Editor's note: This article is part of our "How and Why to Invest in Bonds" series. Click here to read other articles.
It is useful to remember that a bond's classification as short-, intermediate-, and long-term isn't just an abstraction. As Christine Benz notes, investors could also reasonably match their time horizons for each part of a bond portfolio to the appropriate bond type. Money needed for very short-term expenditures (within the next one to two years) is likely best held in cash, whereas assets needed for purchases within the next several years may be OK in high-quality shorter-term bonds. And if that money isn't needed for four or five years or more, intermediate-term bonds and bond funds may look like a reasonable bet. In this regard, duration can be a helpful tool; if a fund's duration is substantially longer than the intended holding period, there's a mismatch at work.
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Tom Lauricella does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.