects for the industrial and financial firms whose debts these funds hold.

Another extra-yield idea: The Federal Farm Credit Banks and the Federal Home Loan Banks are offering new bonds due in seven to 12 years with coupons of 5.7% to 6.0%. These government agency bonds are callable at par value six months after the date of issue, but that still means a premium yield for at least that long, as well as a chance to sell the bonds for a profit before the initial call date if these lenders’ rates on their next rounds of financing are 0.5 or 1 percentage point lower. 

And as for cash: As I write this, you could still originate a two-year CD ladder with an average percentage yield of 4.7%, or a one-year version for 4.8%. These yields stand to be lower in a few weeks and certainly once the Fed’s first cut is official. 

And if the next few monthly or quarterly jobs, retail sales, housing starts and other broad economic indicators soften, the central bank is unlikely to reduce short-term rates by more than 0.5 percentage point right away. The days of zero interest rates and “cash is trash” are not going to return, but neither will the appetite for higher yields be going away.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• 37 Ways to Invest for High Yields While We Wait for the Fed to Move
• Best High-Yield Savings Accounts
• How To Buy Treasury Bonds

Traditionally, many investors have allocated a portion of their portfolio to bond funds in an effort to lower their overall risk while maintaining liquidity. The problem is bonds and bond funds are different. Bonds are guaranteed by and only as good as the entity that backs them, while bond funds are actively traded funds focused on the bond market bonds and can lose principal.

When retirees and near-retirees realize that their diversified portfolio of various stocks, ETFs and mutual funds, blended between the equities market and the bond market, is technically at risk, many start to look elsewhere for more safety. This is especially true when you consider the markets’ historical patterns, which I covered in my article Four Historical Patterns in the Markets for Investors to Know.

This article is intended to highlight the benefits and detriments of five investments and products that offer principal protection with growth potential. Please note investments and products that offer growth potential and principal protection are likely to underperform your standard benchmark indexes during the good years. However, because they offer principal protection, they won’t lose money in the down years (assuming there are no fees associated with the investment or product). Also, make sure to consider the credit rating of the entity that offers these investments or products. The principal protection offered is only as good as the entity that is backing them.

Liquidity could be an issue

Lastly, these investments and products also lack liquidity. Remember, there’s no such thing as a perfect investment, product or strategy. If you want growth potential and principal protection, you’ll have to give up some or all liquidity for a period of time. Consider for a moment that you probably don’t need access to all of your money in any given year. However, making sure a portion of your portfolio cannot lose ground may help you sleep better at night.

Don’t fall into allocation ambiguity and blindly guess how much needs to be protected. Design your lifestyle and legacy plan first and then build your portfolio around those requirements. If you want help understanding how to do this, you can learn more about how to create a retirement plan that’s designed to last longer than you without locking up assets into lifetime income streams from insurance companies in my book, How to Retire on Time. Let’s dive in.

1. CDs

Certificates of deposit, or CDs, are cash-equivalent products that offer a fixed rate for a fixed period of time. Because they are heavily influenced by interest rates, many banks may be hesitant to offer too high of a rate for too long of a period of time.

CDs tend to help with short-term protection needs. If the Fed were to drop rates, the new CD rates may not be enough to maintain your lifestyle expectations.

If you want protection with reasonable growth potential longer than two years, you may want to consider another option on this list.

2. Bonds

Bonds (not bond funds), like U.S. Treasuries or corporate bonds, are debt instruments guaranteed by the entity that backs them. Technically, you can sell a bond before its maturity if needed. However, if you were to sell before it matures, it would be sold at market price. That means you could sell it for a gain or a loss. If you want the protection, you would need to hold it until maturity.

Bonds may be a good fit if you want protection with a slightly longer duration than a CD, even though the short-term CD may have a higher rate. You never know when the Fed will increase or decrease rates. It is important to note that if interest rates were to go down, your bond would become more valuable, in case you decide to or need to sell it early. Otherwise, you can buy a bond and hold it to maturity, knowing what the rate is expected to be.

Be careful when picking high-yield bonds. The higher the yield or rate offered, the riskier the bond. Remember, bonds are only as good as the entity that backs them.

3. Fixed annuities

Fixed annuities, on the surface, are similar to a CD but from an insurance company. Insurance companies and banks operate differently. You may be able to get a higher rate for a longer duration through a fixed annuity. Once the annuity matures, you can liquidate it and spend it or move it into another investment or insurance product (e.g., fixed annuity, fixed-indexed annuities, etc.). If you are working with non-qualified funds, you can defer the capital gains tax by moving the cash from one non-qualified annuity into another non-qualified annuity through what’s called a 1035 exchange.

If you are younger than 59½, proceed with caution. Distributions from annuities before the age of 59½ may be subject to a 10% penalty. It is a retirement product that has limitations.

4. Fixed-indexed annuities

Many people do not realize that fixed-indexed annuities can be used as bond or CD alternatives, offering growth potential and principal protection on your cash value. In other words, fixed-indexed annuities do not have to be used as an income strategy. Many investors use them as an asset-preservation strategy to help hedge against downside market risk.

In a nutshell, here’s how they work. When the fixed-indexed annuity’s benchmark index, such as the S&P 500, goes up, the annuity’s cash value increases as well. When the benchmark index goes down, the principal of the annuity is maintained.

Assuming you picked an annuity with an annual reset, each year, a new “floor” is established. That means, unless you were to take a withdrawal or your annuity has fees associated with the policy, you cannot lose ground. Each year is a new year when the fixed-indexed annuity can grow its cash value or maintain the cash value of the previous year.

That said, I can’t emphasize the following enough: Not all fixed-indexed annuities are built the same. Just like some CDs may offer a 5% rate while others may offer a 0.5% rate, some fixed-indexed annuities have more growth potential than others. Your research and due diligence are incredibly important.

Here are a few words of caution for those considering using fixed-indexed annuities as a bond or CD alternative. Don’t add features you don’t need. If you are looking for potential cash growth and principal protection, don’t add on lifetime benefit riders or try to make your policy into a makeshift long-term care policy. The additional fees may compromise its original purpose of growth potential on the cash value with principal protection.

Also, many times an insurance company will have an annuity with and without a cash bonus offer. Annuities that offer a bonus, known as bonus annuities, tend to have less growth potential throughout the life of the policy. Because the bonus option may offer less growth potential, you may end up with less cash overall at the end of the policy, even when you calculate the cash bonus in the beginning. If you want your cash to grow, compare the options and their long-term growth potential.

I have found that fixed-index annuities, when sufficient shopping and research have been conducted, may offer more growth potential over the longer-term time horizon than CDs, Treasuries and fixed annuities. However, you must shop around and vet the insurance companies’ reputations, renewal rates and credit ratings. Make sure you also spend time understanding the benchmark index associated with any annuity. There are many new indexes focused on back-tested hypothetical results. That doesn’t make them bad. This means you may want to proceed with caution.

5. Cash value life insurance

Cash value life insurance, or permanent life insurance, can be used as a source of principal protection to help you through turbulent times. Even though some life insurance policies may have a cash component, they should not be considered investments.

You should only consider life insurance, whether it be indexed universal life insurance or whole life insurance, if your primary focus is to have a death benefit. The cash value associated with the policy, the tax strategies that can be implemented alongside the policy and so on should all be secondary objectives when considering life insurance. When funded and structured correctly, these secondary strategies can act as a nice complement to a retirement plan.

If you want to consider cash value life insurance, I would recommend exploring your options with an independent insurance agent who is also a licensed investment adviser and tax professional. The additional licenses may be able to help you explore a more comprehensive strategy with your policy than through a professional who is limited to only an insurance license. In other words, if their disclosure states they do not offer tax advice, how can they recommend an IUL for tax planning purposes?

Conclusion

Having principal protection can be helpful during difficult market conditions. If your portfolio is causing you to lose sleep, then maybe you are taking too much risk. I believe every investor should operate within their emotional and economic limits. Overall growth is important, but at what cost? Consider the potential benefits of having some of your portfolio’s principal protected.

If you are wondering how much should be protected, consider putting together your lifestyle plan first, then explore the tax and other strategies you want to implement. Once you understand your plan and the strategies designed to help bring that plan to life, you can start designing your portfolio.

Related Content

• 10 Ways to Generate Retirement Income
• Retirees’ Anti-Bucket List: 10 Experiences You Don’t Want
• Many Retirees Don’t Know About This Major Market Risk: Do You?
• Roth Conversions: Convert Everything at Once or as You Go?
• Social Security Optimization If You Save More Than $250,000

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

That’s a legitimate concern, because personal savings play an even greater role in a successful retirement than they once did. A generation or two ago, retirement for many people was nicely balanced on a three-legged stool — a pension, Social Security and savings.

Not everyone had a pension, of course, but for those who did, those monthly checks provided a solid boost to their finances and gave them more confidence that they could navigate their golden years without running aground.

Unfortunately, that retirement model has gone wobbly. Pensions have been disappearing for a while, and Social Security is a bit shaky, with benefit cuts becoming a possibility sometime in the not-so-distant future, if Congress doesn’t find a way to avoid a funding shortfall.

That means personal savings — an IRA, a 401(k) or some other type of account or investment — must pull more than its share of the weight. Around age 65, we all begin a race to see which will last longer — our money or our lives.

How to take action if you think you’ll fall short

Instead of despairing, it’s important to take action. The problem is clear: Do you have enough money? How can you create for yourself — and your spouse — regular income designed to last, not just a few years, but a few decades?

You’ve climbed to the summit of retirement after a lifetime of hard work while, hopefully, setting aside as much money as possible to pay for the years ahead. But the descent from that summit can be treacherous if you aren’t careful. Taxes, inflation, health expenses and other factors can cause your money to evaporate quickly if you don’t have a good plan in place.

With that in mind, here are a few retirement income strategies that can increase the odds you won’t run out of money:

1. Following the 4% rule.

Essentially, the 4% rule is a budgeting tool. The idea is, in your first year of retirement, you will draw no more than 4% from your retirement accounts. In each of the ensuing years, you will withdraw 4% plus enough extra to cover inflation.

As an example, if you had $1 million in retirement savings, the most you should withdraw that first year is $40,000. The goal is to provide yourself with a steady income while still maintaining a healthy account balance to preserve your money for the rest of your life.

One caveat to consider: If your money is in just a brokerage account and the market drops 20%, then when you withdraw your 4%, your account balance will be down a total of 24%. That would be difficult to recover from, so diversification is important to try to avoid significant losses that would undermine your goal of making that money last.

Also, while the 4% rule is a good guideline, it should not be a hard-and-fast rule. Individual needs and situations will vary. For some people, 4% may not be enough to provide the money they need to fund their lifestyle, so they might up that to 4.5%. For others, 4% might be more than they need — or more than their account can bear — so they could dial it back to 3.5%.

2. Creating joint income for life.

Here’s a way to create your own version of a pension that will provide income as long as you need it. Purchase an annuity and add an income rider to it, designating that the income be paid out for the duration of both your and your spouse’s lives.

Before you start taking the income, the annuity will grow based on a fixed rate, a variable rate or a combination of those.

At some point, you will activate the rider, and the annuity will begin paying a fixed amount that is guaranteed for life. If either spouse dies, the other spouse continues to receive the income.

3. Building a bond portfolio.

A diversified bond portfolio — with a mixture of government bonds, corporate bonds or municipal bonds — is another way to generate retirement income. Bonds pay interest, usually twice a year, so with a good mix of bonds, you can create income payments that arrive every six months. One key factor to be aware of: Interest rates have been high lately, and bonds are interest-rate sensitive. When interest rates go up, bond values go down.

Ultimately, there is no silver bullet for creating an income plan in retirement. But these strategies can offer a good foundation, especially when working in conjunction with one another.

So much of this, though, comes down to what is right for you. A financial professional can help guide you on whether these strategies — or something else — will give you the income you need so you can enjoy your retirement to the fullest.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Insurance products are offered through the insurance business Endependence Financial. Endependence Financial is also an Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. AEWM does not offer insurance products. The insurance products offered by Endependence Financial are not subject to Investment Adviser requirements. Endependence Financial is not affiliated with the U.S. government or any governmental agency. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Investing involves risk, including the potential loss of principal. Any references to protection, safety or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier. 2507395 – 8/24

Related Content

• 10 Ways to Generate Retirement Income
• Retirement Income Funds to Keep Cash Flowing in Your Golden Years
• How the IRS Taxes Retirement Income
• Four Steps to Secure Your Retirement Income
• Seven Big Retirement Risks to Avoid

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

True to their name, high-yield bonds offer an average yield of about 7.7% as of June 30, 2024. This alone is higher than the 7.4% annual long-term return on the S&P 500 since 2000 (based on Bloomberg data to the end of May 2024). So, a high-yield investment could mean locking in “equity-like” returns from the income alone.

But with credit spreads at about 3.1%, should investors wait for them to widen closer to their 5.2% average since 2000?

We think that might not work out — for three reasons:

1. 'Time in the market' might beat 'timing the market.'

