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Charles Schwab: Add This Asset to Your Retirement Portfolio


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longer duration bonds

The first quarter of 2022 has been difficult for retirement savers and retirees alike, and according to investment firm Charles Schwab, it was one of the worst quarters for fixed-income in decades.

However, the rising yields and changed Federal Reserve policy have created a prime buying opportunity, says the investment giant. After nearly three years of near-zero interest on fixed income, retirement savers can finally earn attractive returns. But don’t go and buy just any bonds:  look specifically for intermediate- to long-term bonds. Here’s why.

A financial advisor could help you plan for retirement and help you select low-risk investments that align with your financial goals. Speak to a qualified advisor today.

Fed Tightening Creates Buying Opportunity

The beginning of 2022 saw a marked increase in bond yields, a steep sell-off and a change in Federal Reserve policy all in the span of a couple months. Previously Charles Schwab had recommended that fixed income investors stick to short-term assets to cut exposure risk, but with the most recent quarter’s dreadful performance, change seems to be in the air.

Schwab analysts say it may seem counterintuitive to buy bonds just as the Federal Reserve embarks on a series of interest rate hikes–which are inversely related to bond prices–but the market has actually already discounted much of the expected drops in price.

Why Will Bonds Recover Now?

There are a couple indications that Schwab analysts say point to a buying opportunity.

The bond yield curve jumped and has maintained a high level, which means that the market is already discounting a fast pace of Fed rate hikes. Even though the Fed has only raised interest rates once thus far, the yield curve signals a lot of future rate hikes being priced in–so many, in fact, that the number of hikes would have to extend into 2024 to make sense.

Another indicator is the real level of inflation affecting the economy. Due to rising commodity prices, Schwab analysts expect inflation to remain high through the end of the year, when levels should ease again in response to changed Federal Reserve policy. The economy already appears to be cooling, as rising interest rates moderate housing demand and capital goods expenditures.

longer duration bonds

As a result, retirement savers shouldn’t worry too much about inflation affecting their fixed income investments in the medium term.

Charles Schwab analysts said that “inflation expectations appear reasonably contained. The markets are discounting high inflation in the near term, but…an aggressive tightening cycle [by the Fed] will pull it lower in the longer term.”

Although short-term inflation expectations are at the highest level since 1981, long-term inflation is expected to remain near 3%, a long-term average dating back to the 1990s.

How Retirement Savers Can Take Advantage

Given the market’s reaction to rising interest rates and expected inflation levels over the upcoming year, Charles Schwab asserts that the intermediate to long-term bond outlook is positive. Signs from the yield curve indicate that a peak in yields may be getting closer, which supports the recommendation to buy longer-term bonds. The company acknowledges that there may remain some pricing risk if high levels of inflation continue, but the likelihood appears small given the Fed’s willingness to tighten monetary policy.

Investors can buy intermediate- and long-term bonds through bond funds, which typically offer higher yields for longer bond terms. The higher yields also carry greater interest rate risk, however, stemming from interest rate movements and inflation levels. Which assets are most appropriate for you depends on your risk tolerance and investment strategy.

Bottom Line

longer duration bonds

Investment firm Charles Schwab has found that now may be a good time to add longer-term bonds to your fixed income portfolio. A combination of rising bond yields and planned interest rate hikes points to a relatively-advantageous entry point for intermediate- and long-term bond investing, which can help investors boost their retirement savings and income over time.

Retirement Planning Tips

Not sure if investing in bonds will help you create a low-risk portfolio for retirement? For a solid, long-term financial plan, consider speaking with a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Use SmartAsset’s free retirement calculator to get a good first estimate of how much money you’ll need to retire.

Photo credit: ©, © Asmus, ©

The post Charles Schwab Says Now Is the Time to Add This Asset to Your Retirement Portfolio appeared first on SmartAsset Blog.


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