No. of Recommendations: 3
The traditional Foolish philosophy is that stocks will continue upward in the long term and you need to hold as much equities as you can to keep up with inflation. Corrections in the stock market happen from time to time, but usually recover in under three years. Therefore, you put 5 years of living expenses into laddered maturity fixed incomes--usually T-bills. You live off the interest from the bonds and the one that matures. Each year you sell stocks to cover one year of expenses and buy a new five year bond to replace the one that matured. If stocks crash, you continue to live off the bonds and then replace them later.

For those who retire on a minimal 25 years of living expenses invested, this gives you a very low bond allocation. 20% is typical, but it could be lower if your investments are larger so expenditures are less then 4%. Or it can be higher if you are more conservative.

Although T-bills were the original vehicles recommended, many now use corporate bonds, or CDs because you get adequate safety with better yields.

I do not agree that bond funds is a good way to begin--especially right now. Interest rates are likely to rise some more. REITs just fell about 20% in the last 4 weeks. Long term rates have skipped upward. Bond fund owners have already taken a hit and will likely take a drubbing before interest rates settle down. So if you are thinking of investing in fixed incomes now, be very careful. Wait if you can. A year or two from now things could be more settled. Meanwhile pick CDs, the bonds themselves, or other similar instruments with fixed maturity dates. They will be safer than bond funds for the forseeable future.
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