Most investors try to “buy low and sell high.”

But, believe it or not, that might not be the best way to play high-yield bonds.

Why? Because income has been a larger driver of high-yield returns than price moves over the years. Since 2000, high-yield bonds earned +7.7% annually from income and -1.3% annually from price moves (according to ICE at the end of May 2024).

To earn income, you need to be invested.

We back-tested several hypothetical automated trading strategies. Each hypothetically traded between high-yield bonds and cash at certain credit spread triggers. To our surprise, almost all trading strategies underperformed a simple strategy of just holding the Bloomberg US Corporate High Yield Index, and none consistently outperformed it, even ignoring transaction costs.* Hypothetical results have inherent limitations and are overly simplistic, but it is an interesting exercise that you can try.

2. Lower credit spreads may be justified.

We think the high-yield market is less risky than it used to be.

Historically (alongside the loan market), high-yield was the primary venue for private equity firms to finance leveraged buyouts (LBOs). This meant a sizable proportion of highly leveraged issuers.

But private equity firms have increasingly turned to the private credit market instead. The private credit market’s share of LBO issuance (by number of deals) has soared from 60% in 2019 to 86% in 2023, according to Barclays Research. We believe this may help lead to structurally lower default rates in high-yield bonds.

Average credit quality in the high-yield market has also improved: About 46% of the Bloomberg US Corporate High Yield Index is BB-rated (the highest high-yield rating) today vs about 34% in 2000, according to Bloomberg at the end of May 2024.

Smaller issuers with less frequently traded bonds command an “illiquidity premium,” which is reflected in higher credit spreads. But managers with access to technologies such as credit portfolio trading can trade these issuers as easily as the big names, so they have less need to demand an additional premium.

3. Credit spreads may offer more than adequate compensation for default risk.

We often take polls of investors, asking what they think average high-yield default rates are. Usually, they respond with something between 3% and 5% per year.

It may surprise you that, by our calculations, the average annual default rate on the Bloomberg US Corporate High Yield Index (including distressed exchanges) has been 2.5% since 2005, and the average loss from default has been 1.4%.

As such, we think credit spreads of about 3% offer ample compensation for default risks. One caveat, though: Many high-yield strategies hold only 10% to 30% of the 2,000 U.S. high-yield bonds available, and concentrations like this may amplify the risk of default. For those considering a high-yield vehicle, check how many bonds they hold. Investors may need to turn to a systematic approach to access a fully diversified high-yield strategy.

Waiting might be the wrong call

All-in bond yields are made up of two components: government bond yields and credit spreads. Both have tended to move counter to each other, providing a mutual stability buffer.

When credit spreads widen (usually a result of economic concerns), government bond yields tend to fall, due to a “flight to quality” or market expectations that the central bank will need to cut rates to stabilize the economy. When credit spreads tighten, government bond yields sometimes rise, due to lower demand for low-risk havens.

As such, waiting for credit spreads to widen might not mean investing at significantly higher all-in yields. If you consider all-in yields attractive, now might be a good time to consider an allocation. We believe now is the time to consider locking in high-yield bond yields before rate cuts take effect.

* Where model or simulated results are presented, they have many inherent limitations. Model information does not represent actual trading and may not reflect the impact that material economic and market factors might have had on insight’s decision-making.

Related Content

• Types of Bond Fund Yields and What They Mean
• What's the Difference Between a Bond's Price and Value?
• Are Bonds Back? A Fresh Look at Fixed Income in 2024
• Should You Still Have Bonds in Your Portfolio?
• Best Bond Funds to Buy

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Your goal should be two guarantees: high yield to maturity and full recovery of principal. Neither is assured using index-based exchange-traded funds. An actively managed, go-anywhere fund from an ace manager such as Baird, Fidelity or Pimco will out-return the indexes over the years, but there is near-term price risk if managers mistime bets or if hostile reports on jobs or inflation or another trading signal rips into bond values. 

If your choices are limited within a 401(k) or other retirement plan, choose a short or ultra-short bond fund option, if possible. If not, stay with cash for now. The inverted yield curve, with short-term yields the highest, remains your friend and makes cash profitable and safe.

Looking ahead at bonds

But if you suspect cash yields will drift down and want to lock in the current rates without near-term price risk, my preference would be to infuse some dollars into individual bonds or into target-maturity funds or ETFs, such as Invesco BulletShares or iShares iBonds ETFs. If you have an account with Schwab, Fidelity or E*Trade, it is neither difficult nor costly to research, compare and buy single bonds. Then you, and not a fund manager or the Federal Reserve, control how much and when you get paid and the timing of repayment of the principal.

Normally the best method is to ladder maturities, arranging for parts (rungs) to mature in succeeding quarters or years so you both cement the best yields along the curve and know you will have money to roll over at specific times. You can use Treasuries, high-quality corporate, bank or utility bonds, municipals, high-yield bonds, or a mix of all of them. You can even request a brokerage’s bond platform to set it up for you.

I went to Schwab’s tool to ladder either Treasuries or certificates of deposit. Given the rate-curve inversion, one-year ladders have higher average yields than longer ones. A step stool of T-bills of three, six, nine and 12 months pays an average 5.25% to maturity; use CDs and you get 5.45% (as of May 31). A five-year ladder works out to 4.76% for Treasuries or 4.98% for CDs.

To beat that, of course, you can buy corporate bonds at a spread of one to two percentage points above Treasuries. If you navigate the bond listings, you can ladder one- through five-year BBB-rated bonds for an average 6% yield to maturity; I could recently order a five-step triple-B assembly from Synchrony Bank, Boeing, Ares Capital, Blue Owl and Boston Properties with an average yield to maturity of 5.98%, with none below 5.82%. It’s possible those bonds might flop around in value, but if your plan is to keep them to the end, that doesn’t matter — even if, say, Boeing were to be downgraded to junk status.

Or, you could use a mélange of BulletShares investment-grade, target-maturity corporate ETFs dated 2025 through 2029 for an average 5.3% — less than a BBB ladder due to its A and AA holdings. BulletShares charge just 0.1% and pay monthly, as oppsed to the semiannual interest payments from individual bonds. What matters either way is that you can roll over the principal on your own terms.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here. 

Related Content

• What To Know About CD Ladders: A Flexible Way To Save
• What Are Bonds And How Do They Work?
• Best Bond ETFs To Buy Now

But the array of bond fund yields can be confusing for investors trying to add a fund to their portfolio. In late March, for instance, the Schwab 1-5 Year Corporate Bond ETF (symbol SCHJ) boasted a 30-day SEC yield of 5.11%, a trailing 12- month or distribution yield of 3.16%, and a 5.28% yield to maturity. “If you look at all three, they can help create an overall picture of a bond fund,” says D.J. Tierney, a senior investment portfolio strategist at Charles Schwab Asset Management. 

Note that a bond fund’s yield is just one piece of the puzzle when you’re considering an investment in the fund. Investors should also understand the fund’s investment objective, fees and expenses, overall credit quality, potential risk of default on debt, and sensitivity to interest rates.

And be careful about confusing yield with income, says Tierney. Income is the coupon rate a bond pays — it’s the annual interest paid on a bond, and it is generally fixed throughout a bond’s life span. A bond’s yield, on the other hand, can be an indicator of the return an investor may receive each year over the life of a bond held to maturity, relative to the price of the bond. (Bond prices and yields move in opposite directions.) 

For example, a five-year Treasury note that matures in January 2029 pays a coupon rate of 1.75%. That’s the income, expressed as a percentage of the face value of the bond, you can expect to receive per year. But in late April, the bond yielded 4.74%, reflecting the expected return on your investment over the life of the bond, says Tierney, including interest payments and principal you may expect to receive when it matures, relative to the market price of the bond. 

That said, investors should think of a fund’s yield as “a starting point” when it comes to forecasting a total return, says Warren Pierson, co-chief investment officer of Baird Funds. It’s no guarantee. “A lot can go wrong before a yield turns into total return,” says Pierson. Use this guide to help you demystify bond yields and choose the right fund for your needs. 

30-day SEC yield

The Securities and Exchange Commission created the standardized calculation for the SEC yield, sometimes called the 30-day yield or current yield, to allow investors to compare one bond fund to another. Some even refer to it as the standardized yield. 

“If you’re comparing two different funds, this is the yield to look at first,” says Pierson (and it’s the yield cited most often in Kiplinger). Be wary if one fund sports a yield that’s measurably higher than that of a similar fund. “Rest assured there’s some additional risk,” he says. “You might not be able to determine what the risk is, but it’s there.” 

The calculation shows investors what they would earn, after expenses, over a 12-month period if the fund continued earning the same yield for the rest of the year. It annualizes the income distributed over the past 30 days and divides it by the fund’s net asset value at the end of the 30-day period. All SEC yields are net of expenses. A subsidized 30-day yield reflects fee waivers and/or expense reimbursements during the period; an unsubsidized figure does not adjust for waivers or reimbursements. (Some funds don’t have waivers. In those cases, unsubsidized and subsidized 30-day yields will be the same.) 

But there are caveats. The SEC yield is backward-looking — by 30 days, to be exact. What’s more, fund companies are not even required to disclose yield, but when they do, they must use the SEC-yield calculation. As a result, some bond funds disclose their 30-day yields only quarterly or monthly; others update them daily. It pays to be mindful of the “as of” date when you compare the SEC yields of funds.

Trailing 12-month yield (TTM yield)

Also called the distribution yield, a trailing 12-month yield is the ratio of the sum of all fund distributions over the past 12 months to the fund’s net asset value at the end of the period. 

The one-year look-back makes the distribution yield even more backward-looking than the 30-day SEC yield. As a result, during periods of dramatic interest rate shifts, the trailing 12-month yield can be misleading, says Tierney. “The first question investors should ask is, are we in a stable rate environment, or is it changing?” 

Moreover, the actual distribution-yield calculation is not standardized and thus may vary depending on the fund issuer.

Yield to maturity (YTM)

The yield to maturity of a single bond is the overall annual interest rate you will earn if you buy the IOU and hold it to maturity. 

But bond funds hold dozens if not hundreds or thousands of bonds, all with different maturity dates. So it’s not a calculation that all fund firms provide. Vanguard does, however. In late April, Vanguard Short-Term Investment-Grade had a yield to maturity of 5.4%. And Charles Schwab Asset Management (not to be confused with the online broker) provides it for its mutual funds and ETFs. 

Fidelity and Pimco, on the other hand, do not. Instead, you might see an “average maturity” or “effective maturity” for the fund, listed in years. That’s the average length of time until securities held by a fund reach maturity and are repaid. 

That stat might reveal more about interest rate sensitivity than it does about the fund’s yield, however. The longer a fund’s average maturity, the more the fund’s share price will move up or down in response to changes in interest rates.

Yield to worst (YTW)

Some bonds, such as municipal, mortgage and certain corporate bonds, are callable, meaning they can be “called in” and paid off early by the issuer before their maturity date. “You might have a bond with 10 years to maturity, but it’s callable in five years,” says Duane McAllister, senior portfolio manager at Baird Funds. 

Calling in a bond early can be a good tactical move for issuers; it cleans up a firm’s balance sheet, for starters. A yield to worst, then, is the lowest yield an investor can expect on a callable bond — call it a worst-case-scenario yield. 

Unfortunately, not all bond fund websites cite a yield to worst. But some do, including Baird. In late April, for instance, the Baird Aggregate Bond fund sported a portfolio average yield to worst of 5.08%. Says Baird’s McAllister, “That’s the worst- case scenario, but sometimes it works out to be better than that.”

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• What Is a Debt-To-Equity Ratio and How Can Investors Use It?
• Best Bond Funds to Buy
• What Is a Hedge Fund And Should I Invest In One?

It’s little wonder that the market hit a springtime speed bump, pulling back 5.5% in April before bouncing mostly back. Now, investors have to ask first whether the pullback has run its course before they consider whether the second half will deliver further gains. 

We would not be surprised to see the market fall (and pick itself back up) multiple times over the next several months, within a modestly upward trajectory that delivers gains by year-end. An S&P 500 level of 5300 at year-end seems a reasonable-to-conservative target, with 5500 at the high end of strategists’ estimates. Judging by index levels alone, wrapping up at 5300 would not represent much progress beyond the first-quarter high of 5254 for the S&P 500, although it would be an 11% price gain for the year — a 12.5% return including dividends. (Prices, returns and other data in this story are through April 30, unless otherwise noted.) 

But that doesn’t mean you should have closed the books in March, pocketed your gains and put the proceeds under your mattress. The market is not a monolith, and a rotation of leadership in a number of investing styles and categories will present pockets of opportunity (and some risk) that will demand careful attention to your portfolio. 

In contrast to the record-setting euphoria that characterized the start of the year, however, your patience is likely to be tested in a market contending with several crosscurrents, rising uncertainty and a pick-up in volatility, especially as we approach the U.S. election. Investors who soldier on will be rewarded, says Yung-Yu Ma, chief investment officer of BMO Wealth Management, U.S. “We continue to expect more flow than ebb, more push than pull and more forth than back.” 

