Funds big on bonds risky when rates rise
Taking the easy route with investing isn't feeling so easy.
A no-brainer approach to investing in 401(k)s, IRAs and 529 college savings plans during the past few years has been to choose an “allocation fund,” or a fund that takes you off the hook for making decisions. These single funds divide your money up into stocks and bonds. The idea is to turn your money over to a brainy fund manager and go on with life.
The fund manager pays attention to what you want for investments by adhering to the “conservative” or “aggressive” label you've chosen on a fund.
The surprise of the past few months has been that a “conservative” approach turned into the strategy most prone to losses. “Conservative” traditionally means that a fund manager puts more bonds than stocks into your fund. And while bonds are usually safer than stocks, that hasn't been the case lately.
The safest, U.S. Treasury bonds, have been losers. This year, the Treasurys that mature in 10 years have lost about 4 percent. The reason: Investors have expected interest rates to climb, and interest rates control gains and losses in bonds. During periods of rising interest rates, bonds become losers.
So from May through August, people with money in the average conservative allocation fund lost 2 percent of their money, Morningstar reported. That's not a crippling loss, but it has to be a shock for people who figured they were being safe.
Conservative allocation funds typically keep somewhere from 50 percent to 80 percent of your money in bonds, which makes them vulnerable in a rising interest rate environment.
Moderate funds hold about 30 percent to 50 percent of your money in bonds, which has meant lackluster returns from early May through August. Investors in the average moderate fund gained just 0.1 percent, Morningstar said.
Aggressive allocation funds did better than conservative ones. They gained 0.7 percent on average, according to Morningstar. Many keep 70 percent to 90 percent of an investor's money in stocks. Since May, the stock market gained about 3 percent.
The recent losses in conservative allocation funds don't mean you dump them and run — if you are saving for the future. But if a fund is full of Treasury bonds, and a parent has a college bill coming up, for example, it could be prudent to move some of the money into a money market fund for safekeeping.
Morningstar analyst Greg Carlson suggests that, when picking an asset allocation fund, investors make sure the fund manager is experienced and savvy about picking bonds. Many funds have pros picking stocks who are not as attentive to bonds. They might simply buy U.S. Treasury, rather than a mixture of bonds that provide more insulation in a rising rate environment.
Carlson notes that Dodge and Cox Balanced Fund is a moderate allocation fund that did better than most other moderate funds during the tricky May-through-August period. Other allocation funds that have savvy bond pickers, according to Carlson, are Pimco All Asset, Vanguard Wellesley Income, Vanguard Wellington, Janus Balanced and Fidelity Puritan.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune. Readers may send her email at firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- 10 million Americans sought help to enroll in Obamacare
- Sluggish growth elsewhere could infect healthy U.S. economy
- Federal appeals courts disagree on Obamacare subsidies
- China meat scandal hits Starbucks, Burger King, McDonald’s
- Amwell wastewater site to be shut down
- New York home to 389K millionaires
- Consumer prices creep up 0.3% in June
- Chrysler recalls up to 792K Jeep SUVs for ignition switch defect
- Judge nixes suit from Empire State Building investors
- California firm issues nationwide fruit recall
- Senate, House head for stalemate on border