CDs vs. Bond Funds for portfolio
With the interest rates changing the last 18 – 24 months, we have switched from using bond funds to building a ladder with CDs and Treasury Bills. Is this okay, or would you recommend we move back to bond funds. This money would be the equivalent of that portion of our long term money not invested in stocks.
Terry Says
That depends on what type of bond fund you’re talking about. Does it contain long-term bonds? Is it a managed fund, or a closed-end fixed portfolio of bonds? What quality bonds? Those are all questions that impact the decision.
Remember, when interest rates rise, bond prices fall. That means you can lose money in a bond fund — and the longer the maturities (duration) of the bonds in the fund, the bigger the price swings. So a fund with average maturities of more than 3 years is not comparable to a laddered CD portfolio or Treasury bills. That kind of bond portfolio has far more risk.