It might help to remind yourself that corrections are a fact of investing life, and the market’s recent stumble didn’t even come close to one. Corrections are declines of 10% or more, but less than 20% (which is when a bear market kicks in). There have been 10 corrections since 1990, according to investment research firm CFRA, with an average market decline of 14.7%. 

“One thing to remember about a correction is the speed of recovery,” says CFRA’s chief investment strategist, Sam Stovall. Since 1990, the S&P 500 has returned to breakeven in an average of just three months. 

One pillar gone

Still, there’s no arguing that an important support for the stock market is gone — or at least missing for now. Early in the year, the market was buoyed by the expectation of six or seven interest rate cuts this year from the Federal Reserve, which would have significantly reversed the monetary tightening put into effect by the 11 rate hikes in 2022 and 2023 that brought the Fed’s benchmark rate from near zero to a range of 5.25% to 5.50%. 

Inflation appeared to be waning, with the Fed’s target rate of 2% seemingly within reach, and it looked as if the central bank was going to pull off an economic miracle — a so-called soft landing, taming debilitating price hikes with just enough tightening to cool an overheating economy without breaking its back. 

Not so fast. “The market was overly optimistic about immaculate disinflation,” says Phil Orlando, chief stock strategist at financial firm Federated Hermes. Inflation proved tough to vanquish, and a spate of recent economic reports show prices have headed north instead of south. The government’s recent release of the consumer price index marked the third straight month of no improvement. For the 12 months ending in March, the inflation rate was 3.5%, up from a 12-month rate of 3.2% in February and, for now, about where Kiplinger sees it ending the year. 

Inflation pain points include gas prices, housing and auto insurance costs. Overall, inflation should continue to moderate, although recent months have shown that the “last mile” to the Fed’s target rate can take a twist here or a turn there. 

The Fed’s preferred inflation barometer runs lower than the CPI but confirms the recent uptick. 

Traders are now expecting just one or two cuts from the Fed this year. But no cuts are a distinct possibility and, although unlikely, the possibility of rate hikes has entered the conversation. A “slower to lower” Fed and “higher for longer” economic growth, inflation and interest rates are now the expected order of the day. 

Bond yields have risen in anticipation, with the yield on 10-year Treasuries touching 4.7% in late April, before receding a bit. Inflation beneficiaries have rallied, including commodities as well as energy and materials stocks. Says Jason Draho, a U.S. investment strategist at UBS Global Wealth Management: “The overarching macro theme for the past few months is reflation.” 

It’s also worth noting that despite the market’s hiccup in reaction to diminishing prospects of near-term rate cuts from the Fed, rising interest rates historically haven’t been as bad for bull markets as investors might think. 

Research from market strategist Brian Belski at BMO Capital Markets found that, going back to 1990, the S&P 500 has gained 13.9%, on average, during periods when 10-year Treasury yields were on the rise, compared with 6.5% during falling-rate periods. “This makes sense, since lower rates can be reflective of sluggish economic growth and vice versa,” Belski says. 

A sturdy second support

Without an accommodative Fed to cut rates, at least until closer to year-end, the market is left with a second, arguably more important pillar of support — namely, a surprisingly resilient economy and its corollary, healthy corporate earnings. 

Although a lukewarm report on first-quarter economic growth showed a slowdown, economists concluded that it wasn’t as bad as it looked and that the report understated strong domestic demand. That was followed by an employment report showing moderating gains in job and wage growth. And a manufacturing index that had finally pulled into expansion territory in March contracted again in April. 

Nonetheless, many economists have been adjusting their forecasts higher for gross domestic product growth in 2024 and see little sign of anything resembling a recession or even stagflation, which occurs when the economy stalls but inflation remains high. In April, for one example, Wells Fargo Investment Institute boosted its outlook for GDP growth this year from 1.3% to 2.5% (which is also the growth rate that Kiplinger forecasts). 

“We wouldn’t be surprised to see close to 3% GDP growth this year,” says Ryan Detrick, chief market strategist at money management firm Carson Group. Labor markets and consumer spending are still strong, he says, and the industrial side of the economy is picking up. “It’s positive, especially if the consumer slows down a bit, for that baton to be passed to manufacturing as the economic cycle ages,” Detrick says. 

Meanwhile, corporate profits are robust. Analysts expect earnings for S&P 500 companies to rise an average 10% in 2024, according to earnings tracker LSEG I/B/E/S, and another 14% in 2025. That’s after hardly any growth at all in 2023. 

Better yet, the rest of the market is starting to share in the wealth that heretofore has been concentrated in the so-called Magnificent Seven, the tech-focused behemoths that have dominated lately. “Earnings growth is broadening out, allowing the rest of the market to catch up,” says Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. 

The chart on the facing page, from FactSet Research, another earnings research firm, shows that by the fourth quarter, analysts expect earnings growth of 15% from the same quarter a year ago for the Mag Seven, but they expect 18% for the 493 companies that make up the rest of the S&P 500. Contrast that with year-over-year earnings growth expected for the first quarter of nearly 39% for the Mag Seven and negative 4% for everyone else. 

“The year-on-year revenue and earnings growth that we’ve seen out of tech growth names has been eye-popping,” says Federated Hermes’s Orlando. “I’m not telling you they’re going to lose money, but the pace of growth is going to slow.” 

Crosscurrents to watch

One thing that investors can unfortunately count on in an election year is an increase in market volatility. But these choppy markets tend to resolve to the upside. “Once you’re through the election and uncertainty is alleviated, most of the time you see a rally. We don’t think this time will be different,” says Detrick. History shows average stock market gains of more than 7% in presidential election years (see the chart on page 24). 

Perhaps more important than who lives in the White House is the makeup of Congress: Stocks have gained the past 13 times we’ve had a divided Congress, Detrick’s research shows. Since 1951, the S&P 500 has logged annual gains of 15.7%, on average, when Congress is split but 8% when one party controls both the House and the Senate. 

Drilling down to the sector level, a survey of industry analysts at RBC Capital Markets shows that a Trump sweep or a Trump presidency with a split Congress would be favorable for energy, healthcare and materials stocks. The analysts’ views on sector returns were more neutral in a Biden sweep or split. 

Overall, says RBC’s Calvasina, “the conclusion is that the outcome of the election matters to some sectors and industries more than others, but it’s not the main thing that’s going to drive the markets over the rest of the year.” 

Geopolitical tensions are another worry for investors, with an ongoing war between Russia and Ukraine and escalating conflict in the Middle East. “We all sound crass talking about human-life stories in terms of dollars and cents, but that’s part of our job,” says Mark Hackett, chief of investment research at insurer Nationwide Financial. 

Other than initial reactions, the market typically is not affected much by geopolitical events, he notes. “There’s usually a momentary reaction as people are scared, uncertain or sad—but these events tend not to be disruptive long-term.” It would have been a mistake, he adds, to have sold stocks when Russia invaded Ukraine, or last October, when Hamas attacked Israel. 

But Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, worries that the current Middle East conflict “has entered a new realm. There’s a real potential there for sudden surprises,” he says. Threats to oil supplies in a worst-case scenario could send crude prices surging, he says, “in which case economic slowing in the U.S. would accelerate quite a bit.” Oil prices have been well behaved so far. 

But potential oil shocks are one reason strategist Ed Yardeni, of Yardeni Research, has been recommending that investors overweight energy and precious metals stocks in their portfolios. “They’re shock absorbers against any shocks from these two wars,” he says. 

Buy the new guard

Even down from record highs, stocks aren’t cheap, with the S&P 500 recently trading at 20 times expected earnings. But there’s a wide variation among sectors: Tech stocks sport a P/E of 27, on average, while energy, the cheapest sector, trades at a P/E of less than 13. 

A pivot away from the large, growth-focused stocks in the technology and communications services sectors — or at least some profit-taking — makes sense in order to rebalance into more value-oriented fare. “If you’re going to fish in a pond, fish in one with stocks trading at 14 times earnings with accelerated earnings growth,” says Hackett. “That’s preferable to 30 times earnings with decelerating growth.” 

So-called cyclical stocks, those that do best when the economy is strong, generally fall into the value camp. Sectors you should have on your radar now, according to several strategists, include energy, materials and, depending on who you ask, industrials or financials. Cyclicals also tend to do well in the second half of election years as optimism begins to emerge, notes strategist Calvasina, who recommends overweighting energy, financials and materials stocks. 

Of course, it’s possible that the economy isn’t as strong as some make it out to be, says Wells Fargo Investment Institute’s Christopher. “We think the economy will have a saucer-shaped trajectory this year,” he says, with midyear weakening that is not entirely apparent yet. But that will help cool inflation, spur Fed rate cuts and set up accelerating growth for the economy in 2025, so his advice is the same: Stock up on cyclicals, including energy, industrials and materials. 

Investors looking for a top-notch value fund can consider Dodge & Cox Stock, a member of the Kiplinger 25, the list of our favorite actively managed no-load funds. Or consider Oakmark, a fund whose long-term returns have rewarded patient investors. (To see what stocks Oakmark comanager Bill Nygren likes now, see “5 Cheap Stocks to Consider,” on page 19.) To add broad sector exposure to your portfolio, consider exchange-traded funds, including Energy Select Sector SPDR, Vanguard Financials and Fidelity MSCI Materials. 

Profit from strength in industrial stocks by zeroing in on infrastructure plays, says BMO strategist Ma. Three separate government spending bills are pouring billions of dollars into green energy, roads and bridges, semiconductor manufacturing facilities, and improvements to the electricity grid, among many other initiatives. “These projects take a long time to get going and have a long runway — only a fraction of the buildout has taken place,” says Ma. 

Industrials are also getting support from the longer-term trends of onshoring, reindustrialization of the U.S. and building up supply-chain resilience. There’s even a link to the artificial intelligence megatrend, he says, as a huge need for data centers and the electricity to run them comes into play for industrial firms. 

Ma likes the diversified approach of Global X U.S. Infrastructure Development, an ETF with 73% of assets in industrial firms and 20% in materials companies (which produce and process the raw materials that go into infrastructure production — think concrete, metals, plastics and so on). Among the ETF’s top 10 holdings are Emerson Electric, a member of the Kiplinger Dividend 15 with a 1.9% yield; industrial machinery and supplies company Parker Hannifin; and Vulcan Materials, one of our January Investing Outlook picks for 2024, up 32% since our recommendation but with more room for gains. All are rated “buy” by Wall Street analysts. 

It’s prudent to balance cyclical bets with a stake in defensive sectors. For Calvasina, that’s utilities. Consider Invesco S&P 500 Equal Weight Utilities. For Christopher, healthcare is an undervalued defensive choice. Fidelity Select Health Care is a Kip 25 fund. 

Small-company stocks are on some strategists’ buy lists, but others remain wary, as previous rallies have fizzled. “There’s a long list of why they’re interesting,” says Calvasina. Valuations are at a deep discount compared with large-company stocks; analysts are increasingly revising earnings estimates upward; and forecasts for economic growth are moving higher. “In an above-average or hot economy, small caps outperform, and it looks like that’s where we’re headed,” she says. 

The problem? With typically higher debt levels, small caps feel the pinch of higher interest rates more acutely. They’re unlikely to rally convincingly until the Fed is certain that inflation is under control and cuts rates accordingly. 

“You’ve got to kick off the cutting cycle, or be certain it’s around the corner,” says Calvasina. “I covered small caps for a long time — they’re like my first professional child. But I think Fed rate-cut expectations are all over the place at the moment.” 

Still, small caps deserve a spot in a diversified portfolio. Index investors can improve their chances with a fund that tracks the S&P SmallCap 600 instead of the Russell 2000; the former has a profitability requirement for constituents that raises the quality bar. Consider ETF 20 member iShares Core S&P Small-Cap. Or employ the services of a skilled manager in a fund such as Needham Aggressive Growth. 

Views on international markets are mixed. Among developed countries, Europe is “not quite warming up, but getting less cold,” says BMO’s Ma. Positives include modest valuations and anticipated rate cuts from the central bank, but for now he remains neutral. Japan, by contrast, is a bright spot.

 A number of structural corporate governance changes are increasing shareholder value, says Ma, such as aligning CEO incentives with stock performance, returning cash to shareholders via more dividends and buybacks, and using cash wisely for acquisitions. (Historically, Japanese companies have hoarded cash and been resistant to corporate takeovers.) 

“Structural change like this is rare,” says Ma. “It tends to have a multiyear runway, and the market tends to underestimate it.” He recommends iShares MSCI Japan, an ETF that provides exposure to a broad array of companies. 

Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, likes emerging markets. They’ve languished for years, and a stronger dollar weighs on nations with high dollar-denominated debt loads. But Suzuki sees the green shoots of recovery as global economic growth picks up and a re-flation wave benefits commodity-producing nations. Actively managed Baron Emerging Markets, a Kip 25 fund, is our choice. (For more insights from Suzuki, read his thoughts for the rest of 2024.)

