Tahoe-Truckee Market Beat: The proper use of state maturity funds
Special to the Sun
Many investors today are concerned about the effects of rising interest rates on their fixed income portfolios.
A sustained period of rising interest rates can be a difficult time for bond investments. People who bought bonds in the 1950s had to suffer through almost three decades of rising rates until they finally topped out on the early 1980s.
Capital losses were serious for bondholders of that era, and the ones who held onto long-term bonds until they matured suffered negative real rates of return, as inflation was also high during that period.
In the past I’ve discussed some common strategies for bond investments, like bullets, barbells and ladders.
Some readers asked me if those types of risk mitigating strategies only worked for individual bonds and whether they could also work with bond mutual funds.
The good news is that they can work with mutual funds as well, depending on the type of fund you own. One advantage to owning individual bonds is that you know when they will mature.
Traditional bond mutual funds have the advantage of providing diversification but in the past, you would have to sacrifice having a known maturity date.
Today, due to the ETF explosion, there are a variety of stated maturity funds available so that investors can purchase a fund, have diversification and have a known maturity date. A stated maturity fund is designed to return your principal on a set date just like a bond.
By using stated maturity funds, fixed-income investors are free to employ strategies like bullets, barbells and ladders, while enjoying the benefits of fund ownership like diversification, which is especially important in the high-yield or junk-bond market due to default risk.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog ator 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.