AboutJohn D Smith, CFP Expertise I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related financial planning/investment issues. I have a B.S. degree in Financial Planning & Counseling. I am also a Certified Financial Planner practitioner and have performed fee only investment management and financial planning services for the past 11 years.
Question When my absolute priority of investing is peservation of capital is the word "treasury"some sort of magic guarantee in this scenario: I hold Vang 28 long term investments grade which I know includes many corp.bonds in ofmany ratings. Now I see Vang 83, long term TREASURY Investor shares. ytd and 1 yr. are close. Would I feel much more secure if I switched? Same question applies for many funds
Thanks.
Bill
Answer The word treasury would imply guaranteed against default since it is backed by the US government. However, this mostly applies when buying indivudal bonds and holding until thay mature. When buying mutual funds, since the portfolio is diversified, the default risk doesn't have much of an impact unless you are buying a junk bond fund. With mutual funds, since there is no maturity date, the underlying value of the fund shares can fluctuate based on interest rate movements (rates go up value of bond fund goes down). Longer duration bond funds are more sensitive to this than short term bond funds. In my opinion, when purchasing bond funds, I would use a treasury vs high quality corp (credit rating of A or better)depending on which one is paying a higher yield. However, if corp is only paying slightly more than a treasury, then you may want to ask youself the question of wht are you taking on more risk without getting much more in return. The risk of default may not be the issue, but corp bonds could do worse than treasuries in a soft economy. The key again is looking at duration. In a rising interest rate environment, I would stick with an average duration of 3 years or less.