Finally, fixed-income investors should consider a “barbell” approach to a mercurial bond market. With the yield curve still inverted, short-term bonds and bond funds deliver superior yields for now and are a good place to keep cash you’re waiting to deploy. T. Rowe Price Ultra-Short Term Bond, yielding 4.9%, is an option. 

But consider locking in some long-term bond exposure if and when opportunities arise, says Federated’s Orlando. In a volatile interest rate market, 10-year Treasury yields could retest higher levels in the second half, he says. But with the Fed having completed its rate-hiking cycle, the next move is more likely down; Orlando sees the 10-year yield at 3.8% or lower over the next year or so. (Kiplinger expects the 10-year note to end 2024 with a 4.3% yield.) In that case, recent yields of 4.6% or 4.7% look pretty good. 

“Where’s the top? I can’t pick the exact spot. But investors who have lengthened out their bond duration will be happy they did — much like people who locked in 3% mortgage rates a few years ago,” he says. 

Buy Treasuries directly from Uncle Sam at TreasuryDirect.gov or from your broker. Fund investors can’t “lock in” yields because bonds flow in and out of fund portfolios, but they might consider Vanguard Long-Term Treasury Fund, with a 4.5% yield. Stick with high-quality fixed-income holdings. There’s little in-centive to reach for yield, with the spread between yields on Treasuries and those on lower-rated bonds “incredibly tight,” says Hackett. “You’re not rewarded for being aggressive.”

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related content

• Best Bond Funds to Buy
• The Best ETFs to Buy Now
• Best Dividend Stocks to Buy for Dependable Dividend Growth

While we wait, some enticing yields are on offer across a wide range of asset classes for income-hungry investors — and, for a change, that includes bonds, a core income-producing asset. “One overarching theme is that fixed income is kind of back to normal, which means back to a world we haven’t seen in 15 years,” says Simeon Hyman, global investment strategist at ProShares. 

A case in point: You can now earn a real yield (that is, the yield after inflation) of about 2% on ostensibly risk-free Treasuries and other high-quality bonds — and much more in riskier high-yield bonds. Stocks and energy-infrastructure securities provide both income and a growing stream of dividends, a quality that is especially important in providing protection against consumer prices mercilessly on the rise. Even-higher yields are available from closed-end funds and business development companies. 

This guide will help you identify attractive income-producing investments in nine different categories, ranging from low-risk, plain-vanilla securities to more-complex, higher-risk and potentially higher-return investments. (Although yields and risk usually move higher in lockstep, that’s not the case this year, and we’ve listed investments roughly in the order of ascending risk.) 

Before you embark on your quest for income, keep a few considerations in mind. You should have a financial plan in place that specifies long-term portfolio allocations. Everyone’s financial situation is different, but generally you should ensure that you keep sufficient cash and equivalents on hand to cover six months of living expenses before investing in high-risk/high-return assets. Prices, yields and other data are as of the end of the first quarter of 2024.

5%: Short-Term Accounts

Yields on short-term, fixed-income accounts and securities follow movements in the Fed’s short-term interest rates. That means relatively attractive yields are available on cash and other short-term, liquid assets in today’s higher-interest regime.

The risks: The game will change when the Fed starts cutting rates later this year, which is widely expected. “Money market rates could go down tomorrow if rates decline,” says Lew Altfest, chief investment officer of Altfest Personal Wealth Management. Andy Kapyrin, a partner at Corient, says, “Investors are overeager to stay in cash and thus risk missing an opportunity if the Fed cuts rates.”

How to invest: Kapyrin recommends deploying some of the cash into one- to five-year bonds, which would lock in today’s yields for a longer period than, say, the overnight rates on money market funds. Of course, because this category is mostly cash equivalents likely earmarked for emergency reserves or to meet short-term liabilities, you want to play it safe.

One exchange-traded fund Kapyrin cites is Vanguard Short-Term Treasury (VGSH, $58, yield 4.7%), which invests in one- to three-year government paper and has a duration — a measure of interest-rate sensitivity — of 1.9. That means if rates were to rise (or fall) one percentage point, the fund would lose (or gain) roughly 1.9%. (Prices and interest rates move in opposite directions.) 

If you seek less interest rate sensitivity, Vanguard Ultra-Short Bond (VUSB, $50, 5.1%), which invests in a variety of government and corporate investment-grade bonds, has a duration of just under 1. Investors who want to stick with ostensibly risk-free government debt can consider Goldman Sachs Access Treasury 0-1 Year (GBIL, $100, 5.2%), which tracks an index of Treasury obligations with a maximum remaining maturity of one year. 

Many investors will still want to stash some of their cash in a money market mutual fund, which is a popular parking place for money you’re waiting to deploy. Vanguard Federal Money Market (VMFXX, 5.2%) consistently outperforms its counterparts, largely due to a rock-bottom expense ratio of 0.11%.

5%–7%: Investment-Grade Bonds

The core of a typical fixed-income portfolio is made up of investment-grade bonds issued by the U.S. Treasury, government agencies (mortgage-backed securities, for example) and corporations. These assets provide income without dramatic price fluctuations and, generally speaking, provide portfolio diversification because they tend to move out of sync with stocks.

The risks: Interest rate spreads between corporate bonds and Treasuries are remarkably narrow by historical standards. “There is little spread for taking credit risk,” says Kapyrin. That said, there’s also a risk of inertia in keeping too much cash. 

“People could certainly have money in cash at 5%,” says Abhijeet Patwardhan, manager of FPA New Income (FPNIX, 4.7%). “But the cost of doing that is if the market rallies and rates come down a lot, I think those people will regret not having locked in higher yields that were available.” 

How to invest: Investment-grade fixed income is a vast and diverse universe with many different strategies. FPA New Income, for example, is a fund with superb risk management that focuses on preservation of capital as well as generating income. Patwardhan says the fund’s duration of 2.7 is its highest in 20 years and that the current portfolio is dominated by securitized debt, because that’s where he sees the best risk-adjusted investment opportunities. In the fourth quarter of 2023, he snapped up agency residential mortgage–backed securities.

Altfest also spots value in non-agency mortgage-backed securities because he thinks that homeowners who have lived in their houses for years and have built up home equity are a solid credit risk. He likes Jeffrey Gundlach’s DoubleLine Total Return Bond (DLTNX, 5.4%), which invests in both agency- and non-agency mortgage-backed securities and has a duration of 5.9.

You can find a higher yield in VanEck CLO (CLOI, $53, 6.8%), an actively managed ETF subadvised by PineBridge Investments. Collateralized loan obligations are loans — broadly syndicated bank loans, for instance — that are pooled together and securitized. Fran Rodilosso, head of fixed income ETF portfolio management at VanEck, observes that with investment-grade CLOs (about three-fourths of the fund’s holdings are rated A or above), you can pick up one to two percentage points in yield compared with what’s available in corporate bonds with the same credit rating.

4%–7%*: Municipal Bonds

Issued by state and local governments, muni bonds pay interest that is free from federal taxes — and for bonds issued in your state of residence, free from state and local taxes, too. High-quality, investment-grade munis tend to follow movements in the Treasury market and, like Treasuries, tend to perform well in a recession.

The risks: The main risks aren’t about creditworthiness. “The liquidity of most state and local issuers is at historical highs, due to robust revenues and all the money the federal government gave them,” says Jeff Timlin, a tax-exempt bond manager at Sage Advisory. 

Instead, the main issue may be high valuations, in part reflecting the constrained supply of munis and the very strong demand for them in the market. John Miller, head of First Eagle’s high-yield team, notes that the $4 trillion muni market has scarcely grown in decades. “One reason munis are outperforming is pure scarcity value,” he says.

How to invest: To calculate your tax-equivalent yield and compare it to the yield of a Treasury or other taxable bond, subtract your federal income tax bracket rate from one, then divide a muni bond’s yield by the result. Thus, the tax-equivalent yield for a muni yielding 3% would be 3.95% for someone in the 24% tax bracket, or 4.76% for a taxpayer in the top, 37% federal bracket. Timlin says that in today’s interest rate environment, investment-grade munis generally don’t make sense for investors unless they’re in the 35% or 37% tax bracket.

There are some pockets of value, however. Because investors are crowding into shorter-term muni bonds, their prices are least attractive relative to taxable bonds. But venturing further out on the maturity spectrum can be rewarding. Jim Colby, a muni bond manager at VanEck, says that munis become attractive relative to Treasuries at maturities of about 10 years, and the yields become increasingly alluring the further out you go on the yield curve. 

Consider: For muni bonds rated AA and AAA with maturities of one to 10 years, the current yield ratio to Treasuries is 55% to 60%, compared with a norm of 75% to 80%, according to Miller. But for 30-year maturities, the ratio is above 80%. 

Another area with value, says Colby, are high-yield muni bonds, often backed by revenue from a sports stadium, public hospital or the like. Their yields are an attractive two to three percentage points above investment-grade munis. Historically, the default rate for high-yield munis is a small fraction of that of high-yield corporates, and the recovery rate is much higher. 

You can gain exposure to a well-diversified basket of high-quality munis by investing in a national muni fund. Vanguard Tax-Exempt Bond (VTEB, $51, 3.4%) holds more than 10,000 bonds from across the land, nearly all rated A or higher. It’s an intermediate bond fund with a duration of 6 and a rock-bottom expense ratio of 0.05%. The tax-equivalent yield is 4.5% for someone in the 24% federal bracket, or 5.4% for a 37%-bracket taxpayer.

The high-yield muni market is about 15% of the muni universe, and most of the bonds aren’t even rated because they tend to be smaller issues to support local infrastructure. Active management in such a fragmented market calls out for a seasoned muni bond veteran like Miller, manager of First Eagle High Yield Municipal (FEHAX, 5.1%). Miller was previously head of the muni bond department at Nuveen, a muni powerhouse, before he decamped to First Eagle. Converted from a taxable bond fund, the high-yield tax-exempt fund has soared 4.2% since Miller took the helm at the start of 2024. The tax-equivalent yield for a taxpayer in the 24% bracket is 6.7%. 

If you prefer a shorter-duration, passively managed fund, consider VanEck Short High Yield Muni (SHYD, $22, 3.8%); Colby is a comanager. 

6%–9%: High-Yield Taxable Bonds

Also known as junk bonds, high-yield corporates are issued by firms with sub-investment-grade ratings. As compensation for lending to these higher-risk businesses, investors receive higher yields than investment-grade bonds offer. Junk bonds move more in sync with stocks than with Treasuries and are less sensitive to interest rate swings than high-quality bonds with the same maturity.

High-yield bonds have really come into their own in recent years. “High yield has become a very established, accepted asset class that investors are no longer fearful of,” says Ray Kennedy, co-manager of Hotchkis & Wiley High Yield Fund. “It’s not your parents’ high-yield asset class.” Liquidity and transparency have substantially improved, default rates have remained tame, and risk-adjusted returns have been better than those of investment-grade bonds and several other asset classes.

The risks: The risk of default is the main concern. For now, default rates are a relatively modest 2% to 4%, according to Kennedy, but would rise if the economy were to tip into a recession. 

How to invest: High-yield bonds quite likely merit some allocation in your fixed-income portfolio. “The role in high yield is to achieve higher long-term returns than the rest of your income portfolio but with a lower correlation with interest rate movements,” says VanEck’s Rodilosso. 

Because you also want to sleep soundly at night when investing in these riskier credits, it pays to employ a defensive manager who minimizes downside risk. “You make more by losing less,” says Carl Kaufman, who has run Osterweis Strategic Income (OSTIX, 6.1%) since 2002. 

He likes the current set-up for shorter-term bonds, given the inversion of the yield curve (with shorter-term securities yielding more than longer-term ones). “You can get some nice yields at the short end without taking the risk of the long end of the curve,” Kaufman says. The longer the maturity, the higher the chance of default and the greater the interest rate sensitivity. The fund’s duration is 1.7. 

David Sherman, founder of and portfolio manager for CrossingBridge Advisors, has compiled an outstanding risk/return profile over many years with his short-duration high-yield funds. “We’re 100% bottom-up, disciplined value investors,” Sherman says. “The first investment decision is ‘do no harm.’ ” His CrossingBridge Low Duration High Yield (CBLDX, 8.2%) is one of only a handful of bond funds to make money in 2022, a disastrous year for fixed income. The fund’s duration is generally around 1. 

Riverpark Strategic Income (RSIIX, 9.1%), which Sherman also manages, has a slightly higher duration of about 1.5 to 2 and an equally stellar risk-management record. The fund has only one-third of the average volatility and maximum drawdown of the high-yield bond category. The portfolios are mainly U.S. credits, but Sherman scours the globe and has a particular affection for Nordic bonds.

3%–5%: Dividend Stocks

Dividend-paying stocks play an important income role in a diversified portfolio. Unlike fixed-income investments such as Treasuries and corporate bonds, dividend distributions paid by healthy corporations can increase each year, making the payouts a potent way to maintain the purchasing power of a long-term portfolio. They’re particularly valuable in an inflationary environment such as we have today.

The risks: Stocks tend to be much more volatile than high-quality bonds and suffer more in a recession. Some investors make the mistake of reaching for the highest yields, which can be an indication a company is in distress or lacks promising growth prospects. 

