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Neighbor News

Summer Bond Fund Storm

Bonds can be as volatile as stocks sometimes.

That cracking sound that you heard over the last two months may have come from one of our recent summer thunder storms.  Or it could be the breaking of the retirement plan nest eggs of many Minnesota company retirement plan participants.

Bond mutual funds have always popular investment options in a company retirement plan account. These mutual funds have long been promoted as a part of a long-term investment strategy for retirement plan assets.

Investment professionals have had an easy time selling bond mutual funds to clients for the last several years. Individual investors have gravitated towards bond mutual funds during the last several years of stock market volatility.

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Just read any article in the financial media, or listen to a financial expert. After all, who does not want to be “diversified,” or “balanced” in their long-term investment management approach? 

On May 1st the current yield on the U.S. 10-year Treasury bond was 1.614%.  On June 24th, the current yield on the same 10-year U.S. Treasury bond was 2.657%.

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According to my math, that is an increase of 1.043% over the time period, or an increase of 39.25% in the 10-year U.S. Treasury bond yield in less than two months.

A 39% increase in a stock market investment would be great. The problem is that when interest rates rise; bond mutual funds fall in value.

Rising interest rates affect different types of bonds in different ways.  It all depends on the kind of bonds you own.  But you can be sure that the prices of all bond mutual funds are down in a big way over the last two months.

Stock market volatility has become a way of life in the last few years. Bond mutual fund investors are never ready to lose a significant amount of their company retirement plan principal in a short period of time.

Interest rates may keep going up.  Or they may drop right back down again.  Either way, individual investors need to pay close attention now to the amount of risk they are taking with their bond mutual funds.

The rules have changed. You can’t buy-and-hold bond mutual funds any more. That investment strategy just lost you several years’ worth of investment gains in the last two months.

I know that holding part of your individual company retirement plan account in the money market account option earns you nothing.  But isn’t that better than going backwards owning any amount of a bond mutual fund now?

Your individual company retirement plan account principal is now at a high risk. Don’t keep owning a bond mutual fund just because someone told you to. Your retirement plan principal is at risk now.  Not theirs.

Ric Lager
Lager & Company, Inc.

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