Despite their reputation as a safe haven, bonds are much more dangerous than many think. Historically, there are periods when investors were largely wiped out due to significant bond exposure. The current interest rate environment creates such a risk. A sharp spike in inflation could drive up rates and force bond prices to plummet. While they still serve as an excellent diversification tool, we suggest shorter duration bonds to mitigate some of this risk.
“Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said low interest rates and inflation should dissuade investors from buying bonds and other holdings tied to currencies. “They are among the most dangerous of assets,” Buffett said in an adaptation of his annual letter to shareholders that appeared today on Fortune magazine’s website. “Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal.”
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