How to invest: The oil patch is generally a good place to hunt for yield. John Buckingham, editor of The Prudent Speculator, likes Devon Energy (DVN, $50, 4.9%), an independent exploration and production firm, for its high-quality domestic assets, improving balance sheet, and focus on profitability and dividend distributions. 

Another of his picks is Air Products & Chemicals (APD, $242, 2.9%), a member of the Kiplinger Dividend 15, the list of our favorite dividend payers. Founded in 1940, Air Products is one of a handful of players in the highly consolidated and growing industrial gas industry. The company has increased its dividend for 42 consecutive years.

Core investment banking activities such as mergers and acquisitions and initial public offerings are coming alive again, and that should benefit generous dividend payer Morgan Stanley (MS, $94, 3.6%), says Jay Hatfield, founder and CEO of Infrastructure Capital Advisors. 

If you prefer to invest in a diversified basket of dividend stocks, consider Schwab US Dividend Equity (SCHD, $81, 3.5%). The fund, a member of the Kiplinger ETF 20 list of our favorite ETFs, offers both a relatively high yield and a solid track record of boosting dividends each year. 

Save some room for foreign stocks, which offer significantly higher yields than do their counterparts at home. Jay Hill of Tweedy, Browne notes that European companies prefer to return money to shareholders through dividends, whereas many U.S. firms prefer share repurchases. Tweedy’s Thomas Shrager points to Swiss-based pharmaceutical giant Roche Holding (RHHBY, $32, 4.4%), which trades as an American depositary receipt, as an example. Roche has boosted dividends 37 straight years, and Shrager sees a solid drug-development pipeline that should underpin growth in sales and earnings for years to come.

For a diversified overseas portfolio, consider Vanguard International High Dividend Yield (VYMI, $69, 4.9%), whose top holdings are Toyota (TM), Novartis (NVS), another Swiss pharma giant, and Shell (SHEL).

4%–6%: Real Estate Investment Trusts

Because REITs are required to distribute at least 90% of their taxable income each year, they offer relatively high yields. REITs can raise rents when leases expire, which makes these real-asset businesses a strong inflation hedge in today’s environment of rising prices. 

The risks: REITs tend to underperform in periods of rising interest rates because they typically carry high debt loads and face increasing competition from the higher yields available on fixed-income investments. 

How to invest: The REIT industry has expanded and diversified dramatically to include tech-oriented subsectors such as data centers and cell towers, along with e-commerce warehouses, self-storage facilities and health care properties. In recent months, the financial media have been filled with doom-and-gloom articles about the growing number of bankruptcies of city-center office buildings emptied out by the increasing popularity of remote and hybrid employment. That narrative is somewhat distorted in that office space represents only about 5% of the REIT universe, and some of the urban developers are doing fine.

“I think people are making a big mistake about offices by not distinguishing between A+ properties and B and C” properties, says Hatfield. He notes that REITs, as public companies with mostly fixed-rate debt, are much better capitalized than privately owned office towers, which may have floating-rate debt. He likes the largest office owner, Boston Properties (BXP, $62, 6.2%). 

Another controversial sector is brick-and-mortar retail. Michael Elliott, a REIT analyst at CFRA Research, favors Simon Property Group (SPG, $152, 5.2%), the largest shopping mall owner, for its focus on class-A malls with the industry’s highest sales per square foot. Another of his picks is VICI Properties (VICI, $29, 5.8%), a gaming REIT that owns casinos and resorts in Las Vegas, including Caesars Palace, MGM Grand and The Venetian. 

If you prefer to hold a diversified REIT sector fund, here are two very different choices: Vanguard Real Estate (VNQ, $84, 4.1%) is a low-cost, passively run index fund with a basket of 159 securities. Actively managed Fidelity Real Estate Income Fund (FRIFX, 5.9%) holds an unusual combination of REITs, REIT corporate debt and commercial mortgage-backed securities. 

“I have found that allocating to different real estate security types has helped deliver less volatility, higher income and a similar return profile compared to funds that focus on real estate stock investing,” says Bill Maclay, the Fidelity fund’s manager. Today, Maclay says he finds better value in real estate debt, which is “attractively priced, with the highest yields in more than a decade.” One of his current areas of focus is high-yield mortgage-backed securities secured by warehouse properties.

5%–8%: Midstream Energy Infrastructure

Midstream companies process, store and transport oil and natural gas around the nation through pipelines. Their place is in between upstream companies (energy producers) and downstream firms, which make finished products such as liquefied natural gas.

The industry has performed well the past few years and remains in a sweet spot. Because capital investment needs are modest, the firms are gushing cash flow, which they use to reduce debt levels and increase dividend distributions and share buybacks. 

“The beauty of this story now is that it’s [about] cash flow ... and the return of money to shareholders,” says Greg Reid, a comanager of Westwood Salient MLP & Energy Infrastructure, who says the average pipeline company yields about 6% and is increasing cash flow by 5% to 6% a year. 

The risks: The largest risk is an economic slump, which would cut energy consumption and reduce volumes moved through the energy infrastructure. Inflation is less of a challenge because, unlike in many other industries, pipeline operators can generally pass on higher costs to customers each year through inflation escalators built into long-term contracts.

How to invest: Midstream energy is composed of both master limited partnerships and corporations (also known as C corps). Yields tend to be higher for MLPs, which distribute most of their income each year but issue K-1 forms, which can be somewhat cumbersome at tax time, to limited partners (that is, investors). 

Your first decision is whether you are willing and able to handle the K-1s annually. If you are, then there’s an attractive yield available in Energy Transfer LP (ET, $15, 8.1%), whose operating cash flow is quickly expanding, notes Stewart Glickman, an energy analyst at CFRA. Many fund managers, such as Hatfield, at Infrastructure Capital Advisors, are particularly drawn to natural gas. “The U.S. is the Saudi Arabia of natural gas, which is good for pipelines,” says Hatfield, who recommends Enterprise Products Partners LP (EPD, $29, 6.9%).

Simon Lack, comanager of Catalyst Energy Infrastructure Fund, likes Williams (WMB, $38, 4.9%), which operates, among other assets, the Transco pipeline, a 10,000-mile pipeline system that extends from south Texas to New York City and transports about 15% of the country’s natural gas. If you seek a higher yield, then Lack recommends Enbridge (ENB, $36, 7.5%), a conservatively managed Canadian company and the sector’s largest player by market value. 

Or, for a diversified sector holding, consider Lack’s fund itself. Catalyst Energy Infrastructure Fund (MLXIX, 6.0%) pays monthly dividends and avoids the need to issue K-1s by keeping its MLP weighting in the fund to less than 25%.

9%–10%: Business Development Companies

Business development companies invest in small and growing firms that are typically too small to access bank lending. Congress devised the BDC structure in 1980, and the effect has been to “democratize access to the private-credit asset class,” says Steve Boehm, a partner at the law firm of Eversheds-Sutherland who has advised many of the largest BDCs over the past 25 years. As with similar investments aimed at high-net-worth individuals and institutional investors, BDCs are currently a hot asset class, says Boehm.

Most BDC loans to small, private firms are secured, first- or second-lien variable-rate loans with interest rates that adjust when lending rates change. A BDC can trade at a premium or discount to the net asset value of its investment portfolio, which is reappraised quarterly. 

Like REITs, BDCs are required to distribute at least 90% of their taxable income each year. Because this is ordinary income (that is, not qualified dividend income eligible for lower tax rates), a tax-deferred retirement account is a natural home for these high-yielding investments.

The risks: BDCs often use borrowed money to make loans to their portfolio companies. That leverage can goose returns as long as portfolio loans are solid and BDCs can lend at higher rates than at which they borrow. But it can magnify losses in net asset value if the reverse comes to pass. Another challenge is that lending rates may have peaked this cycle, which would constrain earnings growth for BDCs.   

How to invest: There’s very wide variation among BDCs’ sizes, quality of management and portfolios. Because these are private, high-yield loans with a risk of default, Alex Seleznev, founder of Capital Squared Financial, suggests a low-single-digit allocation to the asset class. “This is an aggressive component of someone’s income-oriented portfolio,” he says.

Seleznev is attracted to Ares Capital (ARCC, $21, 9.2%), by far the largest company in the industry by market value. “Size matters in BDCs,” he says. This is true particularly because BDCs, which must distribute nearly all their earnings, need ready access to capital markets that may be unavailable to small players. Robert Dodd, a BDC analyst at investment firm Raymond James who has covered the industry since 2006, notes that Ares has steadily increased its book value (a critical metric for him because it measures the quality of a BDC’s loan portfolio) and has never cut its dividend in the 20 years since it went public. “There’s a level of consistency over a long period of time,” he says.

Dodd also recommends Sixth Street Specialty Lending (TSLX, $21, 8.6%), whose portfolio consists nearly entirely of first-lien loans. Ares, which almost never trades at a discount to net asset value, is currently at an 8% premium, and Sixth Street at a 26% premium; both have total leverage ratios (borrowed money as a percentage of assets) of about 50%, which is typical.

If you’d rather diversify your BDC portfolio, you can choose between a market-weighted index-tracking fund, VanEck BDC Income (BIZD, $17, 10.3%), and an actively managed one, Putnam BDC Income (PBDC, $34, 9.2%). Putnam’s BDC fund, launched in 2022, is managed by Michael Petro, who has invested in BDCs for more than 15 years. 

4%–12%: Closed-End Funds

Closed-end funds raise money through an initial public offering, then invest the money in stocks, bonds, MLPs and other financial assets. Trading on an exchange, shares of closed-end funds will fluctuate in price according to investor demand and can trade at a discount or premium to the per-share value (or net asset value) of the fund’s underlying assets. 

The risks: Most closed-end funds use borrowed money, or leverage, to invest in portfolio assets. Leverage can work both ways, boosting price returns in up markets but amplifying losses in net asset value when markets decline.

How to invest: Municipal bonds account for about one-third of the closed-end fund market. Muni-focused closed-end funds have struggled a bit over the past year due to the inverted yield curve, which undermines the ability of fund managers to borrow at attractive short-term rates and invest for the long term. 

But herein lies an opportunity, says Steve O’Neill, a portfolio manager at RiverNorth Capital Management. At some point, the yield curve will uninvert as the Fed cuts interest rates. In the meantime, says O’Neill, closed-end muni funds trade at nearly a record discount to net asset value and in the 95th percentile of cheapness by discount over the past 25 years.

One of O’Neill’s picks is BlackRock MuniYield (MYD, $11, 5.7%), which sells at a 9% discount to net asset value and has a 35% leverage ratio, which is about average. The tax-equivalent yield is 7.5%. If you prefer no leverage, he recommends Nuveen Municipal Value (NUV, $9, 4.0%), which trades at a 7% discount. Tax-equivalent yield: 5.3%.

Not surprisingly, higher yields are available on leveraged taxable investments. John Cole Scott, chief investment officer of Closed-End Fund Advisors, likes FS Credit Opportunities (FSCO, $6, 12.0%), which invests mainly in senior floating-rate secured loans, trades at a 15% discount and has 33% leverage. 

Scott is also keen on Brookfield Real Assets Income (RA, $13, 11.0%), which invests in corporate debt and asset-backed securities in the infrastructure, real estate and natural resource sectors. Brookfield sells at a 13% discount to net asset value and carries a modest 17% leverage ratio.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• Treasury Bills vs. Treasury Bonds: Know The Difference
• How To Start Investing
• The Best ETFs to Buy Now
• What Is Quantitative Easing?

Americans voted real estate as the best long-term investment, according to a new Gallup poll. And in fact, real estate has come out on top of this poll every year since 2014, beating out stocks or mutual funds, gold, and savings accounts or CDs. 

This year, 36% of Americans put real estate on top. Next up was stocks, at 22%, followed by gold, 18%, and savings accounts or CDs, 13%. Coming in at the bottom of the list was bonds, at 4%, and cryptocurrency, at just 3% — not a huge surprise, considering many people are still trying to figure out what cryptocurrency is. 

That real estate has been such a consistent winner this past decade is interesting, though. Now, don't get me wrong: Both real estate and the stock market have historically been great long-term investments. They have both exceeded the rate of inflation, meaning that if you were invested, you saw some great returns in the long-term. They also both generally have higher rates of return than safer vehicles like savings accounts, CDs (even with the high CD rates these days) or bonds. 

But lately, stocks have given a better return than real estate, and those returns have come as investing has gotten increasingly accessible thanks to tools like online brokers and trading platforms. Real estate, meanwhile, has only gotten less accessible, if you're not already a homeowner, as prices have been rising and down payments are a bigger barrier to entry than, say, throwing $100 into a Vanguard account. (That's particularly true now, when people like myself are arguing it is the worst time to buy a house between high mortgage rates and prices.)

If you're an older homeowner or real estate investor, though, it's easy to understand why you'd say real estate is a better investment than the stock market. From 1990 to 2006, returns on housing were higher than stocks, according to Investopedia. 

