Since interest rates are higher, I’ve received quite a few emails asking whether we should buy risk-free government bonds.
Before I share what I think is a good idea, let me share what Peter Lynch said when he bought bonds during the high interest rate environment of the 1980s, which reached 14%.
“I didn’t buy bonds for defensive purposes because I was afraid of stocks, as many investors do. I bought them because the yields exceeded the returns one could normally expect to get from stocks…When yields on long-term government bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell your stocks and buy bonds.”
Now, interest rates currently stand at 5.5%. With the S&P500 providing a dividend yield of 1.6%, it certainly doesn’t meet the Peter Lynch rule of thumb yet.
In my case, I wouldn’t want to lock my money in bonds just yet for two reasons:
1) If interest rates rise, my bonds will lose value. If you intend to hold until maturity, this isn’t an issue for you.
2) It limits my flexibility to take advantage of stock market opportunities.
Because I’m from Singapore, the Singapore Savings Bonds (SSB) is a safe and flexible option. This is because it allows me to redeem the principal with accrued interest with no penalty for early withdrawal.