Bonds, which have not lost money in almost 40 years, have stumbled recently. Bond prices go down when interest rates go up, and interest rates went up after the US election. Does this mean interest rates, still historically low, will climb further? And should you sell your bonds?
I won’t pretend to know the future direction of interest rates. But I know this. Bonds play an important role in anyone’s investment portfolio. Here’s why most investors should hang onto their bonds.
Bonds are a lot less volatile than stock. If you are anywhere near retirement, you will soon need a portion of your savings to cover living expenses. Don’t count solely on stocks. They can go down sharply, and selling anything low is a bad idea. You need some of your money in an investment that you can always sell without taking a big loss.
For expenses in the next 1-2 years, you can hold cash. But over a longer horizon, cash is almost guaranteed to lose purchasing power. Use bonds for expenses that are more than a couple years away. Then you can hold stocks for the long run.
If you own a diversified bond fund, when interest rates go up, you will lose money short-term. But some of the bonds will come due, and the fund manager will buy new bonds at higher rates. Longer-term, you benefit.
Bonds may look shaken and stirred. But your investments, like a certain cocktail, should have more than one ingredient. Bonds should be in that mix.