Investing During Market Downturns: Safe Haven Portfolio Strategies for Individual Investors

[@keithmachado-pp6fv]

Here is where I struggle with bonds. You buy a 20 year bond at par and interest rates rise so your value decreases giving you the choice of selling at a loss or getting a below market interest rate to hold to maturity to get back to par. If instead interest rates go down your bond increases in value let’s say it goes up to 110. In this case if you sell to capture the gain you will need to invest elsewhere at a lower rate. Alternatively if you hold until maturity your bond price is guaranteed to lose 10% value getting back to par. Example you buy a $100k 10 year bond at 5% bond at par and after 1 year it is worth $110k plus the $5k interest payment. Over the next 9 years you will get $45k of interest and your bond will go back to $100k, effectively erasing $10k, so the average of $3.5k against an asset worth $110k is 3.18% not 5%.

[@keithmachado-pp6fv]

1 correction the $35k is over 9 years so $3888 per year which is 3.5% of $110k. Thus if you sold that 5% bond at $110k after year 1 and can get more than 3.5% on a new bond you come out ahead.

[@ArmbrusterCapitalManagement]

Keith, Thanks for watching. We agree with your analysis. Generally, we’re not big fans of long-term bonds because of their interest rate sensitivity and associated volatility. However, for a lot of our clients, having a position in shorter-term bonds makes sense to help dampen the volatility of the stock market. Thanks, ACM