Page 73 - Ready Set Retire

Ready. Set. Retire!

from individual bonds. Bonds held within a fund portfolio are
designed to mature on a staggered basis so income payments
are delivered consistently. The fund manager replaces bonds as
they mature, when the issuer's credit is downgraded, or when
the issuer calls, or pays off the bond before the maturity date.
There is no way to elect to hold a bond to maturity within a
fund. They are bought and sold within the fund, meaning they
have been transformed from purely a debt instrument to a
security subject to market forces.

For example, a $100,000 investment in a fixed-income mutual
(bond) fund with an average maturity of 20 years (a mix of 10-
, 20- and 30-year bonds), would fall to $86,667 if interest rates
climb one percent. That drop agitates investors which induces
more selling. That forces the fund manager to sell holdings to
meet redemptions, creating more supply in the market, driving
prices even lower until suddenly there is a run on the fund and
the bubble bursts. What’s so safe about that?

Now, if a one percent hike in interest rates results in a 14.33%
drop in value, what would a two percent rate hike do; or three
percent? Rates are at near historical lows and so have only one
way to go…up. Interest rate increases drive bond prices down.
And your very helpful TDF (target fund) continues to load you
up with “safe” bond funds as you become older and more
vulnerable to market losses. Is that really where you want your

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