Bond Mutual Funds Aren’t Built to Prevent Losses – You Can Still Lose Money

Bond Mutual Funds Aren’t Built to Prevent Losses – You Can Still Lose Money

Many are the myths that surround financial planning, but one of the most unfortunate and, in my opinion, potentially damaging is the notion that bond mutual funds are safe from value dips. As in, bond funds are the “safe place” to be when you don’t want your portfolio to lose any money.

About a week or so ago, I met someone at a social event who was at the least confused and at best disappointed because his bond portfolio has lost close to 15 percent in value within the past two quarters, since about July. His frustration seems to be more related to his understanding, however wrong, that bonds are the place to go to when you are looking to avoid the value dips usually associated with stock mutual funds – which was precisely what he intended and thought he was doing.

Obviously, he’s now learned the hard way that this truism wasn’t true. But he wasn’t the only one who believed this – so do many other weal-meaning, hard-working folks out there. Actually at the event where I met this gentleman, most of the others in our conversation circle believed this myth to be true: that bond funds are safe and won’t lose money.

How is such confusion possible?

I think the confusion seems to stem from the notion that government bonds are safe investments, and so, by implication, bond funds must be, too. While it is true that government bonds have virtually no default risk (meaning, you’ll get back your original investment at maturity), default risk isn’t the only risk associated with bonds. The other type of risk, which is fairly common and does occur frequently, is market risk. This has to do with declines in the price/value of a bond when interest rates rise. It happens when you try to sell a bond before its maturity date at a time when interest rates are higher than when you originally bought it. I must mention, additionally, that other kinds of bonds (e.g., municipal and corporate bonds) do carry default risk.

Without getting too technical, here’s the thing you must understand about mutual funds (including bond funds) in general: your fund manager has the authority to buy and/or sell whenever he or she sees fit. So if your fund sells bonds before their maturity at a time that interest rates have risen, compared to when those bonds were originally purchased, you’ll lose some value. That’s just how things work. And it is also very important to remember that you, as the individual investor in a bond fund, do not get to make the call regarding when the fund buys and/or sells its holdings.

The best way to mitigate some of this risk is to invest in a fund that holds high-quality short-term bonds. High quality to protect against default risk and short-term to combat market value rate swings.

All my best to you and yours in 2016!

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Visit LaserFG.com or call 877.656.9111 right now to book your complimentary, confidential consultation with a financial professional who has your best interest at heart and who is willing to ask the tough questions to help you make a plan that will get you where you want to go. You’ll be paired with an experienced financial professional who can help you plan for a secure future, regardless of your current financial situation. Retirement planning means planning for ALL aspects of your life after retirement. If you’re ready, we’re here to help. 

Is Your Investment Portfolio Ready for the (Inevitable) Bumpy Ride?

Is Your Investment Portfolio Ready for the (Inevitable) Bumpy Ride?

If any portion of your portfolio is invested in equities, you may have noticed that the past several months have been pretty chaotic, to say the least. Naturally, as an investor, you’re somewhat concerned, worried, or even straight-out scared. Is this the beginning of the end, as has been predicted by some for years? Should you head for the exit? Or maybe you should buy gold or silver.

Like many, you, too, are probably trying to find that proverbial “sweet spot” of investing where none of this back-and-forth will affect you. That absolute portfolio that will not experience any of these drops in value but will only skyrocket quarter after quarter and year after year. The only reason that no one has been able to precisely articulate anything like that is simply because it doesn’t exist. At least not on any stock market in the history of humankind, to date.

                                                                                                                                       
By the way, I’m not trying to be sarcastic or fault you for believing or having such expectations as an investor. Just like you, I would prefer not to see my equity portfolio drop in value for even one day, if that were possible. But the thing is that it’s not realistic, or even possible, based on what history has taught us.

So irrespective of what you hear in the media or from some sales guy or gal who’s just interested in lining his or her pocket, it is a fact of investing life that the stock market goes up and down – and when your portfolio contains equities, it will, by design, follow that pattern.

However, that is not to say that all equity portfolios are equal. Far from it. There is such thing as an efficiently diversified portfolio that is built based on the level of volatility you can stomach. A portfolio that is carefully and specifically crafted to help you cope with movements of the various asset classes, something that is bound to occur, as nothing can prevent it from happening. But when those “ugly” moments happen, an efficient portfolio, by definition, should be rebalanced.

By extension, there are also very poorly diversified portfolios that are just based on what’s “hot” at the moment but without any real planning. Based on my observation in professional practice, it seems that, sadly, this is where the vast majority of folks tend to fall. While in the moment it may sound appealing – exciting, even – that you are somehow going to “beat” the market and avoid its natural down moments, you need to be reminded of the fact that the evidence to date shows that no one has been able to accurately and precisely predict where the stock market will be headed tomorrow. 

So it really comes down to what you believe to be realistic. Investing in a manner that recognizes the unpredictable nature of the stock market or investing like it is possible to predict and beat the market. Your call…

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Visit LaserFG.com or call 877.656.9111 right now to book your complimentary, confidential consultation with a financial professional who has your best interest at heart and who is willing to ask the tough questions to help you make a plan that will get you where you want to go. You’ll be paired with an experienced financial professional who can help you plan for a secure future, regardless of your current financial situation. Retirement planning means planning for ALL aspects of your life after retirement. If you’re ready, we’re here to help.