Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Investing in Individual Bonds
Old 03-01-2007, 03:16 PM   #1
Recycles dryer sheets
ScaredtoQuit's Avatar
 
Join Date: Jan 2007
Posts: 190
Investing in Individual Bonds

Does anyone here have any experience buying individual corporate bonds? I am thinking that individual bonds might be a more effective way of investing the debt portion of my portfolio because you can control your interest rate risk by just holding on to maturity. Of course you still have to deal with credit risk but that can be mitigated by selective shopping.

For example, Vanguard's bond desk currently lists a Harrah's 5.375% bond maturing in 2013 at 90.53. Moody's rating is at Baa3, the lower end of investment grade. Yield to maturity is 7.161% and current yield is 5.9%. How hard is it (and expensive) to buy $25K or $50K chunks of something like this?

With respect to credit worthiness on this issue, I am going to assume that people are always going to want to gamble.

__________________

__________________
ScaredtoQuit is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Investing in Individual Bonds
Old 03-01-2007, 03:30 PM   #2
Recycles dryer sheets
 
Join Date: Dec 2006
Posts: 63
Re: Investing in Individual Bonds

Scared to Quit--

I've bought individual corporate bonds through Etrade and through VBS brokerage. I bought quite a few different names in 2003 when you could get issues like xerox and corning for 70 and 80 cents on the dollar. I did well despite the large commissions both brokerages levy. But today the prices on junk/near junk have gone up so high that I haven't been much of a buyer lately. I'm not sure that a 7.1% yield is worth the extra credit risk you're taking on (only a couple of points above a typical money market fund.)

That said, I bought GM a year ago at 85 cents on the dollar....it's recovered nicely. And also Goodyear during the strike, which has recovered nicely too. SO, there are some--though slim--pickings out there. At the moment, I'm eyeing Chiquita bonds which have been beaten down due to the e-coli scare (they own the "fresh express" brand) But really, I'm currently only "dabbling" and waiting for the prices on junk to come down. Most bond gurus are advising staying away from low credit bonds right now. Recalling the much better prices you could get on junk a few years ago, I can see why.

If you haven't already, check out the www.investinginbonds.com site. There you can get up-to-the-minute pricing on corporate and municipal bonds, so that you know you getting a fair price.

winnie

__________________

__________________
winnie is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-01-2007, 03:36 PM   #3
Recycles dryer sheets
ScaredtoQuit's Avatar
 
Join Date: Jan 2007
Posts: 190
Re: Investing in Individual Bonds

What kind of commissions should I expect? How are they figured?

I almost jumped on GM and GMAC last year but I didn't... perhaps a little because I didn't have anyone to bounce my ideas off. Glad to hear it went well for you.



__________________
ScaredtoQuit is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-01-2007, 04:30 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Investing in Individual Bonds

I do this professionally. As an individual, I would stick to exchange traded stuff that trades like a stock (similar to ISM) or NYSE-listed bonds. Otherwise you will get skinned by your broker.

You also have to be able to do credit analysis on the issuer of the bonds.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-01-2007, 04:41 PM   #5
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Re: Investing in Individual Bonds

Quote:
Originally Posted by ScaredtoQuit
What kind of commissions should I expect? How are they figured?

I almost jumped on GM and GMAC last year but I didn't... perhaps a little because I didn't have anyone to bounce my ideas off. Glad to hear it went well for you.

Well, Vanguard does all their FI trades through Pershing BondDesk so you will probably pay $30-50 per trade. but that IS NOT your total cost. In bond trades the majority of the cost is the spread. Pershing has 5-6 big dealers that they get their bonds from. They mark up everything before they give you the price for their profit too.

Buying single issues isn't a great idea for most investors. You get killed on the spreads, and that's only if you're buying. If you try to sell those bonds PREPARE TO BEND OVER. I snapped up a bunch of GM bonds last year and rode them from 82 to 101 before selling them. The truth is that after considering the cash drag while the money was on the sidelines and the ordinary income I would have done much better just leaving the money in my DFA large value fund.

