Two Bond Fund Investors: Same Advice?

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Cheego
Posts: 146
Joined: Mon Jul 18, 2016 11:57 am

Two Bond Fund Investors: Same Advice?

Post by Cheego »

Imagine conservative investor #1 wants to make a lump sum investment due to an inheritance windfall. In keeping with his/her IPS, the investment strategy calls for 60% of it to go into fixed income. The investor needs to put this money into his/her plan but worries about losing value due to rising interest rates and because of this, is considering a stable value fund instead for the FI allocation.

Now imagine conservative investor #2 is already fully invested at his/her IPS ratio of 60% in fixed income. This investor also worries about losing value due to rising interest rates and because of this, is considering a selling the bond fund to move into a stable value fund instead for the FI allocation.

Would you give the same advice to both of these investors?
alex_686
Posts: 13320
Joined: Mon Feb 09, 2015 1:39 pm

Re: Two Bond Fund Investors: Same Advice?

Post by alex_686 »

In theory, No. You have 2 people with the same goals, market expectations, risk tolerances, etc. So yes, they should have identical asset allocations. The great thing about investments is that they have no memories. It does not matter how the person came into the assets.

In practice, Yes. The actual risk tolerances of the 2 individuals are going to be different. One just had money dropped into their lap. Their knowledge is going to be low. Their experience will be low. It almost does not really matter what they state their risk preferences are, they will tend to break in the first market crisis. The second individual who has built up their portfolio over time will have a better gauge of their risk tolerances.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Misenplace
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Re: Two Bond Fund Investors: Same Advice?

Post by Misenplace »

This thread has run its course and is locked (not personal nor actionable). General comment threads are off topic in the forums with "Personal" in the title. See: A reminder that non-investing general comment threads are OT
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