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WSJ: 'Target' Funds Vulnerable to Rate Rise
Old 04-24-2013, 07:58 AM   #1
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WSJ: 'Target' Funds Vulnerable to Rate Rise

'Target' Funds Vulnerable to Rate Rise - Yahoo! Finance

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Take the $19 billion Vanguard Target Retirement 2015 fund. It held 42% of its assets in bonds as of the most-recent date for which Vanguard reported its holdings, according to data from Morningstar, which counts bonds maturing in a year or more. If interest rates jump by one percentage point, the fund's bonds would drop 5.4% in value, based on the fund's duration of 5.4 years as of the end of 2012. For an investor with $500,000 in the fund, that would translate to a loss of more than $11,000 in the bond portion.
Now I'm worried we have too much in target funds....
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Old 04-24-2013, 09:17 AM   #2
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The best approach over a long period of time seems to be to stick to your asset allocation and ignore the noise. Of course bonds will drop if interest rates rise. Is that news? If interest rates are rising in all probability the FED has stopped its QE which would mean the economy is expanding and unemployment rate is improving. Low coupon bonds in the fund will be replaced with higher coupon ones and over time losses will be more than covered. If however, one sells at the bottom and stays in the sidelines, one's goose is cooked. See plenty of folks who sold out everything AT VERY BOTTOM at the beginning of 2009 and then just sat waiting for divine trumpets to proclaim all is safe...
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Old 04-24-2013, 09:24 AM   #3
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Originally Posted by ejman View Post
The best approach over a long period of time seems to be to stick to your asset allocation and ignore the noise. Of course bonds will drop if interest rates rise. Is that news? If interest rates are rising in all probability the FED has stopped its QE which would mean the economy is expanding and unemployment rate is improving. Low coupon bonds in the fund will be replaced with higher coupon ones and over time losses will be more than covered. If however, one sells at the bottom and stays in the sidelines, one's goose is cooked. See plenty of folks who sold out everything AT VERY BOTTOM at the beginning of 2009 and then just sat waiting for divine trumpets to proclaim all is safe...
+1.

Anyone watching the ads on CNBC? There is a certain insurance company sounding trumpets right now specifically to the very bottom sellers, saying "Come on back, we'll help."
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Old 04-24-2013, 12:39 PM   #4
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"Experts" have been predicting a rise in rates since 2010. If these so called experts are wrong, what makes you think this writer will be right? Rates will rise, one of these days. Until then, sit back, relax, and continue your contribution to your allocation and stop listening or reading gossip.

But if you want more useless info, here is my prediction. The stock market will go down 10% in the future. Not saying when but it will, eventually.
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Old 04-24-2013, 06:19 PM   #5
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Noise!

If you want 40% in bonds, you run that risk whether or not you're in Target date funds. 5.4 years is a decent intermediate duration. The duration of the Vg Intermediate Bond Index (VBILX) is 6.5 years today.
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