JBB wrote:They have also argued that when and if interest rates go up, the bond funds such as my Vanguard ones will take a bigger short- and medium-term hit to value than individual issuances because of the effect of large numbers of people selling their fund positions.
It's a good sign that they have used this argument, which is essentially about liquidity, rather than the invalid ones about NAV drops vs holding to maturity that often get floated around. It's a plausible reason to hold individual bonds, but I have yet to see it quantified to precise numbers that would help you (and me, as it turns out) decide if it's worth the increased management fees & hassle. And I still don't fully understand why the liquidity loss is not borne fully by the outgoing investors. I also have some hope that the Vanguard funds are less susceptible to investor flight because Vanguard investors are more likely (and encouraged) to stay the course. Personally, I have gone the fund route and I'm happy about it.
Maybe our expert contributor Larry Swedroe, who has recently posted about the liquidity issue, can chime in.