__________________
saluki9 is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-01-2007, 05:36 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,318
Re: Investing in Individual Bonds

I totally agree with Saluki and Brewer here. I have vowed never to buy another 'used bond' (perhaps exchange traded bonds are more liquid and deep now, but I am talking about the over the counter/telephone market). Even through Vanguard's bond desk, I was getting skinned -- about 1% each way in the spread. Trouble is, you really don't know what the real price of one of these things should be, so you are working in a vacuum, and could pay even more. My father in law was getting quotes from his big brokerage house broker with 3% spreads for municipal bonds. It is a heckuva headwind to try to buck by being smarter than the professionals and snapping up something that is going to go from junk to gold or what have you.

If you like individual bonds, buy them when-issued and then be prepared to hold them to maturity. That is the only way I think the little guy can get a fair deal on bonds. For most of us, a good low-fee bond fund (vanguard or similar) is the way to go. You get diversification (thus protection from a melt-down in any one bond or issuer) and liquidity in exchange for a reasonably low fees and the pain of having the bonds marked to market nightly so you experience a paper loss directly each day when interest rates rise, rather than having the fig-leaf of 'I'll hold it to maturity" to hide behind. Actual investment performance for those who hold their bond funds for equivalent periods -- 10 or 20 years -- is probably pretty close over the full period to those holding the individual bonds, less the .2%-.3% annual fee. I think it is a reasonable tradeoff, but if you disagree, at least stick with when-issued bonds.
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
ESRBob is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-01-2007, 06:26 PM   #7
Recycles dryer sheets
 
Join Date: Dec 2006
Posts: 63
Re: Investing in Individual Bonds

Quote:
Originally Posted by ESRBob
Trouble is, you really don't know what the real price of one of these things should be, so you are working in a vacuum, and could pay even more. My father in law was getting quotes from his big brokerage house broker with 3% spreads for municipal bonds. It is a heckuva headwind to try to buck by being smarter than the professionals and snapping up something that is going to go from junk to gold or what have you.
No, one is no longer working in a vacuum. YOu can always check the going prices for bonds on www.investinginbonds.com. YOu can see what the buy/sell prices in any given day for a particular bond are.....you can see the difference in prices if you are buying 5k as opposed to 100k of a given bond, etc, etc. You can see what the "big boys (and girls)" are paying (lots of one million etc) and also what they are receiving on their bond sales. So you can get a fair idea of what you price you *should* be getting for a bond. Whether or not the junk market as a whole is fairly priced is a different issue.

To each their own, and I agree that, if you buy individual issues, you should aim to hold to maturity. Too, I would never commit more than "play money" to the junk market. It's true, too, that had I bought GM and GT stock this past year instead of their bonds, I would have made a lot more money. But I'm still collecting upwards of 10% annual interest for GM and 9% for GT bonds....so I'm not complaining. And boy do I wish I'd held my Xerox and Corning instead of selling them for the 20% capital gains (even after the broker commissions/cut). I'd now have two stellar companies paying me 14% and 17% interest annually.

best
Winnie



__________________
winnie is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-01-2007, 09:31 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,318
Re: Investing in Individual Bonds

Winnie,
Nice site -- I had heard about it but because of my 'vows' hadn't looked into it. Does it do a good job of giving spreads or is it mostly just the price history on trades? In any case, it is a huge step up compared to a few years ago. Thx for the link. Have you used the site much? Looks like the Bond Association realized that their members could probably sell more bonds if they started being fair with investors?
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
ESRBob is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-01-2007, 09:43 PM   #9
Recycles dryer sheets
 
Join Date: Dec 2006
Posts: 63
Re: Investing in Individual Bonds

Hi ESR Bob-

yes, it's a huge step up in transparency. Unfortunately, all you can see is the price history of trades. But, since you can still often see what a particular lot sold to a broker for, and what they, in turn, put it back on the market for, you can infer what they're making on both sides of the trade.

