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Bond Funds – Why do I want them?

Rates are rising, bond fund values are dropping. Why would I want any bond funds in my portfolio? This is a question often asked by clients. I explain that bond funds are the ballast to the boat to keep your portfolio from violent swings up and downs that stocks often can see. Will bond funds decrease in value? Yes, they will decrease in value especially in times of interest rates rising. Typically, you will see a decrease in bond fund values as rates increase. But each day the bond funds will have bonds maturing and being replaced with higher interest rate bonds. If the bond fund has a short horizon, then you can expect the bond value to be down for a short period of time like its horizon. If you have a longer-term bond fund, then again it will take a longer period of time for the value to come back up.  But one cannot ignore the bond fund income which is where most of an investor's rate of return with bond funds is derived.

 

In the short term, bond funds will show losses but typically between 2-15%. Stock funds can show losses of 10-50%+ in a down market. But over time bonds have typically provided a positive yield of 2-5%+. And most importantly, bond allocations have kept clients invested in their portfolio. Recall that when we recommend investment allocations, we are looking at your long-term goals.  If the funds are needed for spending in one year, the funds should not be in a bond or stock fund!

 

Investing 100% in stock funds most likely would give you the highest rate of return over 10+ years (and is not guaranteed) but could you handle the swings? Most clients do not want to stomach the wild swings especially in retirement. This is why bond funds have a place in your portfolio. They act as the ballast in the boat to keep you from jumping ship at the wrong time.

 

Here's a recent article on Vanguard that I feel is good to read 4 Bond Strategies that Matter

 

-Leslie Trowbridge, CFP®

 

*Investing has risks and there are no guarantees to the rate of return for any stock or bond fund. Understand what you are investing in and if you want advice geared toward your goals and comfort level, contact us.

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