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In January 2020, I invested 150K I had inherited from my parents from the sale of their house. I knew it would be years before I would tap this money, so I invested in Vanguard’s intermediate bond fund in my brokerage account. I had learned that bonds were a safer investment than stocks and I could earn a somewhat higher return than in CDs that were paying next to nothing in interest. By September of ‘21 I was looking like a genius as I had earned 10K. But then came the bond crash and by April of ‘24 I had lost 6K. Now, after 5 1/2 years of investing these funds, I have gained a whopping 4K, a 0.5% gain.
I just read in a Morningstar that, in the past 150 years, there have been only 3 bond bear markets, and of course we know the last one was THE worst in history of the bond markets.
I was trying to be a responsible investor with the cash portion of my inheritance, but how was I to know we would face the worst bond market in history?
Oh well, c’est la vie!
At least overall I haven’t lost any of the money.
P.S. This year I “cut my losses” and took a 21K capital loss and reinvested the money in a short term bond fund as we are hoping to spend some on a new porch. However if the tariffs on Canadian lumber go through that dream may become a financial nightmare.
Trying to understand how you had a $4K, .05% gain and a $21K loss?
Unfortunately, there is no way to avoid financial risks as long as you are alive. Just my opinion, but the optimum way to hold funds that you might spend in the near future is in a Money Market Mutual Fund. In 2020, these funds paid very little due to the then low interest rates. BUT, you wouldn’t have had a loss of principal. They are not risk free however. You still have inflation risk, and there is a very, very small risk of a MMF breaking the $1 per share value resulting in a loss of capital.
The current 7-day yield at Vanguard on their MMF is 4.21%. This is probably a higher rate than your short term bond fund and with no interest rate risk. The fund currently holds $356B.
In this situation, would it make more sense to purchase individual bonds with maturity dates that match your desired time frame?
Thanks for this, David. I am glad it wasn’t just us who were caught by the bond crash in ‘22. Chris
The most important thing to learn about investing is everything has a risk premium which rewards an investor for holding an asset with that risk.
With bonds there are risk premiums for credit risk, duration risk, and inflation risk. When one of those premiums goes below their long-term average or — worse — goes to zero, as duration premiums did before 2022, there is no upside and good odds of a loss.
Right now, the yield on a five-year Treasury note is less than a 3m Treasury Bill, which means the duration risk premium for intermediate bonds is roughly zero. But unlike 2022, bond yields aren’t zero (or nearly) so the size of a loss if yields rise again is lower than 2022 but not zero.
Surely bonds arent there to make you gains. They are there to stop you doibg stupid things when your equities crash. You absolutely cant look at them in isolation.
Unfortunately these monies are in my brokerage account and were going to be used for future purchases of cars, and possibly a porch addition over a period of about a decade. I have 45% bonds our retirement portfolio for the other reasons you mention.
Snag those capital gains, kiss that $21K loss goodbye in one clean swipe – and voila, la vie en rose all over again! Tough break, wise recovery. Good luck.
Unfortunately I had no capital gains to counteract the losses as all my brokerage account was, and is, in bonds. I haven’t lost faith in bonds, I’m just a little bit wiser regarding how inflation and interest rates affect the bond ETF prices.
This is my worse result of my 25-30 year investing career (other than as I previously posted, not listening to a coworker’s husband when he was trying to convince me to buy Apple stock when Steve Jobs returned-OUCH), and as far as I can determine, not a bad investing decision, just a bad result, which sometimes happens.. 🤷♂️
I think most of us got our noses wiped in the bond crash. I console myself by looking at the bigger picture of the total return my whole portfolio has made rather than drilling down to a particular asset class.
I am being somewhat consoled that I can claim a 3K loss per year when I file my taxes (that is the maximum annual deduction the IRS allows for a capital loss). I’m also consoled that it means I can convert an extra 3K to my wife’s Roth and still stay in the 12% tax bracket. Finally I’m consoled by the fact my wife knows that if she wants to be able to wipe out the entire loss she has to make sure I live for at least seven more years (as per IRS rules only the account holder can claim the loss, not even the spouse). 😂
Well, that’s comforting from a near-term longevity perspective😂