The Cash Flow Clock: For Retirees - Book - Page 18
The Cash Flow Clock
Bond funds are constantly bought and sold, just like any other mutual fund
assets. If interest rates remain the same, this not a problem. New bonds and
old bonds have similar rates of return and can be bought and sold without
issues. When interest rates are decreasing, it can actually be good for bond
holders.
Let’s say a bond was purchased 3 years ago with an interest rate of 6%.
Now, it is being sold. If interest rates had remained flat, then this bond
would have as much value as any other bond at a similar rate. But if interest
rates were lower than they had been when the bond was purchased, then the
value would be very different. If new bonds are now returning 3.5%, then
potential buyers would be willing to pay a premium for a bond with a higher
rate. The value of the 6% bond is much higher than it was, simply because
interest rates are now lower.
This becomes a problem when interest rates are increasing. Now the old
bond is at 3.5% and new bonds are at 6%. If a mutual fund is trying to sell
an old bond that provides much lower interest than new bonds, then why
would anyone want to buy it? The only way to sell an old bond in this
circumstance is at a significant discount.
Because bond funds are used as income, they are constantly being sold. It is
very difficult to avoid losing value when interest rates are increasing.
This became very apparent in 2022. As interest rates increased dramatically
in a short amount of time, the bond index fell 13%. This should not have
been a surprise. Everyone knew that interest rates were going up.
Any investment that can lose this much cannot be considered Safe. Bonds,
at least bond funds, definitely belong in the Risky world.
Real Estate
Most investors own, or aspire to own, real estate, whether for their own
residence and/or as investment/income properties. Owning real estate has a
lot of advantages, especially when it comes to taxes. It doesn’t have the
same types of risk as the stock market, but it can (and does) lose value.
While income properties can provide consistent cash flow, the value of the
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