Bonds don't appear to be doing anything more than meandering in a tight trading range

[phil1ben]

+1. What we often seem to forget is that bonds mature, and then you get your money back and can re-invest at the new rates. Stocks are more like the old British Consols- perpetual. If business is good, they may (or may not ) increase their dividends.

Ha

This has been my basis for only buying individual bonds--mostly municipals. Based upon my reading of this Board for about 1 year, it appears that very few members of this Board (or investors in general) buy individual bonds. It appears that many have a fear of evaluating bonds but less of a fear making an individual stock purchase. I would suggest that there is a greater benefit owning individual bonds (rather than bond funds) than owning individual stocks (rather than stock funds).

People are more comfortable buying the stock of a household name than the revenue stream of say--the PA Turnpike.

 

[Dash man]

This has been my basis for only buying individual bonds--mostly municipals. Based upon my reading of this Board for about 1 year, it appears that very few members of this Board (or investors in general) buy individual bonds. It appears that many have a fear of evaluating bonds but less of a fear making an individual stock purchase. I would suggest that there is a greater benefit owning individual bonds (rather than bond funds) than owning individual stocks (rather than stock funds).

I'm not a fan of bonds right now, but you are spot on for those who do want bonds. Bond funds are dangerous if rates begin to rise quickly and can cost a great deal of principal. At least with individual bonds you have the option of holding to maturity, but do carry the entire risk of default. As with stocks, people need to check the financial health of the entity they are buying the bond from.

 

[mathjak107]

I think mathjak meant "up" 8%, not "at" 8%.

correct , total return for TLT ytd is about 8%

 

[haha]

with the long treasury bond up almost 8% this year i wouldn't say bonds are doing little.

There will always be some arbitrary start point from which an asset is either up or down.


This is generally meaningless.

Ha

 

[RetireAge50]

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.

 

[haha]

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.

To me low cost bond funds have three giant advantages over individual bonds. Diversification, costs to buy or sell, and ease and cost of re-investing interest payments.

True if you buy only original issue bonds you will ordinarily incur no charge, but if you need to or want to sell, different story.

 

[lawman]

I quit buying individual corporate bonds not long after I bought Enron stock..

 

[mathjak107]

There will always be some arbitrary start point from which an asset is either up or down.


This is generally meaningless.

Ha

I think most of us track year by year starting jan 1 unless you have reason not to like you bought something 6 months in

 

[Mulligan]

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.

Your opinion Retire is what I understand to be true. Yet this seems to be a debate that pops up occasionally here and at Bogleheads and for the life of me I don't understand why. Some steadfastly believe buying a bond over a bond fund protects you by holding to maturity, but I don't understand how it ultimately doesn't wash out in the end unless like you said someone sells early. But then again, that would also apply to the person holding individual bonds.


Sent from my iPad using Tapatalk

 

[lawman]

I suppose they are pointing out that at some point you will want to sell out and when you do if you do so during rising rates you might end up selling shares at a lower price than you paid..All things considered I much prefer bond funds to individual bonds..

 

[Mulligan]

I suppose they are pointing out that at some point you will want to sell out and when you do if you do so during rising rates you might end up selling shares at a lower price than you paid..All things considered I much prefer bond funds to individual bonds..

I assume along the line of a bond ladder with varying maturity dates? I could see that maybe having some value to a high net worth person, but I wouldn't have the capital to do it correctly and have proper diversification so I have to stick to bond funds and CDs.


Sent from my iPad using Tapatalk

 

[RetireAge50]

I wouldn't buy a long term bond fund for short or medium term principal withdrawals. SAME THING for individual bonds.

Buy a fund or ETF that has individual bonds in them of sufficient amounts and maturities you need. Or multiple funds/ETF's with targeted maturities.

That being said buying bonds of any kind right now pretty much locks in a pretty low return. But losing principal should not be an issue if you withdraw as planned.

 

[youbet]

I think most of us track year by year starting jan 1 unless you have reason not to like you bought something 6 months in

Most may, as you say, track year by year starting Jan 1 but that's certainly a poor way to do it. I always look at multiple time frames and trends to try to get a more complete and telling picture of the situation.

 

[lawman]

buying bonds of any kind right now pretty much locks in a pretty low return. But losing principal should not be an issue if you withdraw as planned.

zactly! For preservation I still see nothing that compares to bonds..

Hogs will get slaughtered in this environment..

 

[audreyh1]

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.

Pretty much how I see it. I'm not willing to deal with individual bonds and I see no advantage - only extra trouble and costs and lack of diversity. Have owned most of our bond funds since 200 when interest rates were much higher, drew on them when we went through market crashes. Will be holding for decades more, so I don't get concerned about short term disruptions, I just rebalance.

I think we'll have both interest rate rising scares and deflation scares over the next several years. There will be no uniform directional glide path - it will be plenty volatile even if the ultimate very long term trend is in one direction, so rebalancing will help.

 

[jazz4cash]

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?

 

[RetireAge50]

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.

 

[audreyh1]

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.

 

[RetireAge50]

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.

 

[jazz4cash]

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.)

 

[audreyh1]

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.

 

[mathjak107]

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..

 

[phil1ben]

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

 

[samclem]

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.

 

[Dash man]

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.