If you want to make money in bonds, make more money as rates move up and eliminate losses in sell-offs… learn to do nothing.
One of the things I try to drill into new bond investors, especially in the increasing rate environment we have now, is that the best strategy in bonds is exactly that: to do nothing.
Leave them alone. Don’t fix what isn’t broken.
Most of you already know from other aspects of your lives that being disciplined enough to not fix what isn’t broken in any setting is difficult.
In the money world where we have 24/7 chattering heads whose only job is to scare you and sell advertising, it is downright impossible. The little guy doesn’t have the historical or technical understanding to ride out most market storms.
Here are a few reasons why you should adopt what I call the “buy and go to sleep” approach to corporate bonds.
First, and we’ve touched on this before: We get paid no matter what the market does. Yes, even when interest rates move up.
The talking heads on TV make it sound like another 2008 is coming whenever the Fed is meeting to consider raising rates. But no matter what the Fed does and no matter how the market reacts to rate increases, the bonds you hold will continue to pay you your interest and return your principal at maturity.
That’s one reason to hold your bonds even if another 2008 rolls around. In fact, all of the bonds I held during 2008 and 2009 paid off exactly as they promised. I had no losses during the worst of the sell-off.
Next, fluctuating bond prices are a bonus, not a problem.
The yields on the corporate bonds rated BB and higher that I hold today have moved up from the 4% area to 6% and 7% in many cases.
They are paying higher returns because, in some cases, market prices have dropped slightly and because new bonds are coming to the market with higher coupons.
Both outcomes are the result of the increasing rate market we have today.
If you use a staggered ladder system where you have at least one corporate bond (preferably several) maturing every year, you will have fresh cash available each year to take advantage of rising rates and higher yields.
As rates rise and you use the cash from bonds that have matured to purchase ones with higher payouts, your overall return will increase.
It only makes sense that if you add higher-paying bonds to your portfolio each year, your overall return will increase.
The folks at CNBC obviously don’t have a clue how this works. Based on their reporting, they seem to think that bond investors lose money when rates move up.
If our payout is immune to rising interest rates and fluctuating bond prices actually work in our favor, then two of the bond market bogeymen that the media is constantly complaining about are handled. We’re paid no matter what rates do, and even in a rising rate market, we can make more money, not less.
That’s why it pays to do nothing with your bonds.