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Sykesix WritesThat might not be true though, you can actually lose some of the principle in a bond fund, because the share price can drop if interest rates rise.

Maybe not you in particular, but someone I'm sure needs to sell some of their bonds/bond funds occasionally to rebalance or take withdrawls. Just something to take into consideration.


For someone who is doing a permanent fixed income portfolio, it's the same thing. The bond fund reinvests called and matured bonds for you while the individual investor has to do it for himself. As long as the individual investor actually does this, the comparison is the same.

EXAMPLE:

A. I invest $100,000 in the Vanguard Total Bond Market fund today. The duration might be 7 years. Interest rates rise over 5 years and at the end of 5 years my fund might be worth $90,000. I received coupon payments equal to example B so I am ignoring them for this example.


B. You invest $100,000 in a portfolio of bonds with a duration of 7 years. As some of those bonds mature, you reinvest so that the duration stays the same...7 years. Your coupon interest payments received is the same as example A so I am ignoring them for this example. At the end of 7 years, your individual bonds are only worth $90,000.

I think you are confusing the concept of a fixed maturity date (5 years) with the concept of a permanent fixed income portfolio.

Daryll40









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