Stable Bond Fund Prices
The value of a bond fund is based on many factors and the current price at any given time will fluctuate. Although we seek to find growth in the share prices as well as income, our primary purpose is steady income for both short and long term. Prices will fluctuate over time, but as long as the price is favorable when we sell, it really is not a big concern.
Think of it like rental property, if we bought the rental house for income during retirement, why do we care what the house appraises for while we still own it? We just want steady rent payments and low costs. If we can sell the house for more when it’s time to sell, great, but while we need income, we just want income.
One reason why we prefer shorter term bonds right now is because we are in such a low interest rate environment. The difference in yield between short and long term bonds is minimal and if interest rates rise, the shorter term bonds should not be as adversely affected. In fact, as bonds mature, those bonds can be reinvested at higher rates, which will improve the yield even more (our primary concern). This means that the fund price may decline temporarily, but will adjust as the fund’s portfolio adjusts to the new interest rates. Again, true customization to the client’s time horizon allows us to adjust for short term fluctuations in bond fund prices.