individual bonds vs bond funds
Hi Terry, given a backdrop of rising bond yields (assuming we’ll get there at some point), which do you recommend: individual laddered bonds (either high quality corporate or gov’t) with varying maturities that are held to maturity or bond funds? If it helps you can assume this is for a $1M retirement portfolio where bonds/fixed income portion represents 25% of total portfolio and I’m ~10 years from retirement. My wife and I also have traditional pensions. Thanks in advance!
Terry Says: Well, it’s good to know that you understand the risks of rising interest rates, which will likely come along — unless we wind up in a Depression! And, as I’ve written before, bonds only work if you hold them to maturity if you own them in a period of rising interest rates. Otherwise if you need cash, you must sell them at a loss. Bond prices go down, when interest rates rise. No one wants to be stuck in along-term bond yielding very little compared to then-current interest rates.
Right now, you get an interest rate premium with corporate bonds. BUT, you almost always get “ripped off” when you buy or sell them! Since the prices of bonds change by the minute — just like stocks — you are dependent on a broker to get the best price, and pass it on to you. The one place to check current bond prices is a tool at the FINRA website: http://finra-markets.morningstar.com/BondCenter/.
You can buy Treasury bonds and notes directly at www.TreasuryDirect.org. There you pay no commission, and deal directly with the government –having payments debited from your checking account, and interest credited back to your account. You can even have the T-bills, notes, or bonds rolled over automatically at maturity at the then current rate.
If you use a “managed bond fund” (as opposed to a fixed portfolio of bonds) you are paying a small amount to the portfolio manager to pick bonds, decide when to sell them, and how to invest new money coming into the fund. Most major mutual fund companies offer bond funds that are specific to various types of bonds, ie corporate, government, or municipal, or even international. Their goal is to get you the highest return commensurate with their charter — not to give you a chance to regularly reinvest maturing securities. They do that for you.
Whichever way you decide, I would keep your ladder relatively short-term — five years at the maximum. Staggering Treasuries during that timeframe is easy, and gives you a chance to not only keep up with current rates (higher or lower, as things develop) but to easily get out of a security at maturity in case you need the cash.
Yes, I know I gave an explanation more than an “answer” — That’s something you’ll have to decide for yourself, based on these facts!
