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> You can simulate the behavior of a single bond by rolling your investments into shorter and shorter duration bond funds over time. As I noted, there are ways

> You can simulate the behavior of a single bond by rolling your investments into shorter and shorter duration bond funds over time. As I noted, there are ways to address interest rate risk with bond funds, but you're ignoring the most important question in the context of this discussion: how many retail investors who put money into bond funds actually know about laddering strategies? > But if a bond's price has declined because of increased interest rates, this means you will be able to re-invest the coupon at a larger yield... This is true, but you have to wait until maturity unless you're willing to sell your bond at a loss. Despite the low interest rate environment, there are still a good number of retail investors buying exposure to long-dated bonds because they don't take the time to understand their investments. Many of these investors will either have to realize potentially painful losses or wait a long time before they have the opportunity to buy new bonds with higher yields.

gfodor 12y ago
I don't think you read the article I linked. Reducing the effective duration on the bond fund portion of your portfolio boils down to the same thing you'd do in any healthy portfolio: yearly rebalancing. Also, the point is not to hedge 'interest rate risk' by just buying shorter duration funds, full stop. Interest rates do not pose a risk unless you had a set date to liquidate your investment. If you are not planning on liquidating your bonds then interest rates pose no risk, they just affect the growth of the income stream. The point is, if you are concerned about getting your principal returned, decide upon how many years down the road you need it back. That is your initial duration. To maximize your return under that constraint, buy a fund at that duration. Then yearly rebalance with other shorter duration funds (while reinvesting coupons properly) to taper the net duration down over the course of the investment period. There you go, you've just simulated a single bond but now are no longer exposed to default risk. Again: perpetuating the idea that 'getting your principal back' is a feature only found if you buy individual bonds directly is untrue and can result in terrible investment decisions. It presents a false dilemma between a 'secure principal' and diversification. Forgoing diversification in bonds is one of the most dangerous things you can do. More than any other asset class, bonds benefit immeasurably from diversification (and probably also active management) since default risk is the major risk the investor faces.
- 7Figures2Commas 12y ago
  I don't think you understand the context of this discussion. As I explicitly stated, "there are other ways to address interest rate risk with bond funds." But this isn't a technical discussion about bond buying strategies. This is a discussion about high-level financial "advice" that was woefully inadequate for the intended audience (retail investors). To highlight this, I used the author's lack of distinction between bonds and bond funds and the most simple difference between how they function as employed by your average retail investor. You're obviously free to go off on a wild tangent detailing in more depth the way that bond funds can be used, but ironically you're only proving my original point: this is not nearly as simple as the OP's advice ("buy a bond fund!") and requires an investment of time and effort that exceeds what the vast majority of people are willing to put in.

gfodor 12y ago

I don't think you read the article I linked. Reducing the effective duration on the bond fund portion of your portfolio boils down to the same thing you'd do in any healthy portfolio: yearly rebalancing. Also, the point is not to hedge 'interest rate risk' by just buying shorter duration funds, full stop. Interest rates do not pose a risk unless you had a set date to liquidate your investment. If you are not planning on liquidating your bonds then interest rates pose no risk, they just affect the growth of the income stream. The point is, if you are concerned about getting your principal returned, decide upon how many years down the road you need it back. That is your initial duration. To maximize your return under that constraint, buy a fund at that duration. Then yearly rebalance with other shorter duration funds (while reinvesting coupons properly) to taper the net duration down over the course of the investment period. There you go, you've just simulated a single bond but now are no longer exposed to default risk. Again: perpetuating the idea that 'getting your principal back' is a feature only found if you buy individual bonds directly is untrue and can result in terrible investment decisions. It presents a false dilemma between a 'secure principal' and diversification. Forgoing diversification in bonds is one of the most dangerous things you can do. More than any other asset class, bonds benefit immeasurably from diversification (and probably also active management) since default risk is the major risk the investor faces.

7Figures2Commas 12y ago
I don't think you understand the context of this discussion. As I explicitly stated, "there are other ways to address interest rate risk with bond funds." But this isn't a technical discussion about bond buying strategies. This is a discussion about high-level financial "advice" that was woefully inadequate for the intended audience (retail investors). To highlight this, I used the author's lack of distinction between bonds and bond funds and the most simple difference between how they function as employed by your average retail investor. You're obviously free to go off on a wild tangent detailing in more depth the way that bond funds can be used, but ironically you're only proving my original point: this is not nearly as simple as the OP's advice ("buy a bond fund!") and requires an investment of time and effort that exceeds what the vast majority of people are willing to put in.