international001 wrote: ↑Mon Sep 14, 2020 9:01 am
For a long term investor, investing on LTT doesn't bring more risk?
If we're talking specifically about "interest rate risk", then the answer is "no, it doesn't bring more risk".
The definition of a risk is "an uncertain event that, if it occurs, has a negative impact on your objective". With interest rate risk, the "uncertain event" is a change in rates. Bond math dictates that there can be NO uncertainty about the ending value of the bond over a period of time equal to its duration. Imagine you buy $10,000 worth of bonds today that are yielding 2% and have a duration of 20 years: if you reinvest the bond payments back into the same bond over that 20 year period, you will own EXACTLY $14,859 worth of bonds at the end of that 20 year period. There are are some simplifying assumptions embedded in the duration calculation itself, but that value of $14,859 at year 20 is certain: no chance of being higher or lower regardless of whether bond yields rise, fall, or vacillate over the intervening period of time.
If you don't reinvest the coupon payments, then you'll have a steady stream of income that will not vacillate over that period of time AND also a known final value of the bond.
international001 wrote: ↑Mon Sep 14, 2020 9:01 amUnderstand risk as variation of results after your investment horizon
short term rates may change, but so do long term rates, and they may make your investment swing wildly.
Looking at a LTT fund, you typically end up with more returns and more risk over the long term
Long-term bonds do have more short-term
price volatility than short-term bonds, but short-term price volatility is NOT a financial risk for a long-term investor.
Imagine a solid cable that connects two trees, and pretend the investor is securely attached to the cable and uses it to slide down from the top of Tree A to the bottom of Tree B.
A long-term bond is like a cable that has some slack in it (meaning investor might oscillate or swing a little bit during the slide) but is solidly anchored to both trees: no matter how wild the ride, the investor is certain to arrive at the anchor point in Tree B at the end.
A short-term bond is more like a rigid cable (or rod) that is anchored only to Tree A and is not connected at all to Tree B. Now the ride is "smooth" (since the rigid cable can't oscillate) but the lack of an anchor to Tree B means the investor could end up anywhere in the forest when they get to the end of the cable.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch