One personal finance question asked widely online recently was: “Should I put my 401(k) in bonds?”

Well, some — but not the whole enchilada.

If you’re a young investor, and even if you’re anxious about the effects of the coronavirus pandemic, most of your 401(k) should be invested in stocks, with a smaller share in bond funds — mutual funds or exchange-traded funds that invest in a mix of bond types. That’s because while stock prices have more ups and downs, they generally have a bigger payoff over time and are your best tool for saving what you need for retirement. You hold stocks for growth and bonds for relative stability.

When you buy a stock, you purchase a share of ownership in a company. Bonds are different; they are a type of debt. Think of it this way: When you buy a bond, you are lending money to the company or government that issued the bond. In exchange, the borrower pays you interest on a regular basis. If you keep the bond until it “matures” — in six months, or 10 years, or 30 years — you get your investment back. Because most bonds pay a predictable, fixed interest rate, they’re generally considered a more stable investment.

But they’re not risk-free, partly because of gyrations in market interest rates. The value of a bond generally depends on prevailing interest rates. When market interest rates fall, the prices of bonds typically rise, and the opposite is true, too. It’s like a seesaw. Sophisticated investors buy and sell bonds in response to changing interest rates, rather than holding them to maturity.

When the stock market plunges, as it did last week, big investors load up on trustworthy U.S. Treasury bonds to wait out the turmoil in a relatively safe haven. That pushes up bond prices and drives down returns — or “yields,” in bond speak. Spooked investors last week put so much money into 10-year Treasury bonds that yields fell to historic lows.

So right now, financial advisers say, many bonds are quite expensive. “Bonds had a nice rally, but it’s not a time to buy them,” said Elissa Buie, a financial planner with Yeske Buie in San Francisco. If you moved all your holdings out of stocks and into bond funds now, you would most likely be selling (stocks) low and buying (bonds) high.


Don’t do it.

The best approach is to choose a mix of stocks, bonds and cash that you’re comfortable with. There are various rules of thumb for how much to keep in each basket. One holds that you should “hold your age” in bonds, meaning if you are 25, you should hold 25% of your investments in bonds and cash. Other guidelines suggest even lower bond holdings, especially if you are in your 20s or 30s. Another suggests a 50-50 split of stocks and bonds for any investor expecting to live at least 15 more years. It all depends on how much risk you can tolerate.

If you don’t want to keep track of the relative holdings yourself, consider a target-date retirement fund, which shifts the assortment automatically according to when you expect to retire.

Should I Stop Making 401(k) Contributions?

You might be asking yourself lately: “Should I stop contributing to my 401(k)?” Lots of people are.

As the stock market plummeted on fears of the spreading coronavirus, that query was among the most popular online searches. The horrid combination of a threatening virus and a shrinking retirement balance made you wonder if you should hang onto your cash instead of investing it for the future.

Totally understandable.

But because you asked, here’s the answer: Absolutely not!

Market crashes are nauseating, especially if you are young and have not experienced one. They are frightening. And no one can say for sure when the market will stabilize. But time is in your favor. You have years — decades! — to recover from this roller coaster ride and reap returns when the market rises again. Even if you are in your 50s or 60s, you are likely to spend 20 or even 30 years in retirement. So you have time to let your money bake longer in the investing oven.

Yes, stocks crashed last Monday and were still gyrating wildly midweek. Yes, there are scary red minus signs next to your online account balances. But that’s exactly why you should keep contributing to your 401(k). “Stocks are on sale,” said investment adviser Dave O’Brien of EVOAdvisers. Your regular paycheck contributions are buying more shares because they’re cheap.

And if you have an employer that matches your retirement plan contributions, you are buying shares partly with “free” money. If you’re not saving enough to get the match, you should increase your paycheck contribution now. If you are already getting the match, increase your contributions. If you are putting away 4% of your paycheck, go to 5%. It’s a small step, so you won’t miss the money much.

So, yes. Acknowledge that it stinks to see your account balance drop. It’s painful.

But keep contributing. Your future self will thank you.