Passive buy and hold bond index fund strategies offer simplicity, low costs, broad diversification, and tax efficiency. Furthermore, bond index funds have historically outperformed the vast majority of similar actively managed bond portfolios over the long term, perhaps best substantiated in the long running SPIVA® Scorecard library maintained by S&P Dow Jones Indices.
The duration of a bond fund portfolio may be matched to the investment time horizon of the investor, initially immunizing the bond fund portfolio. Notably, immunization cannot be maintained without regularly rebalancing bond funds as these have relatively fixed durations (i.e., immunization cannot be maintained with purely a passive buy and hold bond fund strategy). Rebalancing into shorter duration bond funds or money market securities will be required over time to reduce the bond portfolio’s weighted average duration to match the approaching investment time horizon if bond portfolio immunization is desired.