Happy Friday!
Nothing like a beautiful Friday afternoon to bring home our bond discussion.
To recap, this week we learned:
1. Bonds are for producing predictable cash flow2. Bond ETF’s are for strapping a seatbelt on your
portfolio 3. Bonds pay you interest until you get the principal back when they mature.4. When interest
rates rise, the market value of bonds drops
Number 4 is the most important one to understand about bond ETF’s.
When you buy a bond ETF, you invest in a whole bunch of different bonds. The price you pay is the
collective market value of all of those bonds.
But guess what? When you sell that bond ETF (like for passive income), you’re also SELLING at the
collective market value of those bonds.
So if interest rates have gone up, the price of the ETF has gone down.
There is no guaranteed interest rate or maturity value like there is with actual bonds. You’ll get whatever
the bond ETF price is that day.
So if you’re relying on bonds to generate the passive income you need to cover your living expenses, you
don’t know how much you’ll need to sell.
The key to creating sustainable passive income is predictability. That why we use actual bonds with set
maturity dates and interest rates and that’s why we use broad-based index funds for our equities
While they aren’t guaranteed, it’s as close as you can get.
Bond ETF’s may have a place in your portfolio, but it’s not for the Living Expense Bucket you need in
retirement.
Have a great weekend!
