Are bonds safe? Not in 2018

November 14, 2018

With the exception of those brave (and crazy) folks who chase storms, I think it’s safe to say most people want to avoid danger, if at all possible.

Most investors certainly feel that way.

When the stock market gets rough, as it was last month, investors seek safety. And they often turn to bonds, because at the simplest level, stocks are risky while bonds are safe.

Well, bonds aren’t as safe as many believe, especially right now.

From bad to worse

Most mutual funds invested in bonds, either wholly or in part, are down this year (the exception is short-term bond funds). As a group, funds holding long-term government bonds are down more than 8 percent in 2018.

And it’s probably going to get worse.

In general, there is an inverse relationship between interest rates and bonds — when interest rates increase, bond prices decrease, and vice versa.

The Federal Reserve just raised rates and plans to do so again in December, with even more hikes planned in 2019. So one would expect bond prices to decrease accordingly — stocks will probably dip in the short-term too, rate increases tend to spread the pain.

Are you at risk?

You may be subject to bond-related risks (yes, there are risks) and may not even know it. One of the biggest places people invest in bonds is through their retirement plans, so it’s worth a check.

Sometimes it’s easy to know if a fund holds bonds — it will literally have “bond” in the name. Of course, it’s not always so simple.

“Target date” funds, those that adjust their allocation based on a desired retirement date, often hold bonds. And if the retirement date is near, the allocation may be quite bond-heavy. Similarly, funds calling themselves “balanced” or touting a specific allocation may hold bonds.

For those seeking safety

This isn’t to say you shouldn’t own any bonds. It may make sense to hold some bonds as part of a comprehensive retirement plan.

However, you must understand the details of the investment. While they’re known for safety, bonds do carry risk.

For instance, corporate bond investors are subject to the business practices of the firms in which they invest. If those firms lose in potentially troublesome markets (especially those affected by President Donald Trump’s tariffs), bond investors lose, too.

If you’re looking to avoid risk, here are some alternative investments outside the bond market.

Stable value funds: If you’re in an employer-sponsored retirement plan like a 401(k) or 403(b), see if there’s a stable value fund available. These funds are essentially a series of bonds with an accompanying insurance policy. They’re designed to deliver a stable return, hence the name. If the bonds underperform, the insurance picks up the slack.Certificates of deposit (CDs): Another safe alternative to bonds is a CD. Withdrawing the money early will incur penalties, but as long as you wait until the maturity date, you’ll earn interest in an investment insured by the federal government. The insurance limit is $250,000; however, you can divide investments into “insurable” chunks so each one is covered.Treasury notes: Similar to CDs, treasury notes are safe investments. In fact, right now they’re quite popular, with returns above 3 percent — levels not seen in more than a decade.Annuity: With hundreds of different annuity options, there are probably some that you haven’t seen. Many rank among the safest investments available.Cash: Storing money in a savings or money market account is always an option. These deposits enjoy federal insurance too, so they’re safe. But safety has a price, because even with rising interest rates, money market returns are usually smaller than returns from similar alternatives.Life insurance: Depending on the design, cash-value life insurance, like an indexed universal life policy, can provide a safe investment along with peace of mind for your family. Of course, the safety of the investment is tied to two things — the contract and the insurance company’s ability to honor it.

As always, it’s vital to conduct thorough due diligence. That rule applies for any investment — stocks, bonds, real estate, insurance or anything else — whether for safety or growth.

Besides understanding the investment, due diligence will help you discover viable alternatives. Without due diligence, you may end up in a seemingly “safe” investment that’s actually quite volatile.

Holly Peterson is the owner of Elite Retirement Strategies and a former radio show host. You can find her online at or by calling 208-252-4345.

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