Think of it like a phone—when you bought the iPhone 5 last year, it cost $300. As soon as the iPhone 5S came out—at a price of $300 and with other bells and whistles—your iPhone 5 was worth just a little bit less. Doesn’t mean you have to love it less, it just means someone else isn’t willing to pay $300 for it anymore.
The same dynamic is true with bonds. And, importantly for your portfolio, falling bond prices can have a big impact on your investments. If you own 10 bonds that are falling in price, your bond portfolio is worth less, which could lead to less money in your pocket.
One popular way to help guard against falling prices is to get access to bonds that are shorter-dated.
Next up on The Blog—how (and why) these shorter term bonds can help.
Jessie Szymanski writes about personal finance for The Blog. You can find more of her posts here.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.