Below is an excerpt from a Morningstar article by Christine Benz published on 2/28/2011
The Error-Proof Portfolio: Nervous Bond Investors–Don’t Make These Mistakes
“The second potential risk for individual-bond investors right now is one of lost opportunity more than anything else: If available bond yields pop up from today’s ultralow rates, buy-and-hold individual-bond investors won’t be able to take advantage of them until their securities mature. And when they do, they’ll be forced to reinvest their bonds at whatever interest rates may be on offer, even though interest rates could go even higher in the future.”
This attitude is so frustrating. I’ve seen it from Morningstar and individual investment advisors alike. In a discussion of bond allocation in a portfolio to infer that individuals should remain in cash or only buy a capital losing bond mutual fund because otherwise we’ll miss other investment opportunities is downright insulting. What the heck are the alternatives? Bond funds? The implication is that individuals should only invest in bond mutual funds so that we don’t miss investment opportunities! Phooey.
If I invest in a bond mutual fund I will lose a lot more than opportunity compared to buying individual bonds. I will lose capital and with it the opportunity to invest in anything. So what if I have to re-invest my matured bonds at “… whatever interest rates may be on offer, …”. Doesn’t that give me the chance to re-invest at much higher yields? And this is as compared to a bond mutual fund throwing my capital away in order to maintain a fixed duration in their fund. And rarely does the resulting yield rise recoup my capital loss. This comment poisons the rest of the article.