I Wonder how her TIPS are doing that she recommended so highly. phew they got hit as hard as stocks this week if you hold them short term, and market thinking is you will get killed in lost interest if inflation climbs as new bonds are issued at far higher rates. if your not getting those higher rates your loosing then regardless if your bonds are fixed at par or not.
people think because they buy individual bonds and get par they arent loosing. but holding 3% bonds in a 6% world is a loss...... no matter how you want to fool yourself if a money market is at 6% for a period of time and you get 3% on a bond you are loosing 3% for that time frame
The effective return may drop or rise against "current" interest rates but the value of an individual bond/CD is that the principle will be returned at some defined point in the future (not including default risk - a whole other subject). Yes, if you had waited until interest rates went up, you'd have a higher income from your bond. However, interest rates could drop and then you'd have less income because you waited.
Also, don't forget you're paying a management fee on the mutual fund. I can't see any reason to do that when a better return is available in individual bonds. Of course, there are some closed end bond funds selling at outrageous discounts right now. My old self would be loading up on these.
Laddering individual bonds/CDs [-]allows[/-] forces you to reinvest at the current interest rates or spend the money. Buying bond mutual funds may increase or decrease in value depending on the current interest rate. If you happened to buy a bond mutual fund when interest rates were 15%, you're sitting pretty. If you loaded up on a TIPS fund when they were at 0%, you'll be a sad puppy if there isn't any inflation. If you are liquidating a bond mutual fund for living expenses, you may be taking capital losses or gains.
Laddering becomes a way of spreading interest rate risk over a long time period. You will participate in the whole interest rate cycle but the principle will come as the bond/CD matures.
I'm lamenting the maturity of my 5 1/2% CD because I'll have to reinvest at 4%. I may lament the maturity of this one because I'll only have 3% available when I reinvest but I might have 6% available instead.
Also, you pay a management fee for a bond mutual fund. I don't see why I should lower my return when individual bonds/CDs are so easy and cheap to buy. There are some outrageous discounts on closed end bond funds. My old self would be all over these but I keep coming back to the reason I buy CDs. I absolutely positively want to know that I'll have my principle available on a certain date. It's the hyper conservative part of my AA.
