Should I Sell My Bonds? 5 Questions about Investing in 2022

5 mins
Jon Green
May 6, 2022

Is it time to sell or hold your bonds? Here are 5 questions investors are asking about their assets.

Inflation, the conflict in Ukraine, rising interest rates, a soaring housing market, supply chain disruptions, and the labor shortage—financial stress should be the phrase of the year. And for good reason, as all of these events are impacting portfolios big and small.

Bondholders, in particular, look on in terror as bond prices continue to plummet. After all, many bondholders are retirees, and these fixed-income investments are critical for their golden years.

But if the "stable" bond market isn't reliable, what is?

The fact of the matter is that we are living in challenging times, for better or worse. And while it's hard to be objective, the more we can divorce ourselves from emotion while evaluating investments, the better.

I have been helping my clients navigate complicated market conditions for the past few weeks. Here are their top five questions and my answers.

1. Will my bond price keep dropping?

Bond values will continue to drop as the Federal Reserve continues to raise the interest rates. As a result, the prices of older bonds will go down over time.

The important thing to remember: The drop in price is not a reflection of the quality of the bonds.

The bonds themselves have not changed. As long as they are from a trusted bond issuer, it's likely that they will continue to pay out. Corporate and junk bonds may continue to be risky, but government bonds, including municipal bonds, generally tend to provide more stability.

The current drop in bond prices boils down to basic arithmetic:

We've covered this in the past, but bond calculations are linked to interest rates:

Because of this mathematical dynamic, bonds are fairly predictable. Unlike stocks or ETFs, they are strictly based on math. Emotion doesn't factor into bond quality, but it can affect the value when people panic and sell. This effectively drops the bond price further.

2. Should I sell my bonds?

In short: It's not a great time to sell, if you can afford to hold.

Selling while interest rates are rising means losing a portion of your principal investment. But if you feel like you absolutely will need that money in the next 2-5 years, get out now. The longer you wait, the lower the bond price will drop.

Holding your bonds until maturity, inmost cases, translates into saving your initial principal. And if you can hold on to your bonds, you'll most likely continue to get regular income from these investments.

How far will the bond price drop? The Federal Reserve will keep raising interest rates, but how far is anyone's guess. Personally, I believe it will take at least two years for inflation to deflate to pre-pandemic levels.

3. What should I invest in?

This is a more difficult question.

If you are a first-time buyer in the bond market, it may be worth the risk to buy bonds within the next 2-5 years. As the rising interest rates continue, it may be silly to buy bonds immediately as they will quickly lose value again. To do away with the interest rate risk, you could consider a treasury bond designed to combat inflation.

But there are other potential investment options as well, such as:

4. Is there a recession coming?

Not officially.

Experts are of a mixed opinion on whether or not a recession is on its way. However, it never hurts to be prepared.

Preparing your portfolio for a recession generally suggests diversification, focusing on high-quality bonds, index funds, and other assets. Keeping a healthy credit score, reducing debt, and increasing your current savings can all help to protect against sudden changes in the economy.

5. What can I do about inflation?

While the Federal Reserve continues to raise the interest rate in hopes to cut inflation, we probably won't see a significant return to pre-pandemic inflation levels for a year to two.

However, most bonds and other fixed-income assets do not provide a high enough interest rate to combat inflation. The Treasury Inflation-Protected Security (TIPS) investment is a set of treasury bonds that aim to keep pace with inflation, and can limit the value loss on your current cash.

Generally, growth stocks can offer better returns, however, keep in mind that the risk is also greater. Given the current geopolitical climate, investing in emerging markets can become treacherous. Only invest what you can afford to lose.

Finally, silver, gold, and other commodities are often common when hedging inflation.

While no single portfolio is full-proof, diversification and investing in high-quality assets can reduce the potential for large losses.

Principles for sound investing

The next few years will be difficult for everyone. And no matter how well we prepare, how many scenarios we consider, there’s always the possibility that something completely unexpected will thwart your investment planning.

No matter what happens, it’s critical to be as objective as possible. Buying, selling, and holding investments based on a passing emotional reaction can devastate your portfolio.

These tips for sound investing help me, and my clients, to invest with peace of mind:

Want a second opinion?

Want some feedback
on your retirement plan? We can help.

With over 40+ years of experience in the financial sector, and as a licensed fiduciary, founder Jon Green can help you look over your retirement plan and understand whether you are on track.

You can book a complimentary session
or call me at +1 (828) 884-8840.

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