I’m saying no, and for a reason you might not expect: it is actually possible that your bond funds will benefit from rising interest rates, if you reinvest the dividends, only make modest withdrawals. and plan to hold the funds for 20 years. or more. This is because your fund buys the higher rate securities that are currently available in the market, which increases your return. Over the years, your gains may more than make up for the capital you have lost.
For an example of how this works, I turned to actuary and financial planner Joe Tomlinson of Greenville, Maine. He looked at funds invested in Inflation-Protected Treasury Securities (TIPS), the decline in value of which has particularly alarmed conservative investors. The internal value of TIPS is increased twice a year by the rate of inflation, so many investors felt secure.
Suppose you invested $ 290,000 last April 1 in Vanguard’s TIPS fund to help pay for your retirement over 25 years. You planned to withdraw $ 10,000 in the first year, with an increase to cover inflation each year thereafter. By the end of June, rising rates had pushed your fund’s return up 0.83 percentage points. Its market value dropped 7.4% and you suffered a loss of $ 21,500.
Ruined plans? Not at all, said Tomlinson. With the higher yield, you could increase your withdrawal to $ 10,350 and the money should still last for 25 years.
Two factors have made TIPS more volatile than other funds. First, they contain more titles in the longer term. Second, consumer price increases have reached historically low levels. When interest rates rise and inflation does not rise, TIPS tend to underperform.