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bonds or bond funds
Old 12-01-2007, 11:24 PM   #1
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bonds or bond funds

I'm looking for something safe. I have Fidelity bond funds as part of my 401k, but have heard that funds are not as good as just bonds. Is any of this true? I have never bought any kind of bond, just bond funds.
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Old 12-01-2007, 11:56 PM   #2
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I like to invest directly in bonds. I see a bond paying the rate of interest that fits my needs I will invest in it and receive that rate for the term of the bond. A bond fond is constantly selling and buying bonds so you do not have much control over the interest rate you receive. Investing directly in bonds does require more investable funds to get diversification and investing flexibility. You will also have to do some studying on how bonds are bought and priced. I just finished reading "Bonds The Unbeaten Path to Secure Investment Growth." The author suggest an all bond portfolio I am not sure if I agree with that but he does give good advise on how to invest in bonds. He also covers the advantages and disadvantages of both investing directly in bonds or using a bond fund.
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Old 12-02-2007, 03:31 AM   #3
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either way they work out the same. although bond funds have a variable value every day they have a variable interest rate to match. a bond has a fiixed value and a fixed interest rate. at the end of the approxamate duration period returns will be very close. the slight expense on the bond fund is usually offset by the better pricing and knowing how to play the game on a proffessional level. of course this is only true of treasuries or high quality coroporates as any change in credit worthiness is a wild card
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Old 12-02-2007, 05:50 AM   #4
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either way they work out the same. although bond funds have a variable value every day they have a variable interest rate to match. a bond has a fixed value and a fixed interest rate. at the end of the approximate duration period returns will be very close. the slight expense on the bond fund is usually offset by the better pricing and knowing how to play the game on a professional level.
I sure hope you are right. My husband's 401k only offers Fidelity funds. I was a bit nervous when I inspected these for mortgage related debt and was only able to find out that they had mortgage-backed securities at a certain rating. The ratings were known to be in error at that point. So far, things appear OK with the funds but it made it hard to decide what to do with his bond holdings.
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Old 12-02-2007, 06:41 AM   #5
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assuming they share the same credit risk rating yes its true, but usually what im referring to is treasuries or hi grade corporate bonds. the credting ratings are still a wild card on both
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Old 12-02-2007, 09:38 AM   #6
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I use bond funds. Good diversification over companies and time to maturity. I stick with the high grade stuff. Lean more toward intermediate term bonds... split between actively managed and index. Although, I do have some LT bonds and TIPS...

I want to get a little more international fixed income exposure. MF or EFT will be the my approach.
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Old 12-02-2007, 11:20 AM   #7
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An individual bonds value will vary over time just like a bond fund. You will receive a 100% of your investment back when the bond matures but during it's life time it value and yield will vary. The yield I receive does not vary from what it was when I purchased it. That is what I like. I like to be in control of my investments. I also do not invest in stock funds. I invest directly in individual stocks. I am a buy and hold person not a trader which does make a difference.

Edited to add: chinaco it seems like everyone in the US is trying to get international fixed income investments. The number of international bonds available in the last few months has been very slim. I am also wondering if we are seeing a feeding frenzy because of the decline of the dollar. This can happen in foreign currency market just like it does in the stock market.
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Old 12-02-2007, 11:29 AM   #8
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An individual bonds value will vary over time just like a bond fund. You will receive a 100% of your investment back when the bond matures but during it's life time it value and yield will vary. The yield I receive does not vary from what it was when I purchased it. That is what I like. I like to be in control of my investments. I also do not invest in stock funds. I invest directly in individual stocks. I am a buy and hold person not a trader which does make a difference.
yes and no. you may pay 1200 to buy a bond thats worth 1,000 bucks at maturity depending on the coupon rate of the bond. a bond fund has a timeline too. the combination of the variable interest rate and variable principal always work out to an almost fixed amount if you are in the bond fund for the duration value of that fund.

if you pay 10 dollars and get 5% the day you buy in, if rates rise to 6% and the funds duration value is 5 than the funds principal falls to 9.50 but now your getting 6%. it takes 5 years to breake even. at the end if you sell it works out to the same rate as the day you bought in. of course you may vary ever so slightly up or down but basically you will be in the ball park.
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Old 12-02-2007, 11:46 AM   #9
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yes and no. you may pay 1200 to buy a bond thats worth 1,000 bucks at maturity depending on the coupon rate of the bond. a bond fund has a timeline too. the combination of the variable interest rate and variable principal always work out to an almost fixed amount if you are in the bond fund for the duration value of that fund.