But since 2006, stock market growth has exceeded housing. Using the S&P 500 vs the Vanguard Real Estate Index, Sean Ross at Investopedia found that from December 2013 to December 2023, the real estate index had a 37% total return — while the S&P 500 had a 155% total return. 

Even so, again, I can understand why people stick with real estate. It's a simple idea, really, which is that real estate feels safer. The stock market has bumps and volatility in short-term segments, while housing generally keeps a more slow but steady climb. And you can't disagree that on a rainy day, a roof over your head feels like a better investment than a GOOGL share in your Robinhood account. 

Related Content

• How to Help Your Children Buy a Home
• The Best Gold ETFs with Low Costs
• Best Books on Investing

Higher interest rates have introduced challenges for bond investors in recent years, leading to a reevaluation of strategies to mitigate risks while capitalizing on the income-generating potential of bonds. Now, with the possibility of falling interest rates and the Federal Reserve's strategic monetary adjustments, investors need to have a nuanced understanding of how to navigate the complexities of the fixed-income market before rates rise and after.

Fixed-income market dynamics

Fixed-income markets are sensitive to changes in monetary policy, particularly those set by the Fed. These changes can profoundly impact bond yields, prices and overall investment returns. Understanding these dynamics is crucial for effectively navigating the fixed-income market.

The relationship between interest rates and bond prices is inversely proportional. When interest rates rise, bond prices fall, and vice versa. This inverse relationship is a fundamental principle of bond investing and plays a critical role in portfolio management strategies.

Between 2008 and 2023, the bond market in the United States saw an average yearly return of merely 2.81%, according to the Bloomberg US Aggregate Bond Index. U.S. Treasury bonds experienced even lower performance, with an average annual return of just 2.35% during this timeframe. This was exacerbated in 2022 when the Fed's hawkish rate hiking commenced, and bond market losses amounted to a staggering 13%.

The Fed plays a vital role in shaping the fixed-income landscape. It uses monetary policy tools, primarily the federal funds rate, to influence economic conditions. Changes in the Fed's policy stance can significantly impact bond yields and prices.

During the July Federal Open Market Committee meeting, the Fed again held rates steady, though it appears a rate cut could be coming at its next meeting, in September.

Historically, bonds have shown consistent positive performance after Fed pauses in rate hikes. This performance is often linked to the subsequent loosening of monetary policy, leading to falling interest rates.

From August 1984 to December 2021, the average U.S. bond market total returns following the end of a rate hike cycle was roughly 8% after six months and 13% after one year.

Current fixed-income environment

The current fixed-income environment is characterized by higher, but potentially falling, interest rates. The federal funds rate currently stands at 5.5%, up significantly since the sub-1% rates in 2021. This environment presents both challenges and opportunities for investors.

The Fed's stance since 2022 has been geared toward tightening monetary policy to combat inflation. Higher interest rates have led to declining bond prices, resulting in sharp losses for many bond investors. However, these higher rates have also increased bond yields, enhancing the income potential of those securities during that time.

However, based on the Fed's economic projections and policy commentary, the tightening cycle is likely complete unless high inflation reignites. Since October 2023, following a pause in rate increases, the bond market has performed exceptionally well.

There are indications that an interest rate cut could happen in September and continue into 2025 and 2026. Falling rates offer the potential for capital appreciation and increased diversification benefits for bond investors.

Strategies for navigating the current environment

There are several strategies that investors can adopt to navigate the current fixed-income market environment effectively. For instance, with the prospect of falling interest rates, it may be prudent for investors to decrease their cash and short-term bond positions.

Investing in longer-term fixed-income securities can help lock in higher yields before rates fall. Increasing the duration of a bond portfolio can be beneficial when interest rates peak, as long-term bonds have more significant potential for capital appreciation during periods of falling rates.

Investors should also note that floating rate securities, whose interest rates adjust with market rates, have historically underperformed during periods of loosening monetary policy. Reducing exposure to these securities can help mitigate potential losses.

The fixed-income market's landscape is constantly changing, shaped by shifts in the Fed's tone and monetary policy. By understanding these dynamics and adopting effective portfolio management strategies, investors can navigate the fixed-income market effectively.

Securities and investment advisory services offered through Osaic Wealth, Inc. member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth.

Related Content

• 10 Things You Should Know About Bonds
• Bond Basics: How to Buy and Sell
• Should You Still Have Bonds in Your Portfolio?
• Three Habits of My Most Successful Wealth Management Clients
• How Inflation, Deflation and Other 'Flations' Impact Your Stock Portfolio

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Inflation can wreak havoc with your portfolio, too. "Inflation impacts your portfolio in acute and obvious ways and in more sneaky and nefarious ways," says Wylie Tollette, chief investment officer of Franklin Templeton Investment Solutions and coauthor of a 2022 study on which kinds of investments do best in inflationary times. 

Inflation erodes the value of your investments by reducing their purchasing power, for starters. And when inflation is on the rise, central bankers tend to respond with higher interest rates to cool the economy and put a lid on prices. The Federal Reserve, for example, has hiked its benchmark rate 11 times since March 2022. The one-two punch of higher inflation and rising rates sent stocks and bonds reeling, making 2022 the rare year in which both markets tanked. 

More subtly, inflation rates can also influence overall market valuations, or the prices investors are willing to pay for financial assets. In general, the higher the inflation rate, the less investors are willing to pay for stocks. 

One rule of thumb states that stocks are overvalued if the average price-to-earnings (P/E) ratio for stocks overall is higher than 20 minus the inflation rate. Based on a 2024 expected inflation rate of about 3%, that implies a fair value for the S&P 500 index would be about 17 times expected earnings. As of January 31, the S&P 500 index traded at a P/E of 21.7, but that's skewed higher by a handful of giant growth stocks known as the Magnificent Seven.

Likewise, investors are generally willing to lock money up in a bond only if they think the bond's interest rate will beat inflation over its lifetime. "It's all about inflation expectations," explains Rob Arnott, founder of the investment firm Research Affiliates. 

As bad as inflation can be, stagflation (when inflation is rising but the economy is in a rut) can be worse – as can deflation (when widespread, persistently falling prices threaten to destabilize the economy overall). Economists say there are basically five different pricing environments, or kinds of "flation," each impacting your portfolio in different ways. They're listed below with summaries of which types of investments tend to prosper in each. 

Inflation

A little bit of inflation, which is a sustained increase in the price level of goods and services, is generally considered beneficial for the economy. But when prices start rising by more than about 2% a year, policymakers, bankers and businesspeople worry. 

Business managers, fearing their revenues will lag, often start raising prices, and workers demand raises, potentially sparking a dangerous upward cycle. The investments that have historically beaten high inflation include energy stocks, residential real estate held directly (real estate investment trusts have provided much less inflation protection in previous cycles) and Treasury inflation-protected securities. TIPS are federal IOUs that adjust their principal in line with the Consumer Price Index (CPI). 

Commodity funds also tend to beat inflation. For example, the TCW Enhanced Commodity Strategy (TGABX), a member of the Kiplinger 25 list of our favorite no-load mutual funds, returned 44% in the most recent period of rising inflation, from March 2021 through May 2022. 

Stocks in general can be a poor inflation hedge over short periods but serve as potent protection for investors willing to buy and hold for more than five years, Tollette says. Fixed-rate bonds typically underperform during high-inflation periods. 

Disinflation

When the rate at which prices are rising slows, you get disinflation, which is what we have now. During disinflation, unlike in deflationary periods, prices still go up – sometimes painfully. The important distinction is that they are climbing more slowly than in the recent past. 

The good news is that a moderation of inflation, such as the cooling that the economy experienced in 2023, is typically a boon for investors because it bodes well for corporate profitability and thus stock prices. During these periods, investors are often rewarded for taking more risks, such as buying stock in growth-oriented companies. 

Since inflation started declining in July 2022, the growth-oriented Nasdaq Composite index has handily beaten broader measures, such as the S&P 500, for example. Declining inflation also means that bonds bought during the more inflationary period now promise higher "real," or inflation-adjusted, returns. Commodities, however, have done poorly in previous periods of disinflation.

No-flation

Periods of price stability (typically defined as times when consumer prices overall rise by no more than 2% a year) are sometimes referred to as "no-flation." They tend to be a "golden era for financial assets," says Gary Schlossberg, global strategist for the Wells Fargo Investment Institute. 

Think back to 2013 through 2019, when the Consumer Price Index generally stayed below 2%. The S&P 500 notched gains in six of those seven years and produced an above-average annual return of 13.6%. Price and economic stability create a good climate for just about all investments but especially for riskier investments, such as growth-oriented and small-company stocks, Schlossberg says.

Deflation

The prices of some items, such as computers, gasoline and seasonal foods, drop from time to time. But a generalized, economy-wide drop in prices, or deflation, is rare. That's good, because deflation can lead to a vicious cycle: A weakening economy leads to lower wages, layoffs and decreased spending, which in turn ushers in still-lower prices and a further weakening of the economy. 

The U.S. has seen general deflation only twice in the past century: During the Great Depression in the early 1930s and from March through October of 2009, partly overlapping what many call the Great Recession. In both periods, stock prices initially plunged much more than consumer prices and took years to recover. Volatile commodities also tend to suffer during deflation. Bonds that pay a fixed, positive rate of interest offer positive real returns, barring a default.

Stagflation

Inflation that coincides with stagnation in the job market and the economy, known as stagflation, causes truly challenging times for investors. Because economic weakness often prevents companies from raising prices enough to recover their costs, profits shrink, and stock returns fail to keep up with inflation. 

From 1973 through 1982, the annual inflation rate averaged 8.7% and the average unemployment rate topped 7%. But the annual average return of the S&P 500 over that period was just 6.7%, meaning investors lost purchasing power. The economy escaped a stagflation scare during the pandemic. 

If you want to hedge against this type of painful economic malaise, Tollette says your best bet is TIPS, which, if you hold to maturity, are guaranteed to return your investment and move up with inflation. 

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related content

• Rising Prices: Which Goods and Services Are Driving Inflation?
• How Does the Federal Reserve Work?
• How SIPC Works and What Investors Should Know About It

"I regularly clean out my closet, especially at the start of a new season," says Alanna Morey, a private wealth advisor at Ameriprise Financial. She often finds outfits that no longer fit her or her style.

"The same thing can happen in our portfolios," she says. "If we aren't regularly reviewing and making changes to our portfolios, they may not be in alignment with our present goals or risk tolerance."

Just as you might reevaluate your closet every spring, you should follow these steps to spring clean your portfolio.

Review your style objective

The first step to spring cleaning your closet and your portfolio is to remind yourself of your vision for it and the items within it. What were you hoping to achieve with each of the investments you purchased? Are they doing what you hoped they would?

"If your goals have changed, it is likely that your investments need to be adjusted too," says Lisa Westermark, senior vice president and co-founder of Beverly Hills Private Wealth. "For example, if you decide that you want to retire sooner than planned, that will adjust the time horizon for your goal, which impacts the risk tolerance of your portfolio."

If you have ambitious long-term goals, you may need to lean heavily on riskier securities like stocks. Meanwhile, if your goals are more modest or within the next five to 10 years, you should consider more conservative investments that won't overexpose you to the risk of loss when you need to withdraw your money. Bonds and high-quality dividend stocks often fall into this category.

Sell stretched-out items

Sometimes, despite your best efforts to follow the care instructions, clothes stretch out. Investments can stretch beyond their intended bounds, too. It's certainly a great feeling to see overachievers in your portfolio. But holding onto winners can lead to overconcentration, which can push the risk level of your portfolio higher than intended.

To spring clean your portfolio, think about paring back your winners so you can reinvest in your less stretched-out investments. In other words: Sell enough of your outsized investments to bring them back in line with your intended allocation and use the proceeds to buy more of the underperforming investments to bring them back up to the size you intended them to be.

If taxes are a concern, you can gift stock that has appreciated in value to charity to avoid having to take the gain yourself.

Reconsider the underachievers

Not all underachievers need to be kept, however. Sometimes outfits don't live up to expectations. They look great on the hanger, but when you get home, you find you never actually wear them and so they wilt and wither in the back of the closet.

The same can happen with your investments. Sometimes a security that was bought with the best of intentions never achieves what you were hoping it would.

"Maybe you have a pet stock that you have held for years, and it is only losing value," Westermark says. Sometimes this means the investment just needs more time to reach fruition, but other times it could be a sinking ship. 

"Don't fall victim to the loss aversion bias," where the pain of loss is so strong that investors refuse to accept defeat, Westermark says. "Consider if you could instead invest in something that better serves your overall goal."

Check if you're achieving the look you're aiming for 

Once you've reviewed your investments on an individual level, you can take a view to see if you're doing everything you can to reach your goals.

"Can you increase the amount you are saving towards them?" Morey says. "Now is a great time to make sure you are saving as much as possible toward your 401(k), IRA or other accounts that can support your financial priorities."

Should you invest more aggressively in the hopes of a higher return? Or do you need to reduce your risk to help you sleep at night?

