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I am retired and have 55% invested in equities and 45% invested in cash. I understand how bonds work, but in this low interest rate environment, I anticipate that bonds will lose more than they will gain. So do I stay in cash for now, or do I look at alternative investments?
Should I reallocate my cash percentage between corporate bonds, treasuries, preferred stocks, TIPS, reits, global bonds or commodities?
Bonds are going down due to rising interest rates. This is truly getting to be a HATED asset class due to all the interest rate manipulation by the powers.
I am retired and have 55% invested in equities and 45% invested in cash. I understand how bonds work, but in this low interest rate environment, I anticipate that bonds will lose more than they will gain. So do I stay in cash for now, or do I look at alternative investments?
Should I reallocate my cash percentage between corporate bonds, treasuries, preferred stocks, TIPS, reits, global bonds or commodities?
if you stay for the duration of the bond fund you will see the interest rate you signed on for when you bought years earlier . it is no different then an individual bond ... if rates go down you can sell earlier at a profit . if they go up then you will lose money selling early.
longer term bonds like TLT react not only to rates but to fear and greed . i have been trading in and out almost weekly .
Individual bonds held to maturity will not lose value. If you are in a mutual fund the value of your investment in the mutual fund will vary. I would avoid funds.
You can consider individual bonds and CD's. I would at least use CD's probably from an on line bank or stock broker. Note some on line banks pay a higher interest rate on their savings accounts than CD's of a year or less.
Individual bonds held to maturity will not lose value. If you are in a mutual fund the value of your investment in the mutual fund will vary. I would avoid funds.
You can consider individual bonds and CD's. I would at least use CD's probably from an on line bank or stock broker. Note some on line banks pay a higher interest rate on their savings accounts than CD's of a year or less.
if the funds are high quality bonds then just like an individual bond , if you stay for the duration value of the fund you will get very close to what the rates were the day you bought . many funds actually do better because they ride the yield curve as it is called as well as loan out bonds for a fee and sell covered calls .
if you stay for the duration value of the fund you will get very close to what the rates were the day you bought .
Even if you stay for the duration you are not guaranteed to get your return with a bond fund... for example I acquired VBILX with an average duration of 6.3 years on 01/01/2018. SEC yield at the time was 2.75% and the Distribution Yield was close to it.
The SEC yield has gone down to 2.08% now and the Distribution has crept down to 2.4% or so. However, the NAV has risen from 11.33 to 11.80 (as of today - estimated, the bond fund CRASHED today... I use the term "crashed" because a decline of 0.5% in 1 day is MONUMENTAL for a bond fund that is yielding so little in the first place!) with a high of about 12.05 on 9/4/2019.
So for Year 1 and Year 2 I have averaged a Distribution of 2.6% or so. If interest rates stay the same Year 3, 4, 5 say I average 2.2%. No worries since the rise in NAV so far compensates me for the difference between my original promised yield of 2.75% and the lower yield I am averaging.
Now, 6 months before "maturity" or it's equivalent (duration = 6.3 years so sometime in 2024) interest rates skyrocket. The NAV plummets, I incur huge losses. Now I must wait YEARS until the Distribution Yield gradually creeps up. Now if the bond fund has a negative real yield those are years that you are actually losing money.
The risk is much much more than advertised, so it's entirely possible to have losses even if you hold to term.
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