20 Second Advisor: Should I stay in bonds?
You may be asking: Why have my fixed income funds lost money?
- The short answer: The Effective Federal Funds rate has increased year to date; buyers and sellers have incorporated that information, as well as their expectations about future changes in interest rates, into prices.
- Just remember that when the yield of a bond increases, it’s price will decrease.
Why should I continue to hold fixed income?
- Over recent decades, we’ve seen positive performance in periods of rising Federal Funds rate. The below chart, which includes the most notable periods of Effective Federal Funds rate increases, illustrates that periods of rising rates do not necessarily result in ongoing negative returns.
- Trying to outguess the market on future rates or inflation often leads to disappointment. Only 11% of active mutual funds (which try to make these bets) that existed 20 years ago outperformed their benchmark over the 20-year period ending 12/31/2020.
What role does Fixed Income play?
- Bonds are continuing to deliver on the job they were hired to do.
- Bonds can be used to dampen volatility relative to equity, provide liquidity, generate income, and meet sensitive tax needs.
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