Look beyond your closet

Spring cleaning your portfolio doesn't have to end with your investments. You can – and should – evaluate all aspects of your financial life. 

"Review your balances and put together a plan to clean out any debt you can, especially credit card debt," Morey says. Then, assess "your inflows and outflows to determine if you can set up a systematic savings plan to save towards your financial goals."

You should also take stock of where all your accounts are located.

"Many people think it helps to diversify if you have accounts with multiple institutions, when in reality the accounts can be working against each other or have too much overlap to actually be diversified," Westermark says. "You need to have one succinct plan and direction or run the risk of having competing plans."

If nothing else, consolidating accounts will make it easier to spring clean your portfolio next year.

Related content

• How to Invest Your Tax Return
• Stocks vs Options: Which Should You Trade?
• Best Investments to Sidestep Trump's Trade War

"We believe the 25/25/25/25 portfolio will outperform the 60/40 portfolio in the 2020s," says Michael Hartnett, a chief investment strategist at BofA Global Research. 

The simplest reason is that interest rates and inflation are higher than in decades past. The 60/40 portfolio worked best when inflation and interest rates were low or falling, says Hartnett. But this decade he expects higher inflation and interest rates, with added volatility, creating market conditions that are well suited for cash and commodities to outperform bonds and stocks.

So far, though, that hasn't played out. Although the 25x4 portfolio did marginally better than a 60/40 portfolio in 2022, over longer periods, it has lagged. A 60/40 portfolio has gained 4.6% annualized over the past three years; a 25x4 portfolio has lost 0.4% on average per year.

Think twice before switching to the 25x4 portfolio 

In short, don't count the 60/40 portfolio out yet. "Over the years, the 60/40 portfolio has held up for investors, and it's actually provided wonderful returns with low risk levels," says Jan Holman, director of adviser education at Thornburg Investment Management. 

This isn't the first go-around for the 25x4 portfolio. It got its start decades ago by way of Harry Browne, the late investment adviser and two-time Libertarian Party presidential candidate (in 1996 and 2000). In Browne's so-called Permanent Portfolio strategy, investors held 25% in cash, 25% in gold, 25% in long-term bonds and 25% in stocks, rebalancing annually. The idea was that the four asset classes would help minimize risk no matter the market or economic condition. 

Browne helped develop a no-load mutual fund tied to the 25x4 strategy called the Permanent Portfolio Permanent (PRPFX), which launched in 1982. But it's not a straight-up version of his approach. Instead, the fund is more "dynamic," says fund manager Michael Cuggino. 

It targets an allocation of 30% stocks, 25% precious metals (20% in gold and 5% in silver) and 45% in bonds and cash (10% of which is denominated in Swiss Francs). The stock side of the portfolio includes a mix of real estate and natural-resources stocks, such as Prologis (PLD) and Exxon Mobil (XOM), as well as aggressive growth stocks, such as Nvidia (NVDA) and Meta Platforms (META). "The fund's goal is to outpace inflation," says Cuggino, a fund manager since 2003. 

The fund's annualized 5.7% return over the past decade has indeed beaten the 2% average inflation rate over the period. And it has been far less volatile over that time than its peers (moderate allocation funds), which typically hold about 60% of assets in stocks. But 63% of its peers did better, generating an average 6.1% annualized 10-year return. 

That's evidence that it's important to think through any allocation strategy carefully before you implement it. "Asset allocation should always be decided on an individual basis and in the context of a comprehensive financial plan, not based on a gimmick," says Gordon Achtermann, a certified financial planner in Fairfax, Virginia. As an alternative, consider a low-cost target-date fund. "You won't beat the market," he says, "but you won't get badly hurt, either."

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here. 

Related content

• How to Earn a Decent Yield From Your Sweep Account
• Retirement Income Funds to Keep Cash Flowing In Your Golden Years
• Best Conservative Retirement Investments

Most financial metrics are too complex to be done in your head. You'd likely need financial calculator or a spreadsheet to calculate the internal rate of return, yield to maturity, or common risk metrics like beta or standard deviation.

The beauty of the Rule of 72 is that it can be calculated by the average 10-year-old.

Let's take a look at what the Rule of 72 is, how it works and how it can be used in investing and financial planning.

What is the Rule of 72 in simple terms?

The Rule of 72 is a straightforward formula that provides a quick-and-dirty approximation of how long it will take for an investment to double in value assuming a fixed annual rate of return.

It's a solid tool for estimating the effects of compound interest and can be used to gauge the potential growth of your investments over time.

The formula for the Rule of 72 is incredibly simple. You divide 72 by the annual rate of return you expect to earn on that investment.

For example, if you expect an annual return of 9%, it would take approximately eight years for your investment to double (72 divided by nine equals eight).

What are specific examples of the Rule of 72?

Getting more concrete, let's say you own an S&P 500 index fund and you want to map out a few scenarios. If the index rises at its historical average of around 10%, you'd double your money in about 7.2 years (72/10 = 7.2).

If you believed that the S&P 500 is more likely to return, say, 15% due to strong earnings or continued tailwinds from the best AI stocks, you'd double your money in 4.8 years (72/15 = 4.8).

And if you believed the S&P would return a more mundane 5% due to, say, a recession, you'd double your money in 14.4 years (72/5 = 14.4).

In 2024, the S&P 500 generated a total return (price change plus dividends) of 25%. The Rule of 72 would suggest your investment in the S&P 500 fund would double at that rate in 2.9 years.

But that's assuming that rate of return stays constant. At last check, the S&P 500 was up nearly 14% with a little more than a quarter to go in 2025.

The Rule of 72 can also be used to assess the impact of inflation on your purchasing power.

If you want to determine how long it will take for the purchasing power of your money to be cut in half due to price pressures, you can use the same formula.

Let's say the inflation rate is 3%. You could divide 72 by three to get 24 years. Assuming a 3% rate of inflation, your purchasing power would be cut in half in 24 years.

The most recent Consumer Price Index report put headline inflation at 2.8% on an annual basis.

Using the Rule of 72 at that rate, your purchasing power would be cut in half in 25.7 years. But, again, that's assuming the inflation rate stays the same.

Why should I use the Rule of 72?

The benefits of the Rule of 72 are obvious. It's a simple formula that anyone with elementary school math skills can calculate. It doesn't require a Wharton MBA or CFA Charter.

It also allows you to set realistic expectations for your investments and can help you determine whether your financial goals are achievable within your investment time frame.

You can also use the Rule of 72 to compare different investment options. For instance, if you're deciding between a stock fund and a bond fund with two very different expected returns, the Rule of 72 can help you assess which one gets you to your financial goal faster.

Remember though, the Rule of 72 is designed to be a rough estimate and its assumptions aren't always realistic. It assumes a constant rate of return, and stock returns are anything but constant.

The average return is far from indicative of the return you're likely to get in any given year. It also doesn't account for taxes, fees or other expenses that can chip away at your returns.

And, like all financial models, it's only as good as its inputs: garbage in, garbage out.

While by no means a comprehensive analysis, the Rule of 72 is a useful tool that provides a quick and easy way to estimate the time it takes for an investment to potentially double.

It's valuable in financial planning and in comparing investment alternatives. And it's something even someone new to investing can put to work.

Related content

• How to Invest in Stocks as a Beginner: A Guide for 2025
• What Is a P/E Ratio and How Do I Use It in Investing?
• How a Stop-Limit Order Is Used in Investing

But as the old saying goes, past performance is no guarantee of future returns. It's important to take stock of the current economic environment as well as your personal risk tolerance before plowing your hard-earned cash into what's popular.

The good news is that there are plenty of smart ways to invest your money this year. In fact, for most investors with a modest amount of cash, it's easier than ever before to put just a few hundred dollars to work and improve your personal finances significantly.

Smart ways to invest your money: CDs

With the recent increase in interest rates, it's easier than ever before to tap into safe returns that are nearly guaranteed. One of the most rock-solid options out there is a CD, or certificate of deposit. CDs are similar to high-yield savings accounts – these vehicles are basically just bank accounts where you get a fixed rate of return – only can't withdraw your money before a deadline without penalty. 

"For disciplined consumers, CDs can be a great way to set aside money while earning higher interest rates on their balances," writes Kiplinger contributor Seychelle Thomas in her feature on whether or not CDs make a good investment. "However, it's critical to have a readily accessible form of savings even if the rates aren't as high compared to a CD." 

If you don't need your cash immediately, a 1-year CD can offer as much as a 5.5% return right now. Rates, minimum deposits and durations may vary, so make sure to shop around for the best option that fits for you.

Smart ways to invest your money: Bond funds

If you want more "liquid" interest-bearing assets that are low-risk, bonds are a good option. Bonds are investment vehicles where investors give some cash to governments or corporations in exchange for repayment plus interest. Think of it as you, the investor, acting as the bank, and getting paid for the service of loaning out your money.

Rather than do the research for individual bonds, many investors prefer bond funds – which can include both traditional mutual funds or bond ETFs (exchange-traded funds). Both of these options are baskets of hundreds or even thousands of bonds, offering built-in diversification and a structured way to invest your money on Monday but get it back out on Tuesday if you really need it.

The largest bond fund at present is the Vanguard Total Bond Market ETF (BND), with more than $300 billion in total net assets. As the name implies, it holds a wide array of bonds from corporate debt to U.S. Treasury bonds to mortgage-backed securities. 

There are other more tactical options, but with almost 11,000 individual bonds in BND, you get easy access to the totality of this marketplace in a single holding. Right now, this Vanguard bond fund yields 4.3% – meaning the investment offers a slightly smaller rate of return than CDs, but more flexibility.

BND also trades as a mutual fund, the Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX). It requires a $3,000 initial investment.

Smart ways to invest your money for growth: Stocks

If CDs are all but guaranteed to give you your principal investment back, and bonds offer low volatility but more liquidity, stocks round out the list of smart ways to invest your money with a more aggressive but also potentially more profitable option to invest your money.

Stocks are investment stakes in publicly traded companies. And unlike the prior two options, stocks don't deliver a fixed rate of return. Instead, they generally deliver profits by appreciating in value based on those companies achieving better results.

The big success story many folks talk about is Tesla (TSLA). If you invested just $1,000 in its stock on the first day it traded back in 2010, you would have about $140,000 today! Of course, predicting future performance is easier said than done. There are plenty of horror stories, too. Some companies ultimately do go bankrupt and investors lose everything.

So, as with bonds, the safer route is typically to invest in a diversified basket of stocks via an ETF or mutual fund. The largest and most popular vehicle out there is the SPDR S&P 500 ETF Trust (SPY) with almost $500 billion in assets. Tied to the popular S&P index of the 500 largest U.S. stocks that includes Apple (AAPL) and other popular names, this S&P 500 ETF gives you exposure to the biggest companies on Wall Street in one holding that's easy to buy and sell.

Just remember that stocks are much riskier than bonds or CDs. So make sure you assess your own goals and risk tolerance before investing in SPY or any other stock market investment.

Related content

• The Worst Types of Stocks to Buy
• How to Invest in ETFs for Beginners
• Should You Still Have Bonds in Your Portfolio?

Traditionally, the answer has been that bonds provide diversification and income. They zig when stocks zag, providing income for spending needs. In finance terms, bonds have “low correlation” levels to stocks, and adding them to a portfolio would help to reduce the overall portfolio risk. However, over the last two years, as the Fed has worked to aggressively raise rates, this correlation has increased. What we saw in 2022 was the bonds fell right along with (and nearly as much as) stocks.

Compound that with the current state of interest rates. One of the most basic investing truisms is you should pursue investments offering a higher interest rate over investments with lower interest rates for the same level of risk. It just makes sense — of course you would want to earn more interest. Another concept involves how soon you get your investment back (liquidity). All else equal, you would want to make shorter-term loans where you would get your principal back sooner rather than later. The only way that you would be willing to lend your money for longer is if you received more interest to do so.

However, in today’s interest rate environment, investors are earning more on short-term bonds than long-term bonds, as you can see in the chart below. And investors are earning even more on federally insured certificates of deposit (CDs). As the chart below shows, one-year CDs currently pay 5.8% compared to only 4.8% for a 10-year Treasury bond.

Given all this, it seems like a no-brainer to invest in the short-term options and receive the higher interest rates and better liquidity that come with them. If bonds aren’t fully dead, why not at least eliminate the default risk of lending to companies and invest only in short-term CDs and Treasury securities? At first glance, this strategy seems brilliant and, frankly, “too good to be true.” And, of course, that is the case. This is where having a long-term investment approach comes in.

What happens a year from now?

To illustrate the point, let’s think about the longer term. What happens 12 months from now when the one-year CD matures? At that point, investors must look to reinvest the proceeds they receive. Most market pundits expect that the previously mentioned aggressive increase in interest rates by the Fed will at minimum slow the economy dramatically, if not push the U.S. economy into a recession.

If that happens, overall interest rates will fall as the Fed looks to reduce interest rates to stimulate economic growth. That makes it highly likely that investors won’t earn the current 5.8% rate if they reinvest their CDs next year.

