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Old 04-08-2014, 07:50 PM   #41
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Bond funds are not more dangerous than individual bonds. When rates go up both individual bonds and funds will go down.

However, over time you will get all your money back plus interest either way.

Unless you sell in the short term in which case both funds and individual bonds lose.
I can control the sale of an individual bond prior to maturity. How would I know whether a bond fund manager would sell early?
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Old 04-08-2014, 08:35 PM   #42
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After he sells the bonds he will buy more bonds. New bonds will have higher interest rates offsetting the principal loss over the duration of the original bond.
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Old 04-08-2014, 08:41 PM   #43
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I can control the sale of an individual bond prior to maturity. How would I know whether a bond fund manager would sell early?
That's what bond fund managers do - constantly position their portfolios to optimize value, manage risks, etc. They have lots of tools in their arsenal. They routinely "sell early" before bonds mature to manage their duration. This is what we pay them for. When you buy a bond fund you are trusting the manager to do a good job in an ever changing and often challenging environment. No point in second guessing them.
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Bonds don't appear to be doing anything more than meandering in a tight tradi...
Old 04-08-2014, 08:46 PM   #44
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Bonds don't appear to be doing anything more than meandering in a tight tradi...

I do not think it matters what he does. You will get what you signed up for in the beginning unless YOU sell before original maturity.
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Old 04-08-2014, 09:40 PM   #45
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That's what bond fund managers do - constantly position their portfolios to optimize value, manage risks, etc. They have lots of tools in their arsenal. They routinely "sell early" before bonds mature to manage their duration. This is what we pay them for. When you b uy a bond fund you are trusting the manager to do a good job in an ever changing and often challenging environment. No point in second guessing them.

"After he sells the bonds he will buy more bonds. New bonds will have higher interest rates offsetting the principal loss over the duration of the original bond.
"
"I do not think it matters what he does. You will get what you signed up for in the beginning unless YOU sell before original maturity. "

I still don't get it......
Part of the issue, I thought was that a bond fund (unlike an individual bond) does not have a maturity date.
If I hold an individual bond and rates go up my bond value goes down, but I will get all interest payments plus return of all principal as long as I hold the bond to maturity. If I had an emergency, I could (maybe) at least sell individual bonds with the least impact to the portfolio.

If my bond fund manager sells a bond when rates go up, the loss in value is locked in...so the new replacement bond would need to make up for this loss in value (as I understand an individual bond vs. a bond fund).

I should have asked if there is a metric that can be used to determine a bond fund manager's tendency to sell a holding before maturity (like a turnover rate, but specific to selling prior to maturity.)
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Old 04-08-2014, 09:59 PM   #46
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If my bond fund manager sells a bond when rates go up, the loss in value is locked in...so the new replacement bond would need to make up for this loss in value (as I understand an individual bond vs. a bond fund).
Both the new bond and old bond went down in value - it's a wash. Kind of like selling your house but buying another one in a down market.

You can look at how different bond funds have performed during various interest rate scenarios and compare bond funds within the same category to see how they did relative to their peers. That's the metric you might use to pick your bond fund manager.
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Old 04-09-2014, 06:28 PM   #47
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the wild card in bond funds is credit ratings. unless you deal in treasuries only, a fund that has a bunch of bonds lose their ratings or the expectations that corporate bonds my take a rating hit can fall even though rates are going lower.and the fund should rise.

individual bonds held until maturity are not effected by credit rating or the expectations of credit worthiness like a fund is unless they go belly up..
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Old 04-10-2014, 07:40 AM   #48
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I will stick with individual bonds for these reasons:

1. It is easier for me to "keep score". If I sell early I know the exact benefit from a gain or burden from a loss. I rarely sell early but have on occasion.
2. I can better control credit rating and geographic location of my portfolio. In 2009-11 I was able to focus on a mixture of California and Illinois GOs with maturity dates of my choosing.
3. I know (borrowing a default) I will get me full principal back at maturity or call.
4. I can mix my home states bonds with other States in the exact percentage I want.
5. I do not pay any fee except the very small fee charged by Fidelity to purchase a bond (if bought on the secondary market only). No fee for New Issues. At times I have been able to pick up bonds on the "used car lot" very cheaply because some fund was required to "dump" them because of an adverse story.........or someone ran scared. (Ex. Bought a bunch of Nittany Lion Medical Center Bonds (Penn State) very cheaply during the Jerry Sandusky scandal). I was comfortable with that risk.

It is the difference between a custom made suit and one off the rack. Admittedly, I normally have between 90 and 125 different municipal bonds. The Fidelity muni bond trading platform makes this number very easy to manage.

Coincidentally, there is an article today on the CNBC website about this very topic:

http://www.cnbc.com/id/101565187
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Old 04-10-2014, 08:58 AM   #49
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I will stick with individual bonds . . .

