Separate Treasury and corporate bond funds prepare you for market downturns
The core bond fund that likely has been the workhorse in your 401(k)s and IRAs is not ideal once you retire.
Core bond funds and exchange traded funds (ETF) own a mix of U.S. government and corporate bonds. They typically hew closely to the Bloomberg Barclays U.S. Core Aggregate Index, or a similar high-quality U.S. bond index.
To be clear, when you’re saving for retirement, there is absolutely nothing wrong with tucking your bond allocation into a core bond fund. And that’s clearly the go-to move for investors. According to Morningstar Direct, at the end of August there was more than $1.1 trillion invested in core bond funds. Another $800 billion was invested in “core plus” funds that have a slightly longer leash to deviate from what the benchmark index owns.
But once you start making withdrawals from your retirement accounts, there is an argument for shifting all your bonds into U.S. Treasuries, which provide the best protection when the stock market is falling.
Or, if you are eager to continue to own high grade corporates as well as Treasuries (over the long-term, corporates do indeed return more than Treasuries), you might want to consider skipping the one-stop core bond approach and build a two-fund approach with some money in a corporate bond fund and some money in a Treasury fund.
Why? It comes down to what happens when stocks are falling. You’ve no doubt heard