For those who invested in a two-year CD and accepted the lower 5.1% rate, they don’t have this concern, known as reinvestment risk, for an extra year. The longer term of the current investment, the further investors can push out the concern over reinvestment risk.

When long-term bond prices will rise

Additionally, just as longer-term bonds fell when interest rates went up, the prices of long-term bonds will rise when interest rates go down. That is because investors looking to reinvest the proceeds from their maturing CDs are willing to pay extra for long-term higher rates, which are no longer available in the marketplace.

The result is that bonds in general, and long-term bonds in particular, tend to do very well after the Fed stops raising rates (the Fed left rates unchanged at its latest meeting, in December). A study by Capital Group that looked at how bonds performed after past Fed rate-hiking cycles provides room for optimism — that maintaining a bond position in your portfolio may once again provide positive returns, income and diversification benefits.

According to that study, bonds have provided returns of over 10% in the 12 months following the end of the rate-hiking cycle and have compounded at 7.1% over the next five years, well above the long-term average of 4.8%.

Bonds still play a critical role in portfolios

We still believe that bonds play a critical role in client portfolios and that beginning to shift to longer-term bonds could benefit investors over the long-term, given today’s higher interest rates. It is easy to take a short one- to two-year timeframe and wonder if the world has changed, but successful investing requires a long-term focus of seven to 10 years, incorporating full market cycles.

When you’re working with a financial adviser, they will be there to help you keep that focus and to best position your portfolio to generate the long-term returns necessary to achieve your financial plan. Bonds continue to play an important role in that goal.

Related Content

• 10 Things You Should Know About Bonds
• Should You Buy Bonds Now? What to Consider
• Bond Basics: How to Buy and Sell
• What's the Deal With Bonds Right Now?
• Bond Basics: What the Ratings Mean

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Target-maturity ETFs aren’t new; Blackrock and Invesco started offering them nearly a decade ago. But the earlier versions focus on corporate, municipal or Treasury bonds, which don’t adjust with inflation. 

By eliminating the hassles of buying individual bonds, these ETFs make it easy to build a bond ladder, which involves spreading your investments among bonds with staggered maturities — the ladder “rungs.” The goal is to provide steady income or minimize interest rate risk (bond prices and interest rates move in opposite directions). As bonds mature, you reinvest the proceeds in a rung further up the maturity line, spend the cash or invest it elsewhere.

TIPS may be timely given current inflation rates. Kiplinger expects inflation to average 2.4% by late 2024 (which is a smidge below its 30-year average). Inflation-protected securities work differently than traditional Treasuries. 

The principal, or face value, of TIPS, which are issued with five-, 10- and 30-year maturities, rises or falls monthly in step with the consumer price index. On top of that, TIPS pay a fixed rate of interest, or coupon rate, every six months. As of October 31, a 10-year TIPS had a yield of 2.5%. By contrast, the standard 10-year Treasury yielded 4.9%.

Target-maturity funds need some explaining, too. The iShares iBonds Oct 2024 Term TIPS ETF (symbol IBIA), for example, holds TIPS that come due between January 2024 and mid October 2024. Interest payouts are made quarterly. As the portfolio’s bonds mature, the proceeds are reinvested into October-dated bonds or held in a money market fund within the ETF. On October 15, 2024, the ETF will officially close and return all of the capital to shareholders. 

It’s best to buy and hold these funds to maturity. Each of the 10 funds charge a 0.10% expense ratio, and all sport a yield of at least 6% or better. But those yields include both interest income and inflation adjustments to the principal.

Blackrock likes to say these investments “mature like a bond and trade like a stock.” You can buy shares in the ETFs for as little as the price of one share or less if your broker offers fractional-share purchases. That’s less than the $1,000 minimum to buy Treasuries on most broker platforms, as well as the $100 minimum outlay required to buy the securities directly from TreasuryDirect.gov. 

And you can reinvest your interest income and buy more shares in the ETF. “I’m a fan of TIPS ladders. And if you like TIPS ladders, you’ll like these funds,” says Morningstar’s John Rekenthaler.

Whether you hold TIPS directly or invest through an ETF, the tax implications are the same: Interest payments are exempt from state and local taxes, but you’ll owe federal income tax on interest income and inflation adjustments to the principal — due in the tax year they occur, even if you don’t sell the bond — if you hold these assets in a taxable account.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• Best Bond ETFs to Buy Now
• The Best ETFs to Buy Now
• How to Find the Best Vanguard ETFs

The backdrop, of course, is the terrible year that bonds had in 2022, as the Federal Reserve raised interest rates. (Bond prices and interest rates move in opposite directions.) Strategic Income – a member of the Kiplinger 25, our favorite no-load mutual funds – lost 11% that year, compared with a 13% decline in the Agg index. 

But over the past 12 months, the multisector bond fund has excelled, with a 4.0% return, outpacing the Agg index and its peers. 

Strategic Income invests in bonds from multiple sectors, keeping in mind a benchmark of 45% of assets in high-yield bonds (debt that's rated double-B to triple-C), 30% in U.S. government and other high-quality issues, 15% in emerging-markets debt, and 10% in IOUs from developed foreign countries. The lead managers, O'Neil and Adam Kramer, decide how much to devote to each sector; other Fidelity bond sector specialists pick the securities. 

Over the past 12 months, the managers tilted toward high-yield bonds, specifically corporate bonds and leveraged loans (short- to medium-term loans issued to firms with below-investment-grade ratings). That shift paid off as both bond sectors posted double-digit returns over the past year. Emerging-markets debt and the fund's foreign developed bond sleeve performed well, too, beating their respective benchmarks. But the fund's U.S. government debt was flat and a bit of a drag on returns. 

These days, the managers are choosing to hew closely to their benchmark's weighting. "There's a wide range of macroeconomic outcomes that could unfold in the next six to 12 months and we would prefer a neutral position," he says. In 2024, he adds, smart security selection will matter more than asset allocation. 

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related content

• Best Bond ETFs to Buy Now
• Many Mutual Funds Are Converting To ETFs: What To Know
• Should You Buy Bonds Now? What To Consider

Depending on their circumstances, each individual has a different list of the best investing moves to make before the end of the year. But there are a few broad categories of actions that make sense for most folks.

These general tips include making sure your portfolio is diversified and that you're making the best decisions to maximize your tax efficiency and long-term returns.

Every investor has a different risk tolerance, so you should always make the best decisions for your unique situation. These three end-of-year investing moves are a good place to start.

1. Tax-loss harvesting 

Tax-loss harvesting is a fancy term for intentionally selling an investment at a loss to offset the taxes you'd pay on gains in other, more profitable trades.

The U.S. tax code is incredibly complicated, and it would take a separate article or two to explain it. (You can check out the Taxes section on Kiplinger.com to find more tax-specific information.) But in a nutshell, capital gains taxes on investments held for less than 12 months typically correspond to your normal income tax rate, which can be as high as 37%. That can really eat into your profits if you're paying Uncle Sam more than a third of what you've gained.

However, it's all about net profits. So if you make $8,000 on a short-term investment but lock in $4,000 in losses in another asset you were planning on selling anyway, you only pay taxes on the $4,000 that's not offset. What's more, if your losses exceed your gains, you can deduct up to $3,000 in net losses from your total annual income.

It may sound counterintuitive, but selling a losing stock position is an important year-end tool for investors when it comes to reducing tax burdens.

2. Rebalancing your portfolio

Nothing in life stays the same, including your investment portfolio. That means you need to take some time at least once per year to "rebalance" your investments to ensure the mix of assets is in line with your intentions and goals.

Let's take the popular 60/40 approach to investing, which is a portfolio that holds 60% stocks and 40% bonds. If you're lucky enough to be invested in a few high-flying stocks such as Robinhood (HOOD) or Palantir (PLTR) that have handily outperformed bonds, you could find that your mix is more like 70/30 or even 80/20.

That's a good problem to have when your stocks have grown rapidly. But it also comes with additional risk as you are now putting more eggs in those baskets. To stay truly diversified, it may make sense to rebalance by selling some of your outperforming stocks and moving that cash into bonds to get back to the proper mix.

After all, stocks can rise quickly but can also fall quickly. So, when considering your end-of-year investing checklist, don't overlook your long-term strategy based on short-term trends that have changed your portfolio's makeup.

3. Consider annual limits

Not everyone has extra cash to spare right now. But if you do, it's worth considering how much headroom you have left on various tax-efficient investing vehicles.

For instance, the maximum contribution to a 401(k) in 2025 is $23,500. If you are getting a big bonus or if you can spare a few extra bucks from your final paycheck, consider tightening your belt for a pay period or two and allocating extra money to your tax-deferred retirement plan as an end-of-year investing move.

The same holds true for 529 education plans. There are aggregate contribution limits and other restrictions that vary by state, and are worth researching on your own. But keep in mind that individuals other than yourself can contribute to a 529 plan in many cases. This means generous grandparents, aunts and others can opt for a long-term holiday gift to your child's education rather than the latest toys or fashion items.

Lastly, while IRA contributions are most often limited by the tax filing deadline in April rather than the end of the calendar year, the next four months may go quickly. So, if you're doing some of this other year-end financial housekeeping, it's worth considering whether you want to max out your IRA based on the 2025 maximum contribution of $7,000 for those under 50.

Related content

• Already Hit Your 401(k) Limit in 2025? Here's What to Do Next
• Time Is Running Out to Make the Best Moves to Save on Your 2025 Taxes
• What Investors May Face in the New Year: Interview
• Should You Start a 'Trump Account' for Your Child?

But not everything related to finances is gloomy. These days, there’s a glimmer of brightness that investors shouldn’t overlook — bonds.

Bonds have not always been the most enticing of investments, and for a long time, their yield was so small that they added little to the overall growth that many investors wanted to see. But bonds served a purpose even then: They could help reduce risk in your portfolio, balancing out the uncertainty that came with aggressive stock investments. On their own merits, though, bonds didn’t provide much of a return, so many people avoided them or just devoted a sliver of their portfolios to them.

That’s been changing, and if you haven’t given much thought lately to bonds, now is a good time to give them another look. Their yields are much more attractive and offer a good option for investors who would like to realize some return while still minimizing risk.

The Fed helps drive the shift

But why is this happening? What has driven the sudden shift in the outlook for and performance of bonds?

One significant reason for the change has been the Federal Reserve’s effort to fight inflation, that nemesis so many Americans say has them concerned about their personal finances.

The Fed, worried about the cost of everything going up too much too fast, sought to temper inflation’s sting by raising interest rates. High interest rates potentially can help hold down inflation because when it becomes more expensive to borrow money, consumers might opt to cut back on their spending. If they limit their spending, then businesses will be forced to lower their prices to entice those customers back into the market.

But that tactic for trying to check inflation had an additional effect: It created an improved performance for bonds, which may yield 5% or more across the spectrum. Suddenly, bonds, bond exchange-traded funds (ETFs) and bond mutual funds are a more attractive part of the portfolio instead of just an afterthought for diffusing risk.

Doing your bond homework

If you’re contemplating making bonds a larger portion of your portfolio — and you should be — I would add this bit of advice: Do a little homework before you plunge into the purchase of any particular bond, bond ETF or bond mutual fund, much the same way you would when buying a stock.

Think about that for a moment: Most people use discretion when choosing stocks. They don’t just invest money randomly in a company’s stock without at least some investigation into its past performance, what the market is like for the company’s business and whether anything is happening in the world that could impact the stock’s value. Once they do make the purchase, many of those investors will actively track how their stocks are doing, seeking to make informed decisions on when to sell or buy more.

Few people think about that sort of discretion when it comes to bonds. Instead, they often buy a bond ETF and let it sit there. If you want the best return on your bonds the same way you want the best return on your stocks, then you need to do more than that. In the current market, anyone choosing a bond should show similar discretion as they would when choosing a stock, making informed decisions on which bonds make for the more attractive investment. You should look at selecting individual bonds, bond ETFs or bond mutual funds from different sectors and maturities, then allocating appropriately within your overall portfolio.

Active management vs. being passive

Of course, the most attractive investment can change from week to week, which is another reason to take an active approach to your investments. If you are investing today, you want to know what’s happening with the market right now, not what was a good deal a year ago or even a month ago.

At our practice, we believe that active management is more viable than passive. With the market changing so fast these days, it’s more necessary than ever to be engaged and active with your investment strategy.

What’s working well for you can change quickly, so you need to monitor market conditions regularly to take advantage of new opportunities as they arise — or dodge trouble when it appears on the horizon.

Certainly, you can do that on your own, but it pays to find a good financial professional who has the experience and knowledge to assist you with those decisions. Together, you can discover what the right decisions are for you — and when to make them.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a Registered Investment Advisor. BCM and First Coast Financial Group Inc. are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.

Any comments regarding safe and secure products, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way, to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company and are not offered by Brookstone Capital Management.

Related Content

• 10 Things You Should Know About Bonds
• Bond Basics: How to Buy and Sell
• What's the Deal With Bonds Right Now?
• The Benefits of I Bonds vs EE Bonds To Store Your Savings

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.