Does the bond fund you’re holding as a way to buffer your portfolio from the risk of stocks, actually contain more risk than you think? These funds could in fact contain sticks of dynamite, according to Bob Rice, managing partner at Tangent Capital and author of The Alternative Answer. He explains why in the accompanying video.
“You can’t hold a bond fund until maturity, there is no maturity date on a bond fund,” Rice explains (this matters because interest rates or the yield on a bond move in the opposite direction of its price). “Right now interest rates are so low. They have only been this low three percent of the time that U.S. treasuries have existed. So the odds of them increasing are very high, and if that happens many of these bond funds will suffer 20%, 30%, 40% declines in value. So the idea that your bond fund is safe is really misleading.”
Not only that, more than ever bond funds are investing in stocks, which could expose investors to volatility they don’t know about. Rice says, understanding the dynamics of the bond market that he has described, bond managers have taken advantage of their ability in most cases to invest up to 20% in stocks.
The Wall Street Journal reports that the number of bond funds that own stocks has surged to the highest point in 18 years, with 352 mutual funds classified as bond funds holding stocks according to Morningstar (MORN).
And a third possibly misleading aspect of bond funds, according to Rice, is that bond fun managers that are investing in stocks are comparing their performance to the bond funds that really do contain all bonds.
“So they’re bragging about their performance, but they’re investing in apples and oranges,” Rice contends, while they’re beating a benchmark that is just investing in apples.
Rice’s point – do your homework to know what you’re invested in. In the video, he explains how.
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