Occupier wrote:Right now interest rates are at historic lows. The most likely direction is up at some unknown point in the future. When that happens the value of the bonds, or bond fund will decline by their duration. Typical durations for funds, Short term 2 - 3 years, Intermediate term 5-7 years, long term 15-20 years. Most of my lifetime interest rates have been around 5-6% instead of the present 2-3%. If they return to 5% Short term bond funds will decline by 4-9% Intermediate term bond funds will decline by 10 to 21% and long term bond funds will decline by 30% to 60%. So just how intelligent is it to hold long term bonds now earning around 3%? If your name is Dale G, you might think the answer is very intelligent now, but you also might think different in the future. Dave
I an 75 and my wife is 77. We have long held Intermediate term muni's in her account, but lately I have added to the Long Term Muni account - not really long, but longer than the Intermediate. In any case, the duration is less than our expected joint lifetimes and far less than the expected lifetimes of our heirs. We've been through this before.
If I am wrong, Uncle Sam will share our misery via tax losses. If I am right I will enjoy positive returns compared to a shorter duration investment.
And maybe I am wrong - at the very least I will be able to say, "Don't confuse strategy with outcomes", apparently an accepted phrase for having selected the wrong strategy.
I am reminded that four and five years ago Bogleheads were abandoning the Short Term Investment Grade fund because Prime MM was yielding more. Those who have stuck with it haven't done that well.
I don't know what interest rates will do in the future, and I am very concerned about inflation eroding the value of my investments, but nearly 50 years of investing have taught me not to blow with the wind of forecasts of any kind.