It seems obvious, but one way your financial plan or investment strategy will fail is if you buy high and sell low. Simple enough, right? With interest rates at an historical low, it makes you wonder why billions of dollars are flowing out of equity portfolios and into bond portfolios.
To most investors, bonds provide a sense of safety and stability. The problem is that they are subject to market and interest-rate risk. This means that the market prices of bonds do change, a fact that almost anyone who has owned them over the past 12 to 18 months can happily tell you.
The actual math behind bond pricing can quickly become complicated, but remember that there are two primary forces at work every day in the bond market: the demand (or lack of) for bonds and the direction of interest rates. These forces, separately or together, will cause bond prices to move. When interest rates go lower, the prices of bonds go up. When investor demand for bonds increases, so does the price a seller demands to sell them.
The problem is that the converse is true as well. (more)
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