For all the press on the best bond funds to buy, much less attention is given to the issue of when to sell a bond fund. This information can be just as important, since it may save you from incurring losses in a portion of your portfolio you've designed to provide an element of safety.
With that in mind, here are five reasons why you should consider selling your bond fund.
Key Takeaways
- You should track your bond fund's performance and sell it if it isn't performing.
- Bond funds can deliver high performance, but they can also perform too well.
- If the bond fund managers change the fund's fees to a level you feel is too high, consider selling your fund.
- If your fund's fees change, you should look into the reason why and sell if you're not comfortable with the new fees.
- Consider selling your bond fund if your objectives or the fund's strategy changes.
Underperformance
This is the most obvious, but it’s amazing how long people will stick with a poorly performing fund. Some of the worst-performing funds still have hundreds of millions of dollars in assets invested by shareholders who are sticking it out.
This is unfortunate since there are many alternatives among mutual funds and exchange-traded funds (ETFs). Keep an eye on how your fund performs against its benchmark (the index it tracks) and the funds in its peer group. If a fund's return has lagged consistently over a long-term period of three or more years, it's time to sell and move on.
Massive Outperformance
This one is more counterintuitive. Why consider selling a bond fund that’s delivering outstanding returns? The reason is that it may be taking on too much risk, or the managers may have concentrated it in a single asset class.
Note
A fund that is outperforming most others will likely experience an investor rush and a correction.
While the manager may adjust the portfolio by selling the winners and reinvesting elsewhere, substantial outperformance is a sign you should take a closer look at the fund to find out exactly how it’s generating the big numbers.
When Your Objectives Change
Certain asset classes carry higher risk and therefore are appropriate only for longer-term time frames. For example, high-yield bonds would be appropriate in a college savings account if you don’t need the money for another 10 years.
However, once you reach the point where college is, for example, only a year or two away, high-yield bonds are too risky for such a short-term objective. In short, there’s nothing wrong with selling a bond fund when it is no longer suitable for your goals.
A Similar Fund or ETF Has Lower Fees
Would you pay $5 for a gallon of milk when the store next door is selling it for $3.50? Of course not. But people will still pay higher fees for funds that often have alternatives that are essentially the same but much cheaper.
Over time, extra costs can add up. The issue of cost is particularly important when it comes to index funds. Take the time to see how much your fund is charging you, and if you can do better, consider making the change.
Note
Before jumping into another fund because the fees are lower, look into the fund's managers. You might be willing to pay more for a well-performing fund that's had the same manager for 15 years than you would for a lower-fee fund with a high manager turnover.
The Fund’s Strategy Changes
There are many reasons why a fund’s strategy would change: a new manager; shifts in the fund company’s lineup; and sometimes the addition of a new strategy to an existing fund (often accompanied by words such as “Enhanced” or “Plus” suddenly appearing in the fund’s name).
When this occurs, the fund may no longer provide the type of risk-and-return profile you have come to expect, and its record of past performance becomes even less of an indication of future results than it typically would be. Once a fund’s strategy changes, make sure you put it on a short leash and keep a careful eye on performance results that may be different from what you’ve witnessed in the past.
Tax Liability
Before you sell a fund, consider the taxes you'll be responsible for. If you hold a fund in a taxable account, you will be liable for any capital gains that have been accrued. You might trigger more taxes than you want to handle at that time.
While this isn’t as much of a concern with bond funds as it is with stock funds, make sure you look into your potential tax liability before you make any investment decision.
FAQs
Including bonds in your investment mix makes sense even when interest rates may be rising. Bonds' interest component, a key aspect of total return, can help cushion price declines resulting from increasing interest rates.
Should I sell bond funds when interest rates are rising? ›
Including bonds in your investment mix makes sense even when interest rates may be rising. Bonds' interest component, a key aspect of total return, can help cushion price declines resulting from increasing interest rates.
Should I sell my bond funds now 2023? ›
Should I Sell My Bonds Now (2023)? Unless there is a change in your circ*mstances, we believe investors should continue to hold onto their bonds for the following reasons: The bonds will mature at par value, meaning you will receive the face value of the bond at maturity, so present-day dips in value are only temporary.
