Easy Money: Can Bond Funds(Fixed Income) Lose Money?
A lot of advisors and companies will offer bond funds and they call them “fixed income”. You might open your statement and you see that you have 40% equities and 60% fixed income, so you might think your 60% safe. But is that actually the case? Well, not really. Bonds don’t work like equities do, but they still have risk. A big misconception is that bonds actually work the opposite of stocks. Sometimes people will buy a bond fund or a fixed income fund thinking, “Oh well if the stocks go down, this fund will go up.” But that’s not how they work at all.
Bond funds have a duration. If you want to know how risky your bond funds are, you want to look at what the duration is on the bond funds. This will tell you how much they’ll go down if interest rates rise. That’s right, they work inversely of interest rates. So if you buy a bond fund and interest rates rise, your bond fund will drop. If you buy a bond fund and the interest rates drop, your bond fund will rise.
So why is that so important? A lot of portfolios have been around since the late eighties, early nineties, and what has happened to interest rates since the late eighties and early nineties? They’ve fallen consistently. So if you have a high exposure to bond funds or fixed income, you don’t want to look at what they did through the eighties, nineties, and even the 2000’s. You want to look at what they will do moving forward if interest rates continue to rise, which many people think that they will.
Okay, so I’m telling you that fixed income isn’t really fixed, and you might be saying, “Well how do I get some protection in my accounts?” Simple. Use the traditional ways. That’s what CD’s are for. That’s what money markets are for. That’s what annuities are for. What you’re doing is you’re basically giving the risk to a bank, or a mutual fund company, or an insurance company and saying, “Listen, you take on the risk, but I want my money to be guaranteed.” A lot of those, are truly fixed accounts. Not all annuities are, but some annuities are truly fixed. Money markets, CDs, bank accounts, those are how you get protection. If you’re doing it through “fixed income” bond funds, you might not be getting the protection that you think you have.
Securities and advisory services offered through Madison Avenue Securities, LLC, member FINRA SIPC, and a registered investment advisor. Madison Avenue Securities, and Don Anders are not affiliated companies.