Help to understand bonds maturity vs investment timeline

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Help to understand bonds maturity vs investment timeline

Post by jct3132 » Sat Nov 10, 2018 4:30 pm

I have read that I should choose a bond fund (short, mid, Long) based on how long I want to invest for. Why does that matter? I have a taxable account with VTSMX and VCAIX. I was looking at VWAHX or maybe a long term fund that pays a bit higher. If I want to maybe pull some funds in say 5 years, why would holding something like a long term be bad?

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Re: Help to understand bonds maturity vs investment timeline

Post by venkman » Sat Nov 10, 2018 9:37 pm

If you have plans to take the money at a certain time, you want your interest rate risk to decline as your time horizon decreases. The issue with most bond funds is that they maintain a more or less constant duration. A fund with a 5-year duration will still have a 5-year duration in 4.9 years, when you're very close to withdrawing your money. A sharp decline in interest rates at that point would result in a significant hit to your principal.

If you have a definite 5-year time horizon for needing the money, an appropriate investment would be a 5-year bond or CD. If you think you might need some of the money in 5 years, you'll probably be okay with an intermediate-term bond fund; but when you have a firmer idea of when you'll need the money, you should start moving that amount to a lower-risk investment.

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Re: Help to understand bonds maturity vs investment timeline

Post by patrick013 » Sat Nov 10, 2018 11:36 pm

To me it is more important to be in the right maturity for
bonds. The trouble right now is bonds don't pay that much
and some investors don't want large equity AA due to other
risk. When interest rates are high, constant, or falling
then some capital gains are expected as well as normal interest
income. Intermediate and longer term bonds are better then.

Low interest rates have nowhere to go but up or eventually the
economy will be hurt by that. It's not a lost or blind situation.
Laddering helps, shorter maturities help, getting a timeframe
for changing the bond AA will help. When bonds have peaked
return to heavier AA in intermediate and longer terms. I
can't see myself sitting around not knowing what or not doing
something like that. There's some guess work involved but
real information also. If you make a bad decision going long
term it could hurt returns for decades. If you make a bad
decision going short term it only lessens returns for a few years.

Most of the gains and less of the losses only requires one or
two changes to one's bond AA. Getting a government or investment
company forecast or analysis isn't going to hurt.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Help to understand bonds maturity vs investment timeline

Post by averagedude » Sun Nov 11, 2018 12:06 am

Just me, but i would feel more comfortable investing in long term bonds when interest rates are above their historic averages than below their averages. Where interest rates are and where they likely will be in future should be more important than what your time horizon is. Of course determining where interests rates will be in the future is really hard to do, but interest rate risk is something investors haven't been punished for the last 35 years, but could be in the future.

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