Are Bond Funds a Safe Bet or a Mistake?
Bonds have been a good investment choice for decades. They are "perceived" as a safe investment. Most pay interest, don't take a great deal of risk, have good average returns, what is not to like? How about interest rates. There is a little known fact when it comes to bonds. As interest rates go down, bond prices go up. As interest rates go up, bond prices down. What have interest rates done historically? They have gone down. In fact, the have been going down for the most part SINCE the 1980's. Minus a few years, bond funds have looked like a great bet...a sure thing...a safe bet! To add to that perception, historically bonds have gone up when stocks have gone down. As stock prices continue to soar to new highs in the longest bull market in history, investors have started to fear that this direction in stocks can't go on forever. Out of fear of the next great crash, hundreds of billions of dollars have been sold in stock funds and reinvested in bond funds. Well, since the beginning of September, interest rates have gone in a surprising direction... they have gone up! A leading bond index fund over that same period has lost over -1%. There are a couple of "takeaways" to consider if you are depending on bond funds to be a safe haven for your investments. 1) Bond prices will not go up forever nor will interest rates go down 2) You can lose money in bond funds 3) Historically speaking, bonds and stocks can go down in price at the same time (although a rare occurrence) 4) Generally speaking, when the greatest percentage of investors are thinking the same way (bonds are safe) they are usually wrong. 5) A bond is a debt and for the most part a loan. In a world where almost 23 trillion dollars exist in debt, bonds might not be safe after all. Be careful with your investments...there are other options for safety.