Thanks for all of the good work you do. I am within a couple of years of retirement. About 45% of my retirement investments is in a total market bond fund. Do you recommend exiting this type of fund and moving the assets to a money market fund or a short term bond fund or leaving things as they are?
SAVAGE SAYS: Please see the adjacent post explaining how you can lose money in perfectly “safe” bonds. When interest rates move higher, bond prices move lower. Even if they are top-rated bonds. After all, who would want a 4% bond, if the general level of rates moves higher and you could buy a 6% bond? If you must sell the old bond, for which you paid $1,000 when it was new, you might only get $850 to compensate for the fact that the yield is lower than on new bonds.
Now, ask yourself, what could make rates move higher How about fear of inflation — the creation of too much money, making lenders ask for higher rates to compensate for the expected lower purchasing power when their money is returned. And who is creating “too much” money The Fed — increasing the monetary base at a 20% annual rate, pushing new money into the economy at a rate of $85 billion a month! Beware of bonds!