a comforting thought about bonds
with everyone concerened about the drop in value in their bond funds i think a basic look again is in order...
buying a bond or bond fund is no different than buying a cd in most respects...whatever deal you sign on at is the deal you end up with if you hold it the right amount of time. ......now you say how can that be? every day my principal is dropping in a bond fund....here is what you need to know.
a bond fund has a rating called duration....duration is the amount in per cent, of gain or drop a 1% rise in rates will cause to your principal amount .as an example a short term bond fund with a duration of 1 will rise or fall 1% with a 1% change in rates ..if the fund has a duration of 5 that means that if the day you bought in rates were 5% and now they are 6%. then your principal will drop 5%..since rates are now 6% though 1% more than you were getting ,,,,,5% plus the extra 1% your getting compenstates for the 5% drop in principal if you stay for 5 years the funds duration. . in 5 years you will have the 5% extra you dropped and your origional interest rate deal back the key here is watch the duration figure when you buy a bond fund...its always stated.......match it to your goals and expectations and feel comforatable that at least you will always get your origonal deal