Bonds are a crazy animal. With interest rates trending down bond funds look fantastic, yielding much higher returns than you would normally expect. But the only reason they are higher in value is because interest rates are lower. It’s an inverse relationship, and very hard to conceptualize unless you work at this stuff every day.
For long term investors, these fluctuations based upon interest rate changes are a serious distraction. We don’t buy bonds for return, we buy them for security. The stock portion of our portfolio is what we rely upon for return, not the bond portion.
With that in mind, we should try our best to ignore the return component of bonds associated with interest rate fluctuations, and focus more on the safety they provide.
Investors get tripped up when they forget what we buy bonds for in the first place, and start chasing higher rates and return. This creates risk right where we don’t want it, in the safe part of the portfolio.
For larger portfolios, we like to build bond ladders in lieu of using bond funds because the ladder provides us with more clarity and control over what we are trying to achieve.
Interested in learning more? We would love to discuss bonds and bond ladders, and how to best use them in your portfolio. Let us know how we can help! Click here: Phone Call with Rob