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Paul Merriman: Bonds - buy, sell, or hold?
Old 03-26-2014, 09:02 AM   #1
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Paul Merriman: Bonds - buy, sell, or hold?

With multi-year anguish, confusion and nervousness regarding bonds, this article by Paul Merriman looks to be spot on: Bonds: Buy, sell or hold? - MarketWatch

He says what you should do is determined by the three reasons individuals own bonds:

First , the traditional reason is to collect interest. When you buy a bond, in effect you loan money to a company or government entity in return for a promise to pay a given rate of interest for a fixed period. At the end of that time, you'll get your money back.

Second , the reason that I advocate owning bonds (bond funds, actually), is to reduce the risks of owning a portfolio of stock funds. Bond prices are less volatile than stock prices, and often their prices trend in opposite directions.

Third , you can own bonds because you want to make a profit by buying them at low prices and selling them when their prices are higher. This is a perfectly sensible reason to own any investment.
Based on the above, his advice on what to do with bonds now:

One: If what you want from bonds is to collect interest, and if the interest you are receiving is sufficient for your needs, then you probably shouldn't do anything. Sit tight. Bond prices in the secondary market won't affect the interest you collect. If you sell your bonds, your interest payments will stop, defeating your purpose.

Two: If what you want from bonds is to stabilize an overall portfolio, then you would also defeat your purpose by selling bonds. In this case, the bonds can do their job for you only if you own them. You want their prices to move up and down, like the ebb and flow of a tide, to provide stability. (And you'll get some income along the way as well.)

Investors who want to use bond funds to stabilize their portfolios may need to buy or sell them from time to time to fine-tune the amount of risk in their portfolios. But this is usually determined by factors other than near-term expectations for bond prices.

Three: If what you want from bonds is to make a profit by buying low and selling high, then you should sell when the prices are relatively high and buy when they are relatively low. Right now it's hard to make a case that interest rates will go much lower (which would lead to higher prices). So if your motive is capital gains, this might be a time to sell – depending of course on what you paid for them.
The problem is, few of us own bonds for only one of the above reasons, and this conflict results in multiple threads and hundreds of posts widely differing opinions.

Me, I'm definitely a One and Two guy, so I'm holding on to my Wellington and Wellesly held bond funds.

Numbers is hard.

Retired in 2005 at age 58, no pension

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Old 03-26-2014, 09:46 AM   #2
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Good article, thanks for posting. I guess rebalancing between stocks and bonds is a combination of # 2 and # 3, something both Wellesley and Wellington do very well.

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Old 03-26-2014, 11:05 AM   #3
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I'm 1 and 2 also. The bonds saved me during the recent "worse financial crisis since the depression." I like stability. My age in bonds seems about right.

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Old 03-26-2014, 02:15 PM   #4
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CDs and stable value funds fulfill reasons 1 and 2 just as nicely as bond funds do.
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