Although the public considers bonds to be safe―and for the most part this reputation has been justified―in 2008 and early 2009, some areas of the bond markets experienced unprecedented losses. Your goal is to avoid the potential minefield that is today’s bond market.
Drawdown is a visually intuitive way to measure risk. A drawdown is the percentage loss from a high point to a subsequent low point in the value of an investment. This is most easily understood with a visual example.
Figure 1 shows some recent history (December 2008–May 2009) of the iShares Barclays 20+ Year Treasury Index Fund (TLT), which represents all Treasury bonds maturing in 20 years or longer. (This fund ...