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Mutual Fund Deception: Bond Funds Are Not "Always" Safe

Pop Culture Finance wants you to believe that everything is black and white when it comes to investments. For example, just diversify your money between bonds and stocks to reduce risk. If you want to protect your money, invest in bond funds. These strategies work...always.


A very well-known mutual fund company just recently started marketing their main bond fund targeting investors who are scared of the stock market. They first showed how their bond fund stood up during times the S&P 500 (the stock market) lost money. Here was the chart:


Then they went onto to make the following statements:


“Looking for resilience when stock markets are unsettled? This bond fund has delivered strong equity diversification. 


Look at the late-2018 global selloff, for example. Now imagine what could happen in a much deeper correction, and the setback that may represent for your clients' long-term financial goals.”


Well I can tell you how bad this bond fund did during a much “deeper correction.” During the 2007-2009 financial crisis, this bond fund lost -17.63% while the S&P 500 lost -54.82%. Funny, that stat didn’t make their comparison.


2 Takeaways


First, the marketing leaves one with the impression that their bond fund or maybe bond funds in general are a safe place to hide during times the market is loosing money.  Of course, they are not going to come out and literally say it because that would be misrepresentation.  


Second, there is something else interesting about that chart. First a fact – when interest rates go down, bond prices go up and when bond prices go up interest rates go down.  (generally speaking). During every one of those periods illustrated above, interest rates were going down except one. Thus, the bond fund should have had the opportunity to perform well given the interest rate environment.


Bottom Line: Bond funds can lose money and are not a guaranteed place to hide from losses in the stock market. Mutual fund marketing hardly ever tells the whole story. Be careful when they try to tell you everything in black and white because it is hardly the case.