magellan wrote:Many students (and perhaps Ms. Orman as well) don't seem to understand that whether you sell the bond immediately or hold it to maturity, your overall financial well-being is no different. If rates go up, the value of the bond, as defined as the present value of all future payments, goes down.
I understand that perfectly.
The part I don't understand is why I should care about the market value of the bond if I have no intention of selling it prior to maturity. A lot of these explanations I've been seem to me assume that an individual investor has no control at all over his investment policy.
I understand fully that "stuff happens" in real life, but it's also true that sometimes things do go according to plan. Let's say the purpose for which I bought a bond was e.g. to generate retirement income through interest, and to hold it to maturity. If there's a 100% chance that I do what I planned, then why do I care what someone's opinion of the bond's value is in between? If there's an 80% chance that I do what I planned, then why should I give more than 20% weight to the "market value" number on my brokerage statement?
Now, on the other side... my belief is... and if I'm right, I think it's something that people don't understand... that the a bond fund can fluctuatate, but not in the same way
as a stock fund. The hypothetical growth of $10,000 curve can wiggle a bit, but it can only go so far. It's constantly being pulled back to a smooth ascending curve by a) the value of bonds approaching their face value as they mature, and b) the constant effect of reinvested interest being poured in, at a slowly changing average rate.
I don't think there's a big
difference between individual bonds and a bond fund. If the bond fund has short maturities, it won't fluctuate much. On the other hand, if an individual bond has a long maturity, the chances that "stuff happens" and you'll be forced to liquidate it before maturity rise, so the importance of its fluctuating market value increases. Either way, with short maturities the fluctuations don't matter much and with long maturities there's risk.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.