Even the best bond fund involves risk, because bonds fluctuate in value. When interest rates head north, bonds head south. Here’s your best bond fund investment strategy to earn the higher interest income bonds offer while lowering your risk of significant loss.
Our investment strategy involves three different bond funds and four basic steps. The three are: a high quality short-term, an intermediate-term high quality, and a higher yielding (but not junk) intermediate-term bond fund. We have many more Bond Investing Help Articles Now Available.
The short-term fund is the safest and will pay the lowest dividends or interest. It will fluctuate less in value than the other two as interest rates change. The intermediate bond funds pay more interest, but are subject to greater risk and price fluctuation. As interest rates rise they can lose significant value; and they should gain in value when rates fall. Long-term bond funds magnify this effect and are riskier. That’s why I exclude them from our investment strategy.
First, keep your cost of investing low by investing in no-load funds. To lower costs even more go with the index variety. For example, no-load intermediate term index bond funds. Second, invest equal amounts in all three different investments. Third, set them all up so that all dividends are automatically reinvested to buy more shares.
Fourth, rebalance at least yearly so that the value of all three remains about equal. You do this by moving money between them. For example, if the higher yielding one becomes worth less than the short-term fund, move money to make them equal again.
With this investment strategy in place you have a built in defense working for you, because you will be buying more shares as bond prices fall in the intermediate sector. First, reinvested dividends (interest) buy more shares as prices drop. Second, you will be rebalancing and moving money from the short-term fund to the more volatile ones as rising interest rates send their fund prices down more aggressively.
You will be buying more and more shares at cheaper prices. This lowers your average cost per share… so that when interest rates level off and head back down your loses have been minimized. And your bond funds should recover sooner, and show a profit before interest rates get back to where you started.
The simple investment strategy is to just buy the best bond fund you can find and hold on. The problems here is that if interest rates go up significantly and remain at higher levels indefinitely, your bond investment could be under water for years.
People invest in bonds for the higher income they pay. With interest rates at historical lows, the risk of losses due to rising interest rates can outweigh that advantage. Don’t buy bond funds without an active investment strategy. We have many more Bond Investing Help Articles Now Available.