I have 1/3 on my savings in a bond fund. I live in Canada where interest rates are very low.

I know that the interest rates can't stay low forever, and I know from basic finance class that bond prices and interest rates are inversely related.

I'm hypothesising that when central bank raises the interest rates, I will loose a lot from this investment since the prices of the bonds will drop.

Is there a flaw in my logic? Is it wise to withdraw my investment from this bond fund ( It hasn't really made me or cost me anything since I started investing in it -- 6 months ago)

  • It is also worth noting that there is a difference in the composition and performance of short term bond funds and long term bond funds and their results would vary – karancan Sep 23 '15 at 13:50

This is just a pedestrian (my) opinion:

Yes, It is wise to invest in bond funds even in a low interest environment. Check out the lazy man's portfolio on bogleheads.

The reason is:

  • You cannot time the market.
  • Hence diversification (with stock funds and bond funds). in the long run will balance your losses against extreme market moves.
  • If you are concerned, then diversify your bond fund holding into multiple bond funds (including international).
  • Exactly. Don't invest only in bonds, but do use them for diversification, – keshlam Sep 23 '15 at 14:00
  • I, personally, wouldn't touch bonds or bond funds at all right now, for the reason the OP notes. Interest rates have nowhere to go but up, which means bond and bond fund prices have nowhere to go but down. – blm Sep 23 '15 at 16:32
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    "Canada ....interest rates are low" They are low all over the world. Everyone is chasing yield, extending maturities, assuming greater credit risk: this will not have a happy ending, when it ends, but it's been showing no signs of stopping. In the long run, we are all dead. – michael Sep 24 '15 at 4:43

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