Friends Don't Let Friends Buy Bond Funds: Why We Prefer Not to Have Tax Losses to Harvest
By John H. Robinson, Financial Planner
Financial Planning Hawaii
A recent Barron's article titled "Interest Rates Are Surging. Portfolio Moves to Make Now" provides an excellent illustration of why our approach to fixed-income portfolio management at Financial Planning Hawaii is intentionally different from conventional investment industry advice.
The article offers recommendations for navigating a potentially prolonged period of rising interest rates. Some of the advice makes sense. Other recommendations illustrate precisely why one of our favorite sayings is, "Friends Don't Let Friends Buy Bond Funds."
There is also a recommendation involving tax-loss harvesting that highlights another important difference in our investment philosophy.
First, Let's Discuss Where We Agree
Although Treasury yields are now considerably higher than they were during the extraordinarily low-rate environment of the preceding decade, today's interest rates are hardly unprecedented. In fact, viewed through a longer historical lens, they are within, or toward the lower end of, what might be considered a normal range.
We also agree that investors should generally favor shorter maturities in the current environment, particularly if they believe, as we do, that interest rates are still more likely to rise than fall.
However, that is where our agreement begins to diverge.
The conventional advice is to reduce exposure to intermediate- and long-term bond funds and shift toward shorter-duration bond mutual funds and ETFs. The rationale is that shorter-duration funds will generally experience smaller price declines if interest rates continue rising.
That is true, but it misses a much more important point.
Why should the objective be to lose less money when there is a practical alternative designed to avoid realizing those losses altogether?
Our Approach: Individual CDs and Treasuries, Not Bond Funds
At Financial Planning Hawaii, we do not use bond mutual funds or ETFs for the conservative portion of our clients' portfolios. Not EVER. Instead, we construct ladders of individual certificates of deposit and U.S. Treasury securities.
There is a very important distinction.
When you purchase an individual Treasury security or a CD and hold it to maturity, you know the contractual return you will receive, assuming the issuer meets its obligations. Market prices may fluctuate along the way, but those fluctuations do not change the amount you receive at maturity.
Bond mutual funds and ETFs offer no comparable individual-security maturity guarantee. Their portfolios continually evolve, and their share prices remain exposed to changes in interest rates.
Even short-duration bond funds can lose value.
That is why we generally limit our ladders to five to seven years or less. In many interest-rate environments, this allows us to capture a substantial portion of the yields available on longer maturities without assuming nearly as much interest-rate risk.
Better Still: Dynamic Bond Laddering
Our approach goes beyond simply purchasing individual bonds and holding them to maturity.
We employ what we call dynamic bond laddering.
Unlike conventional bond ladders, which typically maintain relatively fixed maturity structures, we adjust the maturities and weightings of our portfolios based on prevailing yields, the shape of the yield curve, and our assessment of the direction of interest rates.
When rates are unusually low and we believe they are likely to rise, we keep maturities short. As yields become more attractive, we gradually extend maturities to lock in those higher rates.
Throughout 2025 and into early 2026, our preference was to use money market funds as a temporary parking place rather than commit substantial capital to longer maturities at yields we believed might soon become more attractive.
We did not need to know precisely when interest rates would rise. We simply believed the probability of higher yields was sufficiently compelling to justify waiting.
As rates have risen, we have been extending our ladders into the three- to five-year range, while continuing to place greater weight on shorter maturities because we believe yields are still more likely than not to rise further.
The objective is not to predict interest rates perfectly. It is to take advantage of changing opportunities while minimizing the risk of permanent capital losses.
Importantly, individual bonds can still decline in market value, and selling before maturity can produce losses. Our strategy is designed around having sufficient liquidity to hold these securities to maturity. This is how we keep the safe/conservate portion of our clients' portfolios as close to risk-free as possible.
The Curious Celebration of Tax-Loss Harvesting
This brings me to another recommendation in the Barron's article that illustrates a major philosophical difference between our approach and conventional portfolio management.
The article suggests that one silver lining for investors holding bond funds with substantial unrealized losses is the opportunity to engage in tax-loss harvesting.
To be clear, opportunistic tax-loss harvesting can be useful. Selling an investment at a loss can generate a capital loss that offsets realized capital gains and, subject to IRS limitations, some ordinary income.
There are certainly circumstances in which we recommend it.
However, I have always found it curious that the investment industry sometimes promotes tax-loss harvesting as though it were an investment strategy in its own right. This always leaves me scratching my head.
Wouldn't it be better not to have the losses to harvest in the first place?
Consider an investor who purchased an intermediate-term bond fund when yields were unusually low. As interest rates subsequently rose, the fund declined in value.
The investor's advisor now recommends selling the fund, realizing the loss, and taking advantage of the resulting tax deduction.
That may be sensible advice today, given the investor's circumstances.
But it does not change the fact that the loss might have been avoided by purchasing shorter-maturity individual Treasuries or CDs instead.
Tax-loss harvesting can reduce the after-tax cost of an investment mistake. It does not magically turn that mistake into an investment success.
Furthermore, the tax benefit is not necessarily permanent. If the proceeds are reinvested in a similar asset at a lower cost basis, some of the immediate tax savings may simply represent the deferral of taxes that could become payable when the replacement investment is sold.
The Bigger Lesson: Prevention Is Better Than Damage Control
I recognize that not every investment loss is avoidable. Stock market volatility is unavoidable, and investors who want long-term equity returns must accept that risk.
But the conservative portion of a portfolio serves a different purpose.
Our clients own stocks and stock index funds for long-term growth. We use individual CDs and Treasuries for capital preservation, predictable income, and liquidity.
That distinction matters enormously.
In our view, the purpose of the conservative portion of a portfolio is not to outperform the bond market or to generate opportunities for tax-loss harvesting. It is to provide stability when other investments are volatile.
If we can accomplish that while capturing attractive yields and positioning portfolios to benefit from rising interest rates, so much the better.
This is why we have been warning consumers about the risks of bond mutual funds and ETFs for years.
It is also why we believe dynamic bond laddering is a superior approach to managing the conservative portion of a portfolio.
The financial press is filled with advice about how to respond after bond funds lose value.
We would rather help our clients avoid being in that position in the first place.
Friends don't let friends buy bond funds. And good financial planning should aim to avoid having tax losses to harvest.