If you have money in mutual funds you should be worried, b꧙ut not only for the reason you think.
Sure, the stock market is causing concern. So investors are right to keep a close watch on the performance of stock mutual funds. But while you are doing that, mutual funds that invest entirely or partially in bonds are quietly having a very rꦓough time.
And it’s bound to get worse.
You have to guess at what stocks will do. Will a company’s profits justify its stock price? Will quants’ computers caꦡuse a major sell-off? Will President Trump say something that spooks Wall Street? Is the guy who runs your mutual fund paying attention?
The bond market is simpler to read. When interest rates rise, bond pric🎃es automatically decline. And bond mutual funds lose money. It’s as easy as that.
If you don’t understand why, here’s a quick e𒁏xplanation. Let’s say you own a 10-year government bond, and it is yielding 3 percent. That 3 percent yield is unattractive now that the new rate for bonds is nearly 3.2 percent.
So your 3 percent bond’s value will have fallen. And mutual funds that own these older bonds will decline in value. (You📖 can get all your money back if you hold the bond to maturity, but funds💦 aren’t going to do that.)
I asked Morningstar, which tracks mutual fun𒐪ds, to give me a list of the performance of those funds that invest in bonds. Nearly all of them are losing money in 2018. Only those that invest in short-term fix-rate instruments are up slightl꧅y for the year.
Take, for instance, one fund group called the US Fund Long Government, which invest♔s in long-term government bonds like the 10-year. It was down over 8 percent in 2018 as of when Morningstar ran the figures for me last week.
Other groups tha🔯t invest in the bo☂nds of emerging markets were down 8.6 percent and nearly 5 percent.
That’ll give you an idea of what you should look for in your retirement accounts — funds with the word “bond” in the name of their funds. Many people think these are safe invest✱ments — but they aren’t right now.
But♓ there is a tric༒kier part to this. You should also look for funds that have bond investments hidden in their portfolios and the name doesn’t shout out this fact.
Typically they have the word “balanced” or “allocation” in their name. The more their money is allocated into bonds the more they (and you) will get hurt by rising i✅nterest rates and falling prices.
The Federal Reserve is expected to raise in꧟terest rates again in December. And Fed chairman Jerome Powell has indicated there will be more hikes because interest rates are still stimulating an economy that looks li🙈ke it is growing nicely.
Those future rate hikes might make th𓃲e stock market go down. But they will hurt bonds as well. So make sure you know what you are invested in.