Three Reasons Not to Ditch Your Bond Fund

Deborah Williams, CFP®

If you are retired, or plan to retire within the next few years, a portion of your portfolio may be allocated to fixed income. With the yield curve sitting flat for so long, you may contemplate ditching your bonds for greener pastures. It’s not easy staying committed when the headlines have been so glum and interest rates are expected to rise. However, bond funds can be critical to the long-term success of many retirement plans and here’s why I advise my clients to keep an appropriate allocation to fixed income.

  1. Bonds can provide a cushion that helps reduce portfolio volatility during a stock down-market.
    Yes, we are clearly not in a down-market…but all good things do come to an end. Since we are unable to predict when this long running bull market will lose steam, it’s best to be prepared. Bond investments can be critical to your retirement planning strategy because they provide diversification which can help during a stock down-market. Most fixed income does not correlate to the stock market and over the past 60 years there was only one year (1969) in which stocks and bonds both experienced an annual decline. Bailing on your bond funds now may leave you extremely vulnerable when stocks come crashing down.
  2. Bonds provide income.
    The objective of fixed income is not one of capital appreciation, but rather to provide a source of stable income. Bailing on your bond fund can leave you susceptible to losing a portion of your retirement income, along with putting you at greater risk for losing principal. While stock funds appear to have all the performance at the moment, they are not always able to provide you with stable income in retirement. Please note that bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.
  3. Bonds are slow and steady and beneficial long-term.
    Bond mutual funds have lower market risk than stock funds. In the investment race, they represent the tortoise, not the hare. Is your investment goal capital appreciation or is it to achieve a confident and stable retirement? Sometimes we don’t like our investment decisions in the short-term, however, by sticking with our investment plan we are able to increase our odds of pursuing our long-term financial goals. Ditch your bond mutual funds for higher performing stock funds today and you may finish the retirement planning race with less than desirable results, especially if you are taking a high distribution rate and experience a market downturn.

When it comes to investing and financial planning, there is one thing I can guarantee my clients…Things will change. With change being the one variable we can rely on, it’s important to stay the course and not let the fear of missing out lead us to make hasty decisions. Depending on your individual circumstances bond mutual funds can play an important role in retirement planning and I believe now is not the time to bail on them.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Bonds are subject to market and interest rate risk if sold prior to maturity.Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Investing in mutual funds involves risk, including possible loss of principal. Investors should consider the investment objectives, risk, charges and expenses of the mutual fund carefully before investing.

The prospectuses and, if available, the summary prospectuses contain this and other important information about the mutual fund. You can obtain prospectuses from your financial representative. Read carefully before investing.

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.