In fact, now that I think of it, I think they used to specify when a particular trade was a "SELL" to broker and when it was a "BUY from broker. They don't specify (B) or (S) anymore....which makes it a little more difficult to infer the spread. But, it's still do-able, especially on thinly traded issues.

Maybe I am still getting scr*wed on these trades and just kidding myself....it does seem that the general consensus is to stay away from these things....but this just hasn't been my experience to date.....I'm probably missing something, as usual.

winnie
__________________
winnie is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-01-2007, 09:58 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,384
Re: Investing in Individual Bonds

Quote:
Originally Posted by winnie
Too, I would never commit more than "play money" to the junk market.
I have never been able to understand play money. What is it? To me, play is hanging out with nice people, going on a ferry ride, fishing. Anything I do with money is serious, because money is all that stands between me and some guy sleeping on cardboard over a grate.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is online now   Reply With Quote
Re: Investing in Individual Bonds
Old 03-01-2007, 10:14 PM   #11
Recycles dryer sheets
 
Join Date: Dec 2006
Posts: 63
Re: Investing in Individual Bonds

Quote:
Originally Posted by HaHa
I have never been able to understand play money. What is it? To me, play is hanging out with nice people, going on a ferry ride, fishing. Anything I do with money is serious, because money is all that stands between me and some guy sleeping on cardboard over a grate.

Ha
I define it as an insignificant amount of one's portfolio (less than 1%) -- it's not going to impact one's plans or lifestyle whatever happens to it.

Anyway, who said "play" is not "serious"? These are not antithetical terms, necessarily. We send our child to a waldorf school. The principle premise here is that "play" is the child's most important form of work. Play, at its best, is a "serious" form of engagement with the world and of exploration of one's context.

To wit, I learned a lot about markets, and about investing in general through my forays into the bond market. I used relatively insignificant amounts of money....and this enabled it to feel like "play". IN turn, my successes here helped bolster my confidence that I could actually succeed in investing, ween myself from my dayjob, and eventually FIRE. Come to think of it, it was when my day job began to feel like work, that I began to "play" seriously in the market.

I'll bet your hypothetical guy on the grate gave all forms of play a long time ago.

winnie

__________________
winnie is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-01-2007, 10:33 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,384
Re: Investing in Individual Bonds

I respect your trading bonds. I don't have the knowledge to try. Also, I am allergic to being someone's mark, which would be my fear vis a vis the transaction itself. It appears that you have found a way to end run those concerns, and I congratulate you on achieving that.

Personally I prefer the electronic order execution and the protections given to small investors on the exchanges.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is online now   Reply With Quote
Re: Investing in Individual Bonds
Old 03-02-2007, 10:45 AM   #13
Recycles dryer sheets
ScaredtoQuit's Avatar
 
Join Date: Jan 2007
Posts: 190
Re: Investing in Individual Bonds

My whole motivation for buying individual bonds was to try to eliminate (or reduce) the amount of interest rate risk... i.e. get some degree of assurance that I would get back ALL of my principle.

It seems to me that it would be a good idea to have a bond mutual fund with all of the maturity dates in the same year. So you could buy a XXXX Bond Fund 2017 which if you hold until 2017 would liquidate and you would get all of your principle back (assuming no one defaults)

Is anyone aware of any such animal. Is it on anyone's horizon? How do you make that as a suggestion?


__________________
ScaredtoQuit is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-02-2007, 10:56 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Investing in Individual Bonds

Scared, you do not eliminate interest rate risk by buying bonds and holding them to maturity, so don't fool yourself.

