Losing Money in Bonds? What Retirees Should Know

Losing Money in Bonds?

This market has been quite a shock for many retirees who hold bonds.

Today we discuss the role of bonds in a retirement portfolio (given this market environment).

Losing Money in Bonds? What Retirees Should Know

Show Notes:

  • Charts & graphs

losing money in bonds & interest rates


Fed reserve data losing money in bonds

Full transcript:


Alex Okugawa & Anthony Saffer

Alex Okugawa 0:00
Are you losing money in bonds? Today we’re going to discuss what retirees should know about this very important investment to make sure your money lasts through retirement. Stay tuned.

Hey, there, it’s Alex and Anthony from One Degree Advisors. If you’re new here, we are Certified Financial Planners that help folks with all things, tax, retirement, and investment related, Anthony, you know, a lot of people, especially retirees, might be opening up their statements or looking at their accounts online. And a specific part of their portfolio, their bonds have been going down, depending on the type of bonds you own could be done quite a bit this year. And I think it’s a shock for a lot of people. Because for so long bonds have been seen as this pretty conservative investment class that provides relatively consistent returns, and they don’t fluctuate a lot. And so far this year, that’s proving to be not the case.

Anthony Saffer 0:57
Yeah, Retirees are looking for income. And when bonds are going down in value, then it’s it becomes against the objective here. So let’s take a look at this long-term chart. If you go back to 1980, we were at the peak of interest rates. And you see this downward trend right here. And then at the very end, here is where we’re at today. And that’s what’s causing problems.

Alex Okugawa 1:16
This little pickup here in the interest rates, that’s what we’re talking about. But let’s talk about why this happens. Right? Why is it that when interest rates increase? Why is it that bond prices go down? Quite a bit?

Anthony Saffer 1:31
Yeah, bonds and interest rates are inversely related. It’s kind of this teeter-totter effect here as prices, or as interest rates go up, then prices fall. And that’s what we’re seeing today. But the previous 40 years from really like before the last two were the opposite. We had this very decades-long stretch of yields coming down and prices were rising, and so subsidizing bond returns.

Alex Okugawa 1:56
I think a lot of people are wondering, do I still own bonds right now? Are they still worth investing in? Like, where do we go from here? What is a retiree do because bonds have really been the bedrock for a lot of retirees creating consistent income? And I think it has a lot of people wondering like, is it even still worth owning? Because, again, when we go back, and we look at that long-term chart, you know, sometimes in our mind’s eye, we’re going okay, this is just gonna keep going up like a rocket ship. Right? So is it still worth owning?

Anthony Saffer 2:24
Yeah. And it may be we’re in a stretch of interest rates continuing to increase for a while, and that is going to put downward pressure on bonds. It’s hard to know. But here’s the good news for bond investors, is that interest rates have come up to somewhat normalized levels. I mean, people argue that the expected return on your bonds has also increased. So even though we’ve experienced some pain, the good news is that the expected returns on bonds have increased somewhat.

Alex Okugawa 2:47
Can you explain a little bit what that means expected return on your bonds?

Anthony Saffer 2:51
As interest rates have come back up, as we’re buying new bonds here, the interest rate that the income that we’re getting off those bonds is now at a higher level. And so that’s going to help returns theoretically, as we go forward here.

Alex Okugawa 3:03
And the types of bonds that you own are very important, especially going forward. So for example, you know, bonds that are longer term and maturity, let’s say like a bond that will mature in 20 years, that’s going to be much more sensitive to interest rate increases than let’s say, a shorter term bond of, you know, maybe three or five years.

Anthony Saffer 3:23
People have different philosophies on bonds and how to invest some will go for the highest yield, meaning they’ll try to invest in a low-quality bond that pays them a really high-interest rate. We tend to go the opposite way with that and say, if we’re going to take risk in our investments, we want to get that from stocks and real estate in the equity type of investments. We want to be very conservative with bonds be very short term, high quality, and then also manage risk in other ways besides bonds within the overall investment portfolio.

Alex Okugawa 3:51
And now let us know what you think. Do you believe that bonds are a good investment going forward? Why or why not? Let us know your thoughts in the comments down below. And if you enjoyed today’s video, please like and subscribe for more. Thanks for watching.

Transcribed by https://otter.ai

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