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  • Bob Brooks

The Wrong Message About Bonds 


Mutual fund companies send out what I call handholding pieces to advisors to calm their clients. My inbox gets flooded with these types of emails when the market is having a tough time as it is today.  Investors are worried, and the market reflects that worry. Mutual fund companies do everything possible to assure you everything will be just fine. The message can be summed up this way: "Don't worry about the fact you are losing money, just go on back to sleep and don't pay attention.  This soon will pass." 

The following hand holding piece came from a mutual fund company with what I believe is the wrong message about bonds. In order to understand the message, see further clarification located within the parentheses. 

"Conventional wisdom says to sell fixed income (bonds) when interest rates rise (go up).  But is timing buy and sell decisions based on rates the right move?

Remind clients of the important role of fixed income (bonds) in a portfolio: to provide diversification in the event of an equity drawdown. (stock market decline)" 

Reality Check – Here is what they are not telling you: 

"Conventional wisdom says to sell fixed income (bonds) when interest rates rise (go up).  But is timing buy and sell decisions based on (interest) rates the right move?" 

Conventional wisdom is correct!  When interest rates go up, bond prices go down. And when bond prices go up, interest rates go down. 

What about the decision to buy and sell bonds based on rising interest rates? With the exception of short-term duration bonds, and the probability of much higher interest rates, selling certain types of bonds definitely could make sense.  Said another way, higher risk bonds carry much higher risk in this type of environment. 

"Remind clients of the important role of fixed income (bonds) in a portfolio: to provide diversification in the event of an equity drawdown. (Stock market decline)" 

Diversification 101 would say to split your 401K money between stocks and bonds to diversify your portfolio. This way, if stocks go down, bonds can provide a safe haven for your portfolio. Contrary to what the article says, that is not always the case. Both bonds and stocks can lose money at the same time. This is what has been happening thus far this year. 

The bottom line - bonds don't always play the role of the safe haven. Advisors can "remind clients of the important role of fixed income" all they want. Just remember, nothing in the investment world (such as bonds) works 100% of the time.