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Author: EsM30 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35351  
Subject: Worst case for bond funds Date: 5/21/2013 10:42 AM
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I don't have much experience with fixed income investments, so forgive my ignorance.

My parents recently moved a large amount of their savings from CDs and savings accounts to bond funds because they were tired of their low interest rates at the suggestion of a planner at their bank. They tend to do EVERYTHING at the wrong time because they are scared and think the next asset class will be safe. They lost a lot in stocks in the dot com era. Now they will never buy stocks again. They lost a lot in REITs after the real estate bubble (since real estate is safe, not like those stocks!) And now, they are just now deciding they can't stand their sub 1% interest and need to move into a bond fund because those are safe and have been doing so well.

I have no special knowledge of when our low interest rate environment will become an extended rising interest rate environment, but it seems possible that it could happen eventually.

I am certain my parents are not willing to risk their principal for a higher current income. (They do not care when I explain real versus nominal losses, they are very emotional about money.) What is the worst case for a bond fund holder with no plans to reinvest any income received? Financial planners love to point to the last 10 years of returns, but they gloss over discussion of what could happen. I asked my mother if the planner mentioned that she could lose some of her principal and she said that he did explain that but that "they buy and sell all the time so they would end up buying the higher yield investments." Of course they do.. the buying and selling is the only cause of the loss in nominal value.

Sorry, I buried my question in a wall of text:
What is the worst case for a bond fund holder with no plans to reinvest any income received? What happened to someone who bought into bond funds at the worst time in the 1970s, for instance?
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