SS+D FINANCIAL NEWS AND INFORMATION

July 30, 2010

THE OVERLOOKED RISK OF BONDS

A recent article in Barron’s points out that investing in bond funds presents a unique risk.  Bond owners can recoup their principal by holding bonds to maturity, but the owners of shares in bond mutual funds are at the mercy of the fund manager.  In a rising interest rate environment, the fund manager may be required to sell bonds prior to maturity in order to meet redemptions.  The owners of bond funds can suffer a significant loss of principal even if they have no intention of selling their shares.

A classic investment strategy is to diversify a portfolio among equities, bonds and cash.  The ratio of equities to bonds is adjusted according to the owner’s risk tolerance.  A portfolio with a large bond percentage has historically had lower returns than one with more equities, but it is less volatile.  Advisors typically recommend such portfolios for those who are less risk tolerant.

At SS+D Financial, we use such traditional asset allocation models.  However, we have been concerned for some time that the risk of investing in bonds has been overlooked.  Interest rates are currently at historic lows after a ten year decline.  With borrowing costs so low, many companies are issuing bonds to raise capital and refinance their debt.  Investors, wary of the stock market, are buying more and more bonds, thereby increasing their price.  It is a basic investing fact that bond values decrease as interest rates rise.  There seems to be nowhere for interest rates to go but up.  Investors, especially those holding long-term bonds, could see the principal value of those bonds decline significantly as interest rates rise.

At SS+D Financial, we have strategies to create diversity and lower risk without overdependence on bonds or bond funds.  These strategies are part of our overall investment philosophy where we strive to achieve your life goals with the least risk possible.  Click here to read our article on the “Protected Portfolio”.

For more information, contact SS+D Financial for a no obligation discussion to see if we can increase your peace of mind.