What’s safer: Individual bonds or funds?

A common misconception is that bond funds are more exposed to interest-rate risk than laddered individual bond portfolios. The truth is that they have identical exposure.

The logic for the standard view basically starts and ends with the observation that an investor can hold individual bonds to maturity while bond funds don’t necessarily hold all bonds until they mature. Most bond fund managers trade their assets periodically.

Because you can hold individual bonds until they come due, as the conventional logic goes, it doesn’t matter if their prices go up or down in the interim. But if you compare laddered individual bond portfolios and bond funds with similar-maturity holdings, you run virtually the same risk if rates change. Yet the incorrect viewpoint is all too common and can lead investors to take excessive interest rate risk in individual bond portfolios without understanding the implications.

via What’s safer: Individual bonds or funds?.


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