dealtn wrote:JohnW wrote:
Most people I imagine. Even those that don'y literally "mark to market" their portfolio valuations like institutions (and professionals) are still likely to be a mixture of disappointed and horrified to have lost money, and being (ir)rational human beings considering cutting losses. Add in the likely reality that higher than anticipated yields (and lower than expected bond prices) is running parallel with inflation and elevated goods and service prices, which are unlikely to reverse, that huge drop in capital, even if/when it recovers in nominal terms, won't be worth close to what it was expected to be in real terms.
Its probable you will be disappointed on two fronts. You have to bear the reality of a drop in capital value, and the uncertain timeframe on when that might/will recover, plus the likelihood that when it does inflation has eaten away at your plans such that your planned spending match of duration is now only partially met.
"Losing money" with bonds is a funny concept -- not to minimise the recent crash and the pain of anyone who might foolishly have been speculating on gilt prices (more fool them).
IMV JohnW is right about the duration matching. Anyone who duration matched properly is not likely to have "lost" much. Think about people investing 2ish years ago (pre-crash):
Let's start with people who wanted their money in two years (today) for example. It they bought a two-year gilt they did so at a yield of (say) zero percent and at the end of the two years their return was zero. Did they lose anything? They were stupid to buy gilts with such a poor yield in the first place, but they knew what the return would be and they got that return. Okay, they missed out on the chance to invest their capital at 4% for a few months but that is no great loss -- their money was tied up anyway by that initial decision to invest - it is not the price falls that tied them in.
Now what about someone with a longer horizon, say ten years. If they bought a ten-year (duration) gilt, similar argument to the above. The return is around 0% but that is what they signed up for.
What if the investment horizon was ten years but they bought a 30-year gilt? Well, presumably then a third of their portfolio was invested in the gilt but the remainder in cash resulting in a portfolio duration of ten years (or an equivalent arrangement). Now of course if yield remain unchanged the thirty-year bond shows a significant loss at the end of the ten years. BUT the 66% cash allocation which was expected to earn 0% over the ten years now earns 4%+ (or can immediately be invested in 8-year gilts earning 4%). These 4% compounding interest payments over the remaining eight years will largely recoup the loss on the 33% thirty-year gilt component. Again the return over the ten years is close to zero but that is what was expected at the outset.
So to me duration matching is sound and maximises the probability of meeting the investment objective. Note that if the duration did
not match then the outcome would be more divergent e.g. the two-year investor putting 100% into 30-year gilts (?!) would have a huge loss.
This is Bond 101 so apologies if it's obvious to anyone, but I'm struggling to see how dealtn is taking this on board.
GS