In Jeff Benjamin’s article, Beauty of bonds lost in stampede to the exits, he talks about how investors are losing sight of the need for a volatility buffer and may be leaving bonds for far riskier bandwagons. In the process, Jeff quotes our own Brent Burns saying “For the folks who are really trying to find noncorrelated and less volatile investments, bonds fit that profile, and people own bonds because there is some kind of financial plan, whether it is stated or not,”. Read the full article here >>>
In May of 2013, a small rise in interest rates highlighted the risk that bond fund investors face in their “safe” investments. The relationship between interest rates and market risk is clear. The mathematical relationship is straight forward. When interest rates rise, the value of bonds goes down. For bond funds, rising rates means that total return has to fight the headwind of losses on the underlying portfolio. As NAV declines, coupon interest generated by the bonds in the portfolio may or may not be enough to overcome the price loss. On the other hand, making the same fixed income allocation to high quality individual bonds and holding them to maturity is a clearly superior strategy when rates rise because it can protect principal and avoid losses in a way that bond funds cannot. Download the white paper >>>