Bond prices go down when interest rates go up. This is because newly issued bonds are paying more interest than old bonds. To be attractive, the old bonds decrease in price, which increases their effective yield. How might this impact your 401k retirement plan? At 401K Selection we use the C-lect program to provide you the most return with the lease amount of risk. If risks go up and returns go down, we suggest changes.
You should also be aware how this fact impacts your bond fund. There is a major difference between your buying a single bond versus buying a bond fund. While buying a bond fund has the advantage of immediate built-in diversification, which lowers your risk, there is not a bond fund fixed maturity date whereby you are assured of ever getting back your invested capital.
Like all bonds, a rise in interest rates will cause the price of the bond fund’s bonds to decrease in value. Bond fund cash flows from new fund buyers and fund sellers may force it to sell bonds at depreciated values, instead of waiting for full maturity.
The key takeaway is be careful with the outdated buy and hold and forget advice you might hear as it applies to bond funds in a rising rate environment.
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Stephen L. McKee
What are your thoughts? Comments are always welcome!