James d. Gwartney

Match the Length of Your Investments
to the Timing of Your Needs
When making long-term investments, such as the funds allocated into a retirement plan, a
stock index fund is generally your best investment. While the long-term return of stocks is
substantially greater than bonds, the value of the latter is more stable over short time periods.
As the time approaches when the funds from an investment plan may be needed, it will make
sense to shift funds toward investments of more stable value. Given a five-year horizon,
purchasing a bond that matures in five years, at which point you will receive your initial
investment plus interest, is a relatively safe investment. As a general proposition, buy bonds
that mature at about the time you will need the funds, perhaps for a down payment on a home
or income during retirement. If you aren’t sure about the timing, you can spread your
investment across bonds with different maturities.
The risks of owning bonds include credit risk (that is, the risk that you won’t get your
principal back), unanticipated inflation, and changes in interest rates because the government is
attempting to pursue fiscal policy. If you invest in government bonds and highest-quality
corporate bond funds, the greatest risk of owning bonds is inflation, which lessens the value of
both the principal and the fixed-interest payments. However, that risk can be reduced or
eliminated with the use of Inflation-Protected Bonds, such as Treasury Inflation Protected
Securities (TIPS)
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in the United States, or Obligations Assimilables du Trésor (OATs) in
France, which are fixed-rate Government bonds indexed on inflation, which means they pay a
fixed interest rate plus compensation for the loss of purchasing power due to inflation. Because
unanticipated inflation is one of the factors that causes the return from bonds to be worth less
than expected, buying and holding Inflation-Protected Bonds will protect the holder against
that risk. These types of bonds are particularly attractive for retirees seeking to generate a