Hello, YieldAlley readers! In this issue:

🔑 Understanding the Recent Inflation (Larry Swedroe)

📈 When the Fed Cuts Rates, What Really Happens to Stocks? (MyPlanIQ)

🤯 6 Questions To Make An Advisor Squirm (Fortunes and Frictions)

🚚 Safe Withdrawal Rates and Retirement Strategies (ChooseFI)

🏈 Sports fans to spend a record $30 billion betting on this year’s NFL football season (Sherwood)

In the world of bond funds, investors face a bewildering array of choices that can significantly impact portfolio performance and risk exposure. Rather than navigating this landscape through guesswork or chasing last year's winners, sophisticated investors can employ a systematic framework that aligns fund selection with individual circumstances and objectives.

The most effective bond fund selection begins with three fundamental questions that create a logical decision tree. This systematic approach provides clarity in an otherwise complex marketplace by addressing risk tolerance, time horizon, and investment goals.

Question One: How Risk Averse Are You?

Your comfort with potential losses should drive your initial fund universe. If you're very risk averse, consider sticking primarily with money market funds and government and treasury bond funds. Most money market and government bond funds include some mixture of Treasuries and agency bonds in their overall portfolio, while Treasury bond funds typically include Treasuries only.

If you're somewhat but not completely risk averse, think about buying a higher yielding investment grade municipal and corporate bond fund. Just remember that higher yielding bond funds tend to have lower credit quality bond holdings in their portfolio. In the world of bonds, higher yields always go hand in hand with higher risk.

If you're not risk averse at all and want the highest possible return in the world of bonds while accepting that your investment may potentially go down in value, consider an intermediate or long term bond fund that incorporates or even focuses on some non-investment grade high yield debt across industries.

Question Two: How Long Do You Plan on Keeping Your Money Invested?

Your investment timeline should directly influence fund duration choices. If you have a short term time horizon, say between zero and three years, again consider money market funds and short term government and treasury bond funds for time horizons of less than one year. If it's one year or more, think about other short term high quality bond funds as well.

Keep in mind that some short term high quality bond funds may include municipals and corporates, so while they may offer higher yields than their money market and short term government bond fund equivalents, they might also be somewhat riskier. Plus, their prices tend to fluctuate more on a daily basis, meaning that the value of your investment will also change regularly depending on current market conditions.

Bond funds with specific maturity ranges generally state this in their fund name. Short term funds typically invest in bonds with maturities of one to three years, intermediate term funds typically invest in bonds with maturities of three to ten years, and long term funds typically invest in bonds with maturities of more than ten years. When you see "short term" in a bond fund's name, make sure that fund's definition of short term aligns with yours, because your idea of short term may be three months, whereas the fund's idea of short term may be two years or more.

If you have a longer term time horizon of three years or more, take a look at intermediate term, long term, and higher yield bond funds. In a normal yield curve environment, intermediate term and long term bond funds should offer higher yields than money market funds and short term bond funds, although that may not necessarily be the case during inverted yield curve environments. The prices for intermediate term and long term bond funds also tend to fluctuate considerably more, as do the prices for higher yield bond funds. For these types of funds, you may need the time to ride out those market ups and downs, making them much less suitable for holding money that you might need in the near future.

Question Three: Are You Investing for Current Income, Capital Preservation, or Long Term Growth?

All funds have investment goals such as income generation, capital preservation, or capital growth, and bond funds are no exception. Each bond fund strategy will differ depending on what those investment goals are. Once you've figured out how risk averse you might be and what your time horizon is, you need to determine what your financial goal is for this specific investment and whether that matches up to a bond fund's investment objectives.

If your goal is current income, you will probably look at bond funds that have this specific objective and that will most likely also preserve your capital. If your goal is long term growth and you don't want to just rely on equities alone for that, a more aggressive, riskier bond fund may offer higher overall returns, such as a long term bond fund that includes or even focuses on non-investment grade high yield debt across industries.

This framework creates natural alignment between investor characteristics and appropriate fund types. The shorter your time horizon, the more risk averse you are, and the more focused you are on current income, the more likely it is that you should stick with money market funds, short term government and treasury bond funds, plus other short term high quality bond funds.

If you have a longer time horizon, are more risk averse, and also more focused on current income, you may want to consider a longer term treasury fund or even a TIPS fund if you want some inflation protection.

The longer your time horizon, the less risk averse you are, and the more focused you are on long term growth, the more likely it is that you should consider intermediate and long term bond funds that may include investment grade municipals, corporates, and possibly even high yield debt across industries.

Start by honestly assessing your risk tolerance, clearly defining your time horizon, and articulating your investment objectives.

Remember that bond fund selection isn't static. As your circumstances change or market conditions evolve, your optimal allocation may shift accordingly. Regular reassessment ensures your bond fund choices continue to align with your current situation and goals.

This structured approach provides a more reliable foundation than ad hoc decision-making, particularly during periods of market stress or unusual yield curve conditions. The goal isn't to find the "perfect" bond fund, but to select funds that align with your unique circumstances while maintaining reasonable diversification across the various risks inherent in fixed income investing.

Government Money Market Funds (7-Day Yields)

Brokered CD Rates (6-Month Rate)

ETFs (30-Day Yields)

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