zombie_lawyer wrote:Is there a good reason why someone who has a long investment horizon (i.e. is in their 20s) should not initially invest the bond portion of their portfolio in long-term bond funds? Vanguard's Target Retirement funds for young investors are invested in intermediate term bonds. I'm sure there's a good reason for this, but can anyone explain the rationale?
Longer bonds are more volatile. They also yield more, but many believe that the increased volatility is not adequately compensated. Why not? I can speculate that going far enough on the yield curve, the certainty of receiving relatively higher yields for the next 30 years, no matter what happens, begins to acquire positive
connotations, so investors demand less yield than pure interest rate risk would suggest. Kind of like some folks are uncomfortable with signing up for mortgage payments every month for the next 30 years through thick and thin, but in reverse.
Anyway, the effect of bond volatility on a far-away Target Retirement fund is low right now, but it will begin to increase as the fund approaches its target and it holds more bonds. I don't think the TR folks want to design its path in such a way that a switch from long to intermediate down the road is necessary
Larry Swedroe has a good paper on the effects of long bonds as diversifiers for various equity allocations. It's pay to read, but summarized here: https://www.pwlcapital.com/en/Advisor/T ... term-bonds