There has recently been a lot of press about many bond funds that have tanked recently due to investments in securities backed by subprime mortgages.
For example the Wall Street Journal reported today that the Schwab Yield Plus bond fund is down 24% so far this year, and the Fidelity Ultra-Short Bond Fund is down 7.3%. Contrast that to the Vanguard Total Bond Market index fund which is up 2.1% this year.
Of course the Schwab fund was the darling of Wall Street and the fund manager was touted as one of the best by the firm according to the Journal article.
The collapse of many of the ultra-short funds that invested in securities backed by subprime mortgages proves the old adage that higher return=higher risk. Of course no one cares about the higher risk until everything collapses.
So when you are thinking about investing in something new and exciting that is performing really well, understand the risk you are taking and don’t chase last year’s returns.