It's only a bond rout if you sell: Vanguard

Short-term paper losses can likely be offset by reinvesting at higher rates

Feb 12, 2013 @ 2:18 pm

By Jason Kephart

Advisers have bigger things to worry about than the short-term shellacking bond portfolios will take if interest rates go up.

At least, that's the take of Joel Dickson, a senior investment strategist at Vanguard Group Inc. “It's not clear that rising interest rates are detrimental to long-term returns,” Mr. Dickson said in an interview at IndexUniverse's Inside ETFs Conference.

Yes, rising interest rates might result in immediate losses, with a 100 basis points move up inciting a 4 to 5% loss in an intermediate-term bond mutual fund. But over a longer time frame, Mr. Dickson said, the benefits of reinvesting at higher rates could offset the short-term losses.

Although it's easy to fear short-term losses, investors might find themselves in trouble if they don't keep to a long-term plan. “The behavioral reaction to the short-term losses is the real risk,” Mr. Dickson said. “There's the potential to make things worse by selling and locking in the loss.”

Mr. Dickson compares the potential scenario to investors who sold out of the stock market in 2008 or 2009 and consequently missed out on the stock market's return to pre-financial crisis levels.

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