Admittedly, I normally have between 90 and 125 different municipal bonds.
Au contraire, I think you do have a municipal bond fund.
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Old 04-10-2014, 09:14 AM   #50
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If interest rates rise quickly, bond fund managers may be faced with having to sell holdings at fire sale prices to raise cash for all those redeeming their shares. Fund prices may fall more than an individual bond's value in the short term.
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Old 04-10-2014, 09:16 AM   #51
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Au contraire, I think you do have a municipal bond fund.
I do not disagree. I have created my own fund out of my individually picked bonds. The point, however, is that anyone could do this. One can buy bonds in increments of $1,000.00. In my opinion, one would need at least 25 bonds to properly diversify.
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Old 04-10-2014, 09:23 AM   #52
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The point, however, is that anyone could do this. One can buy bonds in increments of $1,000.00. In my opinion, one would need at least 25 bonds to properly diversify.
Sounds like work to me - and I'm retired.
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Old 04-10-2014, 09:45 AM   #53
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If the fund price goes below the bond market values that would be great. The people exiting the fund would get the panic price and those remaining would be better off (because they paid off people at lower than market value).
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Old 04-10-2014, 10:23 AM   #54
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Sounds like work to me - and I'm retired.
+1

I feel the same way about owning individual stocks.
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Old 04-10-2014, 10:33 AM   #55
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Rebalancing really helps during periods of market stress where people flee certain asset classes. You buy more. The asset often recovers, then you sell a little to get it back into balance.

If you are holding investments for decades, these little blips are opportunities rather than things to go out of your way to avoid.

I'm sure several of my mutual funds go hit hard in 2008 by redemptions and fleeing investors, in fact, of several years after 2008 investors continued to sell equity funds and buy bond funds. Yet equity funds have been extremely rewarding to own since 2008. And bond funds I owned that got hit hard snapped back very quickly. Every time I've had a fund hit hard by redemptions, it's made an amazing recovery once the selling pressure was exhausted, and if I rebalanced and bought some when it was down, I was generously rewarded later.

If you take a multi-decade view, you don't sweat the small blips.
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Old 04-10-2014, 12:49 PM   #56
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> 5. I do not pay any fee except the very small fee charged by Fidelity to purchase a bond (if bought on the secondary market only). No fee for New Issues.

Every time I get interested in buy individual bonds I always run into articles that talk about how the small investor pays exorbitant fees when buying individual bonds.

Set me straight...
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Old 04-10-2014, 02:51 PM   #57
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From Fidelity's website the fee is:

Municipals $1.00 per bond Corporates (BBB– or higher), CATS/TIGRS $1.00 per bond Corporates (BB+ or lower) $1.00 per bond

So the fee on a $25,000 Bond would be $25.00. It is important to remember that Bonds are not as liquid as stocks. You must check EMMA to see recent sales to determine that the price you are paying is a fair one. The price differences one sees in trades taking place within minutes of each other is eye-opening and downright troubling. I have seen price differences of 20% for trades taking place within minutes of each other. It is very important that homework is done before a purchase is made.
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Old 04-10-2014, 03:14 PM   #58
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Rebalancing really helps during periods of market stress where people flee certain asset classes. You buy more. The asset often recovers, then you sell a little to get it back into balance.

If you are holding investments for decades, these little blips are opportunities rather than things to go out of your way to avoid.

I'm sure several of my mutual funds go hit hard in 2008 by redemptions and fleeing investors, in fact, of several years after 2008 investors continued to sell equity funds and buy bond funds. Yet equity funds have been extremely rewarding to own since 2008. And bond funds I owned that got hit hard snapped back very quickly. Every time I've had a fund hit hard by redemptions, it's made an amazing recovery once the selling pressure was exhausted, and if I rebalanced and bought some when it was down, I was generously rewarded later.

If you take a multi-decade view, you don't sweat the small blips.
+1
Nailed it.
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Old 04-10-2014, 03:16 PM   #59
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It is important to remember that Bonds are not as liquid as stocks. You must check EMMA to see recent sales to determine that the price you are paying is a fair one. The price differences one sees in trades taking place within minutes of each other is eye-opening and downright troubling. I have seen price differences of 20% for trades taking place within minutes of each other. It is very important that homework is done before a purchase is made.
I think that is the main issue when they talk about buying individual bonds (not treasuries directly) being expensive for the small investor - you'll way overpay if you don't know what you are doing.
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Old 04-10-2014, 03:27 PM   #60
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Rebalancing really helps during periods of market stress where people flee certain asset classes. You buy more. The asset often recovers, then you sell a little to get it back into balance. ...
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+1
Nailed it.

Maybe not. I've seen some studies that show re-balancing has as much or greater negative effect overall by selling off into a rising bull market.

I think it makes psychological sense if maintaining an AA you are comfortable with makes you feel better. But it could hurt in actual $$$ in the long run.

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