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Subject:  Bonds vs Bond Funds--Again Date:  12/29/2009  5:20 PM
Author:  temsike Number:  29600 of 36328

There have been a dozen or more threads in which advocates of individual bonds spread fear that, were rates to drop at exactly the wrong time, you would not get your money back out of the bond fund when you needed it, and therefore buying individual bonds must be safer. In response, others (at least some of whom I would consider experts in the bond market) have responded that as long as your duration is greater than your need for the funds, you will not lose money, and that comparing a non-rolling bond ladder to a fund--equivalent to a rolling bond ladder--is not a valid comparison.

More recently, the final twist on this endless circle has been a claim by anti-bond-fund posters that since at some point you will need the money, even if you are investing for the long-term, at some point you will need the money and your principal will not be safe.

In response to this, I will excerpt and summarize one of the major academic books elucidating how bonds respond to price changes, Fabozzi's Fixed Income Mathematics (1993), pp175-190 or so, the chapter called "Price Volatility Measures: Duration," sub-chapter "Role of Duration in Immunization Strategies." Note that Fabozzi uses the term "immunize" to mean ensuring that the amount that you get out of a "bond portfolio" (the term here can mean either a ladder of individual bonds, a bond fund, or a grouping of bond funds, as long as the duration is the same across types).

Full thread:

Comment: Now that we got rid of Junkie, let's continue to explore this always interesting (religious) topic.

I'm a cheap, lazy, index investor. For me, indexed bond funds are better than individual bonds. I feel exactly the same way about picking stocks. Indexed stock funds are better than individual stocks.

My favorite quote: "Before the deduction of the costs of investing, beating the stock market is a zero-sum game. After the costs of investing, beating the stock market is a LOSER'S game.

Even more so for bonds! That's why Junkie is a loser who doesn't realize it YET.

The costs of investing are: expense ratios, commissions, bid-ask spreads, market impact costs, and taxes.

If you DON"T know these for your portfolio, you're flying blind. I know every single cost of my port. Do you?
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