Why Bond Funds Are More Dangerous Than You Think

Why Bond Funds Are More Dangerous Than You Think

Rising interest rates have plagued the bond market for months, and bond-fund investors have discovered the hard way that their investments are more vulnerable than they believed. But the worst for bond-fund investors might be yet to come, even though many of them aren't even aware of the danger.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, talks about the hidden danger in bond funds that many investors don't know about. Dan notes that when interest rates rise, bond prices fall, and the longer the maturity on the bond, the bigger the price decline. That's why iShares Barclays 20+ Year Treasury and iShares Barclays TIPS Bond have suffered such extensive losses in recent months, as they tend to own longer-dated bonds. By contrast, as Dan observes, more balanced exposure from Vanguard Total Bond and PIMCO Total Return have limited their declines somewhat.

Dan observes that the big problem with bond funds is that they buy and sell their portfolio holdings regularly, rather than holding bonds to maturity. With individual bonds, you can hold the bond to maturity and generally get the full par value of the bond back, essentially letting you ride out interest rate fluctuations. Bond fund investors, on the other hand, might never make back their losses, showing the true danger in choosing bond funds over individual bonds.

The income alternative to bonds
Many frustrated bond investors have noticed one simple fact: Dividend stocks can make you rich. Over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

The article Why Bond Funds Are More Dangerous Than You Think originally appeared on Fool.com.

Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.