As if capital preservation doesn't matter to older wealthy bond investors...sure, just tell your friend that you've asked some basic questions on an internet forum (some of which could have been answered by common sense) and his multi-million dollar investment in high yield junk bonds probably won't go to zero so he has almost nothing to worry about. Btw, even if you did not read the prospectus, why not pull up a chart and look at what happened to some of these bond ETFs back in 2008 / 2009. Along with the yield, that will give you some idea of the level of risk involved.
When interest rates rise, existing bond values fall. Some of the experts around here can provide some details. But in a rising interest rate environment, I'm not sure if a bond fund is going to be so great.
Yeah but to me that just seems like timing the market. Isn’t that like saying certain times are bad for being in equities. I think if I’m looking for the long term (5-10 years) it doesn’t really matter what rates are doing right?
If you buy a bond and hold it to maturity, assuming the issuer doesn't default, then rising rates won't matter to you. The bond will lose value when it is marked to market but if you're just going to hold it to maturity regardless you get repaid face value.
True. But keep in mind that if you buy a 10 year bond at 2% and interest rates go to 10% in year 2, you lose out on 800 basis points worth of interest for 8 years. That's exactly reflected in the amount the bond decreases in value in year 2. So the fact that you get repaid face value at the end of 10 years is somewhat of a red herring and rising interest rates do matter.
While it is true, coupon is reinvested at higher interest rates. So total return over that 10 year is higher. Duration of the bond is the breakeven period, provided coupon is reinvested. I picked random article from internet, but one can workout the details https://www.schwab.com/resource-cen...-bonds-or-bond-funds-when-interest-rates-rise Inflation is higher threat for the bonds than the rising rates.
A good point. Alternately when your current 10 year treasury rate is 2.8%, not a whole lotta coupon to invest.