Davy gives bond warning for people nearing retirement
Those approaching retirement could find it hard to get by on their pension if they have invested a lot of their money in bonds, Davy has warned.
Bonds can fall in value should interest rates rise – and this could eat into pensions that are heavily invested in them, says the stockbroker.
"The investors most at risk are either those already in retirement, or those nearing it," says Oliver Sinnott, global investment strategist with Davy. "Many investors are simply unaware that the value of a bond can change significantly over its lifetime. If you buy a bond today paying a high coupon and interest rates fall tomorrow, the price of that bond will rise as investors are willing to pay more for the higher coupon.
"But the reverse is also true. If you buy a bond today with a low coupon and interest rates rise tomorrow, that bond will no longer be as attractive, and its price will fall. With the low interest rate environment, pensioners who buy bonds will find it difficult to fund their retirement."
One solution is to invest in short-duration bonds. "The shorter the maturity, the less impacted the bond should be from rising rates," he says.
To add to the problem, about 80 per cent of those in Irish pension schemes choose lifestyle funds – where the money in your pension is moved into less volatile investments before you retire.
"The majority [of lifestyle funds] are likely to be holding large amounts of bonds at a time when yields (the investment return on a bond) are at historically low levels," says Mr Sinnott.
Sunday Indo Business