Re: Deja vu: Bond funds lose money every year
Posted: Mon Jul 08, 2013 3:00 pm
Why not? In post above you stated this:Red Rover wrote:I appreciate all the responses, but I'm not looking for alternatives.
Just wondering why you wouldn't consider alternatives that provide similar yield with less risk. It's OK, but it might be worthwhile to articulate your reasons.but I also am concerned that the balance of my bond fund will decline.
If you want to stick with a bond fund anyway, then I don't think you need to dig down into all the nitty gritty details to have a pretty good idea of what could happen.
Might the balance of your bond fund decline? Yes. How much? No one knows. If you understand the relationship between yield and price based on duration, then you can do your own rough estimates. For a bond fund with a duration of 5 years, 1 percentage point increase in rates -> 5% decline in price, 2 percentage point increase in rates -> 10% decline in price, etc. Of course it works the other way too.
Will higher rates eventually make up for losses. Yes. How long is eventually? It depends on how fast and how much rates change. You can do some rough calculations that will give you a rough idea.
Be very cautious about using any recent history as a guideline. I think you have to go back to the mid-1940s to see what might happen starting from today's low rates.
Will pulling out 4%-5% per year and not reinvesting dividends have an impact with rates at about 2%. Yes. How much? You can do some simple spreadsheet what-if calculations to get a rough idea. Again, why wouldn't you consider alternatives that might be more appropriate for your particular situation?