When it comes to your bond money, you want to live to fight another day. To make sure you do, I recommend that you keep the duration short and the credit quality high. Duration measures a bond’s sensitivity to interest rates. It’s the predicted percentage change in a bond’s price given a 1% change in interest rates. So if a bond has a duration of 2, and interest rates change by 1%, the price of the bond will change by 2%. A well-known financial publication recently produced a list of defensive bond funds. Only one of the funds had a short enough duration for my comfort level. So pay attention to duration when you’re doing your investment work. It’s easy to be led astray and reach too high for yield, especially with all the hype that you read or hear.
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