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I want to invest 10% of my portfolio into bonds. The other 90% will go into stock. I took a look at Government Bonds which TD Ameritrade offers at a $5000.00 minimum. This is a little over my budget. I am also considering low cost bond funds such as VUSTX/VBISX. The returns on these bond funds are historically beating the market. However, the return appears to be based on interest rates which the government has announced should be going up in the short term. I could hold onto cash, buy short term, buy long term...I am having difficulty deciding.

With the belief that interest rates are rising in the short term should I just hold onto cash until April 2015 (I think rates will be up by then)?

P.Brian.Mackey
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    Have you done any research to see how long people have been saying "interest rates should rise soon" only to see rates have stayed low for years now? – JB King Nov 11 '14 at 23:25
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    The way the question is phrased, it boarders on rhetorical. "With the belief that interest rates are rising in the short term should I just hold onto cash until April 2015 (I think rates will be up by then)?" - If your belief is strong enough you should short the long bond. On margin. If not rhetorical, it's opinion-based, and we are not supposed to offer opinions on this type of question. – JTP - Apologise to Monica Nov 11 '14 at 23:32
  • @JBKing - What individuals say or believe does not matter to me at all. I'm basing my judgements off what the federal government says. Do you have evidence that the government is changing it's announcements over the past several years? JoeTaxpayer, I'm asking for advice based off my view of the market direction. I do not see how this is rhetorical or an opinion. "In the case where interest rates are going up it is best to do X with bonds". – P.Brian.Mackey Nov 12 '14 at 15:03
  • This answers my question: http://money.stackexchange.com/questions/7717/how-would-bonds-fare-if-interest-rates-rose?rq=1 – P.Brian.Mackey Nov 12 '14 at 15:39

2 Answers2

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You can look at TIPS (which have some inflation protection built in). Generally short term bonds are better than long if you expect rates to rise soon. Other ways that you can protect yourself are to choose higher yield corporate bonds instead of government bonds, or to use foreign bonds. There are plenty of bond funds like Templeton Global or ETFs that offer such features. Find one that will work for you.

NL - Apologize to Monica
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It depends a lot on your investment period and the quality of the bonds that you want to invest.

For example, if you want to invest until the maturity of the bonds, and the bonds are very safe (i.e. they are not expected to default), it does not matter that the interest rate rise. That is because at the maturity of the bond it will converge to its maturity value which will be independent of the change of the interest rates (although on the middle of the life the price of the bond will go down, but the coupon should remain constant -unless is a floating coupon bond-).

An option could be to invest in an ETF with short term bonds (e.g. 1 year) with AAA credit rating (high quality, so very low default rate). It won't yield much, but is more than 0% if you hold it until maturity.

Escachator
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