Fix My Portfolio: ‘Bond funds are the devil in disguise’: You have to know what you’re actually buying.

by | Nov 7, 2023 | Stock Market

Got a question about Series I bonds or other fixed-income investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write me at [email protected].   Dear Fix My Portfolio,

Bond funds are the devil in disguise. Why do I say this? Because individual investors are drawn to bond mutual funds for three main reasons: instant diversification, professional management and in-and-out liquidity. But they never stop to ask what they are actually buying.  You recently wrote an article that compared bonds to bond funds, and most of the advice was that individual investors were better off in bond funds. I disagree. Investing in a bond fund is a bet on interest rates, plain and simple. If rates go down over your holding period, you win. If they go up, you lose. Ninety-nine out of 100 bond-fund investors never think about that. And I guarantee you that was certainly not their intention when they bought a “safe” mutual fund.  The fund investor often panics. We can see their emotional response to volatility in fund outflows. All of us have an innate tendency to interpret large temporary declines in the market as the beginning of the end. And when we panic, we flee. We sell at the wrong time and incur that permanent loss of capital. There is rarely a reason to sell a quality bond at a loss. If the recent collapse in b …

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