Worried by bond market fluctuations? Here’s what to do

Barbara Bogaev Jul 5, 2013
HTML EMBED:
COPY

Worried by bond market fluctuations? Here’s what to do

Barbara Bogaev Jul 5, 2013
HTML EMBED:
COPY

Older Americans, whose retirement portfolios include a lot of bonds, might worry about fluctuations in the bond market right now. Bonds have tumbled in price since Fed Chairman Ben Bernanke made some positive remarks about the economy a few weeks ago. And watching the the bloodbath, you’re probably wondering is this a time to buy or sell, or wait and see. Marilyn Cohen with Envision Capital Management has some sound advice for you.

“People listened to Chairman Bernanke and thought uh-oh, this is it, rates are going to start going up. They pointed and clicked, went to their phones and sold their bond funds. In bond land, when retail investors react with one panicky voice, you see reverberations and we saw that happen,” says Cohen. “It’s been quite a selling panic since May.”

Cohen says investors worried about the fluctuations shouldn’t panic — and shouldn’t go back into bond funds. If investors want to improve the downside risk in bonds, Cohen suggests they buy individual bonds. It’s much more work to keep up with how the company is doing, she says, but investors can then withstand a storm or bond market tsunami because they’ll know when the bond is going to mature and will get their money back.

Cohen says investors should diversify their bonds portfolio — just as their equity portfolio is diversified.

“Use your common sense, allocate into different sectors and different names with specific maturities. Do anything between eight or nine years and call it a day until interest rates really start moving up and you can capture that higher yield,” says Cohen.

Cohen says nobody is smart enough to time the bond market, but says people need to watch what their duration means.

“That is simply telling you how sensitive the bond that you buy and the portfolio that you put together is to interest rate moves. So if your duration is two and a half years and rates move up 1 percent by Friday night that means your portfolio will be down 2.5 percent. But you can withstand that because you know when exactly your bonds are going to mature,” says Cohen.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.