Yesterday I asked readers Do You Know this about Vanguard Wellington and Wellesley Funds? I explained that we have not soured on the funds, but that their effective maturities are longer than we’d like. I also wrote that at Young Research we recommend laddering bonds.
One of the reasons we favor laddering bonds is to help strip-out interest rate risk. When you own a bond outright you have control over your holding period.
Duration measures a bond’s sensitivity to interest rates. For example, a bond with a 15-year duration will decline by 15 percent with every one percent increase in interest rates. Would you pay the same price for a bond you bought last year that yields one percent more today? No, you’d pay less—about 15 percent less in this case.
Compared to a three-year duration—it will decline by about three percent if rates increase by one percent—you’d lose a lot less. And if you happen to own the bond in a ladder you could hold it, collect your interest along the way, and receive your principle at maturity.
E.J. Smith - Your Survival Guy
Latest posts by E.J. Smith - Your Survival Guy (see all)
- Your Best State on Guns, Plus the 8th Wonder of the World - December 3, 2021
- VACCINATE THE WORLD? Biden’s COVID Plan - December 3, 2021
- Correction: New Hampshire’s 4,000 Footers - December 3, 2021
- Dreaming of Bitcoin in Your Stocking this Christmas Season? - December 2, 2021
- ENOUGH IS ENOUGH: Record Number of Police Shot This Year - December 2, 2021