Why do investors sell bonds when interest rates go up? ›
When interest rates rise, existing bonds paying lower interest rates become less attractive, causing their price to drop below their initial par value in the secondary market. (The coupon payments remain unaffected.)
Can I sell a bond fund anytime? ›
Bond funds can be sold at any time for their current market net asset value (NAV), which may result in a capital gain or loss.
Will bond funds recover in 2023? ›
Bond Market Performance Rebounds in 2023
Following the worst bond market ever in 2022, fixed-income markets have largely normalized and rebounded in 2023. This year to date, fixed-income returns are positive, with those bonds that trade with a credit spread having performed better than U.S. Treasuries.
Should you sell your bond funds now? ›
If interest rates rise quickly, the underlying value of your bonds will drop so substantially that you probably will experience an overall loss. However, if interest rates rise more slowly (which seems to be the general consensus among many Fed-watchers) you can probably still make money on bonds.
What is the outlook for bond funds in 2023? ›
Despite yields rising year-to-date, the U.S. Aggregate Float-Adjusted Bond Index has returned +2.12% through June 30, 2023. Such results re-affirm our “bonds are back” view as higher yields can generate positive returns even in the face of continued rate hikes and periods of elevated volatility.
When should bonds be sold? ›
In general, when interest rates go down, bond prices go up. If this happens, you can make money by selling your bond before it matures. You'll get more than you paid for it, and you'll keep the interest you've made up until the time you sell it. Learn more about how interest rates affect bond prices.
When should I sell my bond index fund? ›
You should track your bond fund's performance and sell it if it isn't performing. Bond funds can deliver high performance, but they can also perform too well. If the bond fund managers change the fund's fees to a level you feel is too high, consider selling your fund.
While the upward pressure on rates continues to affect bond prices, net new investments in bond funds will steadily lift yields in the portfolio higher as higher-yielding bonds replace lower-yielding bonds in the fund. This means that, over time, the total return of the bond will increase.
Why are bonds losing money right now? ›
“The Federal Reserve raised rates more than they have in 40 years. That caused massive losses inside of bonds,” says Robert Gilliland, managing director at Concenture Wealth Management. “It's important to understand that bonds are generally secure, but not necessarily safe.”
How much do bond prices fall when interest rates rise? ›
For example, if rates were to rise 1%, a bond or bond fund with a 5-year average duration would likely lose approximately 5% of its value. Duration is expressed in terms of years, but it is not the same thing as a bond's maturity date.
What would make a bond harder to sell? ›
An increase in interest rates might also make it more challenging to sell a bond at a desirable price, especially bonds with longer duration. Similarly, a credit scare across an industry sector or with respect to a particular issue might have a dramatic liquidity impact.
What are the cons of a bond fund? ›
They can provide investors with a window to diversified, low-fee investing. However, bond index funds also hold several disadvantages, such as volatility related to rate changes, lower performance than other fund-based investments and more.
How do I avoid paying taxes on savings bonds? ›
Roll Savings Bonds Into a College Savings Account
Another strategy for how to avoid taxes on savings bond interest involves rolling the money into a college savings account. You can roll savings bonds into a 529 college savings plan or a Coverdell Education Savings Account (ESA) to avoid taxes.
What will happen to i bonds in 2023? ›
The 4.30% composite rate for I bonds issued from May 2023 through October 2023 applies for the first six months after the issue date. The composite rate combines a 0.90% fixed rate of return with the 3.38% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).
Will bond prices go up or down in 2023? ›
The Bloomberg Global Aggregate bond index rose 3.7% in 2023 through Thursday after a 16% decline last year.
Will Series I bond rates go up in 2023? ›
Coverage began in earnest in May 2021 when the 6-month 'inflation rate' of 1.77% was announced (which is 3.54% annualized!). Then, in November 2021 I bond rates doubled to 7.12% and then 9.62% in May 2022! Now, for purchases in August 2023 the rate is 4.30%. More importantly, the fixed rate is 0.90%.
What is the 10 year Treasury bond forecast for 2023? ›
This combination should keep corporate defaults low. Treasury yields are likely to fall slightly this year, and we expect the 10-year Treasury yield to end 2023 around 3.35%. We favor selectively taking on risk in this environment of attractive prices and yields.
