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Author: Case58 4 Year Anniversary! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76082  
Subject: Re: SWR/High Bond Fund Allocation? Date: 3/8/2011 6:57 PM
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Res' last e-mail raises a point that I've never understood about bond funds, and I need to because in a year or two I'm going to be living on a more or less standardly allocated portfolio (probably 60/40 in my case). I understand the point that as interest rates rise, existing bond prices fall. I understand that if you have a collection of bonds (like a mutual fund or ETF) at any given time the snapshot picture can be less (and maybe dramatically less) than you paid as interest rates rise. But does that matter if you are holding the bond fund for the long term (for the interest payments and lesser volatility)? The bond fund keeps buying new bonds as the old ones expires so it works through the interest rate rise, and if you never sold the fund it doesn't matter what the snapshot valuation is at any given time. You are always getting whatever the current interest is, your goal.

To put it another way, you buy a five year bond today and hold it to maturity, and buy another tomorrow, and so on, the value of your bonds at any given time will fluctuate but you don't care because your holding them to maturity. And it's no different from a mutual that you hold for the long-term.

Is this correct, or am I totally goofed up?

This question is important to me, because I've got roughly 25% of my assets right not in an intermediate bond ETF, BND. My working assumption is that I'm going to be holding that same ETF 20 years from now. Should I care that it's valuation will be going down?
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