AREN’T BONDS SUPPOSED TO BE SAFE INVESTMENTS? THEN WHY HAVE THEY BEEN LOSING MONEY THIS YEAR???
With the recent increase in interest rates, most of the focus has been placed on the effect it has on mortgage rates.
And rightfully so. Mortgage rates affect a huge number of people and are an overall indicator of the economy’s health.
But interest rates also influence a wide range of investments, particularly bonds, and it’s crucial that investors understand this influence. Why?
- Bonds are typically the primary portfolio component for people in or very near retirement.
- They are typically safer or have more predictable returns than stocks and they bring in income in the form of interest.
But a question I’ve been asked a lot this year is, “If bonds are supposed to be so safe, why have they lost money this year?”
Well, when interest rates rise, something interesting occurs – bonds with lower interest rates become less valuable. The value of a bond is inversely related to interest rates.
For example – let’s say last year you bought a $10,000 30-year bond that pays 5%, but this year that same company came out with a 6% bond. How does this affect you?
Well, if you went to sell your bond, you won’t get your full $10,000 principal back because your 5% bond is worth less than the 6% bonds now in the market. At best, you’ll receive $8,333 because the person purchasing your bond will want to receive 6% interest, and $500/year is 6% of $8,333.
But here’s an important lesson to understand:
If you don’t sell, you don’t lose anything!
It’s only when you go to sell your bonds that you need to be aware of current interest rates and how they will affect your principal.
Yet another confusing piece in the investing puzzle, right?
We’re here to help, so call us today at (330) 836 7800 Ext #1 or Click the link to book a 15 minute phone call with https://go.oncehub.com/LeeHyder
We’ll review your portfolio and help you create a strategy that sets you up for financial success, no matter what interest rates decide to do!
