Q: I invested an inheritance ($62,000) in the T. Rowe Price US Enhanced Bond Index Fund, 2 weeks ago. I need to protect my principle to rebuild our Florida vacation home. The principle is not enough to do this but in 5 to 6 years I will hopefully get another inheritance from my parents to buy out my sisters on the Florida property and rebuild. I am not greedy, I just wanted a return greater than the 1% I could get on a CD. Looking at charts bonds have paid between 2% and 4% over the past few years. Should I stick with the TRP Bond account, or is there something better now that interest rates are increasing.
A: If you absolutely want to protect the value of your principle and make more than 1% – you’re going to have a tough time. Because “guaranteeing” the stable value and paying a higher return are very difficult in this market. Over the next 5-6 years, a bond fund could probably store your value if you counted the income you’ll be receiving as part of the return. And good bond managers will likely find ways to outperform even if rates continue to rise. But that’s in no way “guaranteed”.
An individual bond ladder would guarantee you have your original principle back in a stated period of time, assuming no default. But building that can be expensive and complicated, especially with that amount of money.
If you want total comfort knowing your money will be “whole” in 5 years, keep it in the insured accounts. If you’re comfortable rolling the dice – a good investment grade bond fund should get you more income, but may not be able to outpace rising rates in the years ahead.
Generally speaking – we keep money with that short of a time horizon in cash.