There are such liquidating bond funds. If memory serves, many of them are closed-end funds with a liquidation date.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-02-2007, 11:02 AM   #15
Thinks s/he gets paid by the post
wildcat's Avatar
 
Join Date: Feb 2005
Location: Lou-evil
Posts: 2,025
Re: Investing in Individual Bonds

I think individual buyers of bonds are at a huge disadvantage and it is generally not worth the temptation. If you really know your sh!t you can wade into the junk pool but don't pay attention to the sign that reads:
"come on in, the water is warm"
__________________
"These walls are kind of funny. First you hate 'em, then you get used to 'em. Enough time passes, gets so you depend on them"
wildcat is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-02-2007, 11:36 AM   #16
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Re: Investing in Individual Bonds

Quote:
Originally Posted by brewer12345
Scared, you do not eliminate interest rate risk by buying bonds and holding them to maturity, so don't fool yourself.

There are such liquidating bond funds. If memory serves, many of them are closed-end funds with a liquidation date.
Brewer is correct, there are several closed end funds that are date certain. Most of them trade at a discount and are sold with a 3-4% dealer concession (i.e commission) up front so don't buy a new one.

Winnie - it would be nice to thing that investinginbonds is bringing transparency to the little guy, but that is only half the truth. Most large dealer to dealer transactiont never make it to their screens. They are still done among guys who know each other, over the phone, and out of sight. Things are starting to change with muni's and the MSRBs new 15 minute rules, but treasuries and corporates don't fall under their eyes.

__________________
saluki9 is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-02-2007, 12:22 PM   #17
Recycles dryer sheets
ScaredtoQuit's Avatar
 
Join Date: Jan 2007
Posts: 190
Re: Investing in Individual Bonds

Quote:
Originally Posted by brewer12345
Scared, you do not eliminate interest rate risk by buying bonds and holding them to maturity, so don't fool yourself.
I don't understand this comment. Assuming you have done an okay job assessing credit risk and your bond issuer survives the holding period, AND you hold to maturity, how can you lose principle as a result of fluctuating interest rates?

Am I missing something here?
__________________
ScaredtoQuit is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-02-2007, 01:15 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Investing in Individual Bonds

Quote:
Originally Posted by ScaredtoQuit
I don't understand this comment. Assuming you have done an okay job assessing credit risk and your bond issuer survives the holding period, AND you hold to maturity, how can you lose principle as a result of fluctuating interest rates?

Am I missing something here?
You said you thought you avoided interest rate risk by buying individual bonds. You don't. Whether you own a fund or individual bonds, you get the total return of your investment (including market losses due to rate increases).
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-02-2007, 01:16 PM   #19
Recycles dryer sheets
ScaredtoQuit's Avatar
 
Join Date: Jan 2007
Posts: 190
Re: Investing in Individual Bonds

But if you hold to maturity, what difference does it make?? You get back the FACE amt of the bond.
__________________
ScaredtoQuit is offline   Reply With Quote
Re: Investing in Individual Bonds
Old 03-02-2007, 01:22 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Investing in Individual Bonds

Quote:
Originally Posted by ScaredtoQuit
But if you hold to maturity, what difference does it make?? You get back the FACE amt of the bond.
If you have a nominal cash amount of cash that you know with certainty you will have to cover at the time the bond matures, that's fine (aka "immunizing" or "cash matching"). Otherwise, you are merely deluding yourself. How happy were the people who bought 7% coupon 30 year treasuries when rates went to double digits and stayed there for years (with a similar rise in inflation)? Even though they would get their principal back with 100% certainty, t hey lost a lot of money.
__________________

__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Should a married couple have individual retirement investing plans? Anaya_1de Young Dreamers 28 12-05-2006 08:57 PM
Swedroe comments on buying individual stocks. Nords FIRE and Money 27 10-12-2005 10:20 PM
TIPS vs I Bonds ron FIRE and Money 39 01-30-2005 04:56 PM
Some questions on bonds woolybully FIRE and Money 13 11-11-2004 05:04 PM
The Scoop on High Yield Bonds Ted FIRE and Money 9 12-04-2003 01:03 PM

 

 
All times are GMT -6. The time now is 01:08 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.