The time to get into bond funds was about three years ago, when greed was in full control of the stock market. To do so now, with interest rates at close to zero and soon to rise, would be a huge mistake. Even Bill Gross (The head of PIMCO) is saying whoa.

1) Most bond funds rarely hold bonds – even short term bonds – to maturity. Not sure who gets stuck with it at maturity but usually not the fund.

2) What is “enough”? There is no answer. Trying to predict how much you will need for a 10-20-even 30 year retirement period is reading tea leaves at best. Toss in 2-3 years of high inflation (do you REALLY believe there was no inflation in 2009? And won’t be any in 2010 either?!) and your money reserves just crashed and burned.

Without getting another job equities are the only way to try (no promises) to compensate for the unknown.

Now if you have individual bonds, you can ignore the fluctuation and wait to maturity. But you need a certain amount of money to buy enough individual bonds as the are sold in lots of 5 of $1000 in face value each lot, so the minimum investment is around $5000. I say around because it is $5000 in face value of bonds, but you pay less if the bond is selling at a discount (i.e. below its face value) and more if it is selling at a premium. So if you want to be diversified, you need to have money to buy many issues. Then, you will not get compounding unless you have enough money in bonds that the bond’s interest paid twice a year is enough for another bond issue.

@MasterPo – regarding exposure to equity. It’s really all depends on how much return one needs. If one already has enough money for retirement or one’s situation is such that he can save enough without risk, than why take any risk? There is no need to risk more money than necesary to achieve one’s goals.

The rate of a bond is the fixed (in most cases) interest amount it pays while the yield of a bond takes into account the market value of the bond.

So if you have a 5% and interest rates go down that bond is worth a lot more than just 5%. That is because to get 5% when rates are otherwise lower you have to pay more which offsets the value of the intrest income stream. The value of the bond goes up so the yield goes down because now you have a bit of capital appreciation with it.

By contrast, if rates go up 5% is worth less so the value of the bond goes down. Therefore the yield of a 5% is higher because you’re getting 5% at a lower price.

Therefore to answer your question more precisely, when rates drop the value of higher interest bonds goes up and there for the yield goes down. And similarly when rates go up the value of the bonds goes down and the yield goes up.

Some bond funds list the average coupon rate of their holdings. Many don’t though.

We are pretty heavily tilted to stock index funds, and rode out the crisis without making any changes; however, the experience taught me that I do want to rebalance to a greater allocation in bond index funds. The crisis and since have given me a look at ‘political risk.’ This experience made me realize my risk tolerance is not so very high after all.

But I haven’t changed anything yet.

You need some equity exposure.

It’s just a matter of how much you can handle risk wise.