Adding Treasuries to your portfolio is smart, and easy
— -- Q: How do I go about adding Treasuries to my portfolio?
A: Many stock jockeys are starting to add the words "fixed income" to their vocabularies.
While many investors were chasing hot stocks in 2007, and ignoring financial planners urging them to add bonds to their asset allocations, the world changed. The vicious bear market in stocks has served up a big reminder of the value of having a dose of stable bonds, that is fixed-income securities, in your portfolio.
Last year was a great example. U.S. stocks suffered crushing losses, with stocks of large U.S. companies losing 36.8% of their value, according to IFA.com. However, during that same time, the IFA 5-year government index, which tracks government bonds, gained 8.4%. Yes, you read that right. Gained.
The fact that Treasury bills, notes and bonds often hold their value or rise when stocks are getting clobbered is one of the core premises of asset allocation. By owning a basket of diversified stocks and bonds, you can help reduce the shock of a massive stock market decline.
What percentage of your portfolio should be in government bonds is up to you. It's a factor of how much risk you'd like to take. And remember, Treasuries aren't without risk, either.
If interest rates rise, if the supply of Treasuries increases or if investors start to prefer stocks, Treasury prices will likely fall. Some investors, like Warren Buffett, have warned there's a bubble in Treasuries as investors have bid their prices up. But because prices and yields move in opposite directions, if Treasury prices drop, yields will rise.
With that caveat in mind, there are a few ways to buy Treasuries:
•Directly from the government. The lowest-cost way to buy Treasuries is straight from the government. TreasuryDirect (www.treasurydirect.com) is a website that allows you to enter orders to buy or sell Treasuries. If you know what you're doing, this is the best way to go. However, you really need to know what you're doing. You need to understand how to build a laddered portfolio by buying Treasuries that mature at different times in the future. If you don't understand this, you're better off with one of the methods discussed below.
•Exchange-traded funds. If you already have a low-cost online brokerage account, and want to add some Treasuries, there are several exchange-traded funds, or ETFs, that will do this for you.
You can buy a bond ETF, which then owns a basket of Treasuries and bonds. Both iShares and Vanguard offer a big family of bond ETFs. For instance, Vanguard's Total Bond Market ETF bnd is heavily weighted toward medium-term Treasuries, 34%, and adds some exposure to other forms of government debt and industrial companies, too. USATODAY.com's ETF screener can help you find an ETF that suits you.
•Mutual funds. There is a variety of both actively managed and index bond funds to choose from. USATODAY.com's free Mutual Fund Screener can help you find bond funds that suit your needs.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.