if you pay 10 dollars and get 5% the day you buy in, if rates rise to 6% and the funds duration value is 5 than the funds principal falls to 9.50 but now your getting 6%. it takes 5 years to breake even. at the end if you sell it works out to the same rate as the day you bought in. of course you may vary ever so slightly up or down but basically you will be in the ball park.
I agree with what you say. But your example is a bad one as I never pay more than par for a bond. So my example would be I pay $800 for a bond and receive $1000 back when it matures. As I am retired I look at the coupon rate than look to see what the price is . So in almost all cases my bonds YTM is higher than the coupon rate. YTM does not pay for food. Risk is the next thing I look at.
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Old 12-02-2007, 11:48 AM   #10
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only newly issued bonds bought direct are at par. every other bond is traded above or below par to compensate for the interest rate of the moment
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Old 12-02-2007, 11:59 AM   #11
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only newly issued bonds bought direct are at par. every other bond is traded above or below par to compensate for the interest rate of the moment
That is true and that is why most of my bonds are bought below par. They are bought from people or bond funds for whatever reason they have want to sell them. There is a very large bond secondary market. I can use the search tool my broker has to search through thousands of secondary market bonds. I can also buy original issue bonds that my broker is issuing.
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Old 12-02-2007, 12:17 PM   #12
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I'm looking for something safe. I have Fidelity bond funds as part of my 401k, but have heard that funds are not as good as just bonds. Is any of this true? I have never bought any kind of bond, just bond funds.
glinka, bond funds in your 401k from Fido will be a fine choice if you are looking to reducethe volatility of your portfolio. But beaware that you are probably giving up some return over time and that high grade bonds might not be the greatest buy right at this moment. But if your portfolio doesn't have at least 10 to 20% bonds, its still worth buying some.

And FWIW, every bond portfolio should have some mortgage backed securities. Particularly Fannies, Freddies and Ginnies, as they have zero credit risk while still offering yields well over treasuries.
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Old 12-02-2007, 01:22 PM   #13
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Bond funds are much easier to deal with in the long run, and cheaper too unless you are buying treasuries direct.

Audrey
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Old 12-02-2007, 01:27 PM   #14
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Aren't most bonds callable? So you really don't have complete control over the interest you receive with them either, because if rates get a lot cheaper than what the bonds are paying, the issuer will buy them back. Or are callable bonds a thing of the past? I've never bought an individual bond.
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Old 12-02-2007, 03:09 PM   #15
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Edited to add: chinaco it seems like everyone in the US is trying to get international fixed income investments. The number of international bonds available in the last few months has been very slim. I am also wondering if we are seeing a feeding frenzy because of the decline of the dollar. This can happen in foreign currency market just like it does in the stock market.
I agree. I am not looking to bet the farm on International bonds... But adding some for diversification seems to make sense. My approach to moving into international fixed would be to make the move slowly over time... Most of our fixed securities will remain in domestic high quality bonds. I believe the USD will recover and is probably at or close to its low. If I ran out and bought a bunch of Euro based bonds... I could get whipsawed.

I already have some international exposure with equities.
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Old 12-02-2007, 04:39 PM   #16
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right now i like bond funds. just the last few weeks i admit it. i was a dirty lil market timer taking quick profits in TLT AND IEF. the treasury bond funds have been swinging wildly with TLT swinging 2% in one session.

i rarely buy individual stocks except for taking a flyer with both citi and merryl lynch the last week or so.

im just not smart enough to pick just the right stock in just the right time in just the right industry ,in just the right market sentiment. and even if i got all the above right i still dont know what the competitors are doing. then one bad earnings report and your down 30% in a heart beat. nope i love funds.. i dont want to assume individual company risk too at this point as part of my main investment portfolio
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Old 12-02-2007, 10:46 PM   #17
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Aren't most bonds callable? So you really don't have complete control over the interest you receive with them either, because if rates get a lot cheaper than what the bonds are paying, the issuer will buy them back. Or are callable bonds a thing of the past? I've never bought an individual bond.
I was a trustee for many corporate issues and most were not callable... and if they were there were specific dates.. and some had a premium if they were called (like 101% or 103% of principal)....

Now, the single family housing bonds were callable either every month up to every 6 months... we did calls all the time. Most mortgage products have a call provision.
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Old 12-02-2007, 11:28 PM   #18
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[quote=brewer12345;583901]glinka, bond funds in your 401k from Fido will be a fine choice if you are looking to reducethe volatility of your portfolio. But beaware that you are probably giving up some return over time and that high grade bonds might not be the greatest buy right at this moment. But if your portfolio doesn't have at least 10 to 20% bonds, its still worth buying some.

I am 57 and have been retired for 2 years. I have 30% of my 401k in bond funds. I am concerned that I have too much or too little in bonds funds. When I read about percentages you should have bonds to equities they always talk about 65 as the retirement age. How do you figure what is enough?
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Old 12-03-2007, 03:14 AM   #19
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since having to sell equities in a down market can be the death of your nest egg i would like to always have 10-14 years of relatively safe money based on yearly withdrawls in bonds,cash,non traded reits and annuties. the rest stay as aggressivly invested as if i was 20
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Old 12-03-2007, 07:52 AM   #20
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glinka, figuring out how much you should have in bonds begs the questions of what your risk tolerance is, other sources of income might be, and what your overall portfolio allocation should be. If you post details, I am sure the board would be happy to comment excessively.

Maybe a new thread would be best.
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