UnThreaded | Threaded | Whole Thread (12) | Ignore Thread Prev | Next
Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35387  
Subject: Re: Worst case for bond funds Date: 5/21/2013 5:51 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
Good previous answers.

Bond funds are basically a business that invests in bonds. If business is good the share holders do well, if business is bad the share holders do poorly. Its almost like investing in a commodity company like X (united states steel) when steel is needed X tends to do well, when steel isn't needed X limps along.

The greatest risk is principal loss. Currently a commercial grade bond fund holds primarily bonds bought at a premium because much of that portion of the bond landscape has been priced with a premium for a long time. As interest rates rise that premium will dwindle if not completely disappear. Duration of a fund also dictates buying and selling; funds tend to hold a range of maturities, outside that range they buy or sell. For years these mid and long range funds have been forced to sell and buy into a rising market. It all looks good on paper, but over paying for anything rarely ends well.

A long time ago this board conducted several studies on what bond funds are likely to do through multiple up and down cycles. The primary conclusion is that if one reinvests the dividends the higher yield does not make up for the loss in principal. If one does not need to tap into the principal the rising dividend yield might be beneficial but it will not off set the loss in principal. If they ever need to start drawing down on the principal they will be eating a significant loss.

jack
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (12) | Ignore Thread Prev | Next

Announcements

Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Post of the Day:
Value Hounds

Netflix Riles Investors
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement