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.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

Martin Dempsey: Geopolitical hotspots (and how they could impact investing)

What are the big international hotspots and how could it affect advisers and investors. Gen. Martin Dempsey, the former chairman of the joinst chiefs of staff, offers his unique perspective.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Why private equity wants a piece of the RIA market

Several factors, including consolidation in the independent advice industry and PE's own growing mountain of cash, are fueling the zeal to invest.

Finra bars former UBS rep for private securities transactions

Regulator says Kenneth Tyrrell engaged in undisclosed trades worth $13 million.

Stripped of fat commissions, nontraded REIT sales tank

The "income, diversify and interest rate" pitch was never the main draw for brokers.

Morgan Stanley fires former Congressman Harold Ford for misconduct

Allegations against the wirehouse's former managing director include sexual harassment, which Ford denies.

Senate tax bill changes for pass-throughs more generous than House version, experts say

Senate measure's handling of such small-business income is simpler and makes allowances for more service companies.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print