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A while back, I was reading an article aboutbond funds. The subhead read, The trick next year will be to avoid losing money.

The first sentence should have been Dont buy bond funds.

The writer could have saved himself 700 words, taken the afternoon off and caught a matinee. Instead, he wasted readers time showing them how little theyd lose if they bought the top bond funds featured in the article.

Why are bond funds near-certain losers whenbondsare so important tobalancing a portfolio? It has to do with the mechanics of a bond.

Wheninterest rates rise, bond prices fall. Say you buy a bond yielding 5%. The next year, the Fed raises rates a full percentage point. That 5% yield is not quite as valuable in ahigher interest rate environment not when you can get an identical bond for 6%. So the price of the bond falls (increasing the yield).

But none of that matters if you plan onholding the bond until maturity.

If you bought the bond at par ($100) and the price dips to $90, youll get only $90 if you sell it instead of $100. But if you hold it until maturity, youll get your full $100. Note that bonds are sold in increments of $1,000 but are quoted at one-tenth the price. So a $1,000 bond that is at par will have a $100 price. A bond that is priced at $90 will be worth $900.

So theres nothing wrong withowning individual bondsin your portfolio if you plan on holding them to maturity. In fact,I recommend it.

When you buy a fund, the price of the fund is based on the value of theassets.

So lets say the bond fund has 1 million shares outstanding, and thefund managerbuys $20 million worth of bonds at $100 each. The fund price would be $20 ($20 million divided by 1 million shares).

Then interest rates go up, and the bonds decline in value to $90 each. The price of the fund drops to $18. As with individual bonds, if you sell now, youll take a loss. But unlike owning individual bonds, the fundnever matures.

Those original $20 million worth of bonds will eventually mature, sure. But the fund manager is unlikely to keep them in the portfolio. They have no reason to.

Fund managers are usuallyincentivized to beat specific benchmarkslike a bond index. For that reason, they notoriously overtrade their portfolios.

For example, the largest actively managed bond fund, thePIMCO Income Fund(PIMIX), has a yearlyturnoverrate of 472%, meaning that it sells every bond in its portfolio at least four times per year.

Its cousin, thePIMCO Total Return Institutional Fund(PTTRX), beats that at a whopping 723%, meaning it replaces its entire portfolio more than seven times each year. Another large bond fund, theMetropolitan West Total Return Bond Fund(MWTIX), buys and sells its entire portfolio almost three times a year at a 255% turnover rate.

All that tradingnot only runs up costs but also ensures investors will realize losses as rates go higher.

Bond funds are a nearly guaranteed way to lose money. Even when rates do head lower, as we might see in the coming months, at near record lows it is likely to be temporary, and you can be satisfied with the higher yields you earn on your individual bonds and see lower prices as a buying opportunity.

Its not always easy to make money in the market, but it can be easy not to lose it. Dont buy bond funds.

Marc Lichtenfeld has studied the markets for more than 22 years. After getting his start on the trading desk at Carlin Equities, he moved over to Avalon Research Group as a senior analyst. Marc was also a senior columnist at Jim Cramers TheStreet.

Currently, Marc is the Chief Income Strategist atWealthy RetirementandThe Oxford Club. He is an author, speaker and financial guru to 500,000 readers who receive his publications each week.

His readers include teachers… engineers… sound technicians… real estate investors… financial advisors… business developers… law enforcement officers… people from all walks of life.

Marcs mission is to help every one of them generate a safe and steady stream of retirementincome that never runs out.

Marcs top-notch research makes him a sought-after media guest. He has appeared on CNBC, Fox Business and Yahoo Finance. A few of his appearances are below

If you want to feature Marc, please reach out on ourcontact page.

Marc Lichtenfeld Talks About Gary Cohns Resignation

Description: Marc appears on Fox Business Mornings With Maria segment to discuss Gary Cohns resignation.

Marc Lichtenfeld Discusses Americas Retirement Crisis

Description: Marc makes a guest appearance on Bloomberg Radio to discuss Americas retirement crisis.

Click Here to See a Full List of Marcs Appearances

Marc Lichtenfelds first book,Get Rich With Dividends: A Proven System for Double-Digit Returns, achieved best-seller status after its release in 2012. Since, the book has gone through 30 printing runs. And in 2016, the Institute for Financial Literacy named it Book of the Year.

In early 2018, Marc released his second book,You Dont Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle without Getting a Job or Cutting Corners, which hit No. 1 on Amazons best-seller list.

To learn more about Marcs books, check out ourBest Finance Books.

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Now in my late 60s, The Oxford Club is like my ol recliner – familiar and comfortable – and am not going to change. Thanks to you, et al., for providing a reputable service!

Now in my late 60s, The Oxford Club is like my ol recliner – familiar and comfortable – and am not going to change. Thanks to you, et al., for providing a reputable service!

Your articles are very helpful – keep up the good work. Thank you.

Your articles are very helpful – keep up the good work. Thank you.

Marc, I would like to thank The Oxford Club… I almost doubled my money.

Marc, I would like to thank The Oxford Club… I almost doubled my money.

Excellent article by Marc Lichtenfeld. A great teacher who explains things so clearly and with such precision youre never left wondering but understand instantly.

Excellent article by Marc Lichtenfeld. A great teacher who explains things so clearly and with such precision youre never left wondering but understand instantly.

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