Any individual bond investors here?

[disneysteve]

If you are someone who invests in individual bonds rather than bond funds, I'd love to hear your experiences, tips, advice, etc. I know that each option has pros and cons. I've always stuck to funds but want to start dipping my toes into individual bonds.

 

[njhowie]

You're welcome to join our long running municipal bond thread:

https://www.early-retirement.org/forums/f44/muni-bond-and-muni-bond-fund-discussion-104000.html

 

[foxfirev5]

Good thread but many of us don't need to go into the muni world. Personally I keep my assets in tax free and deferred as much as possible. Equities in Roth and CD/Bonds in tIRA. In the tIRA I combine high Divy yield with a big CD ladder and only keep 3 bond funds for tracking purposes. As long as the CD ladder's current yield is greater than 5 year treasuries I'll stay with them. If not I'll easily substitute treasuries for CD's as the rungs mature. As a matter of fact I'd rather have treasuries than CD's for liquidity. The spreads on brokerage CD's will kill you if you're forced to sell. My 2 cents.

 

[MichaelB]

We use mostly fixed income mutual funds at Vanguard. I know those folks are better than me at choosing bonds and they also get better prices. I’m also confident they are less likely to do something boneheaded - unlike me.

During the GFC in ‘09 I put about 10% of our total portfolio into individual bonds, mostly munis. The sellers were in panic, the prices were too good to pass up. The last bond matured a earlier this year. I’d consider buying individual bonds again, but only under similar conditions. Otherwise I’ll look for return and take our portfolio risk in equities and use the Vanguard bond funds to give our portfolio stability.

 

[njhowie]

foxfirev5 - You may be of the belief that municipal bonds are only of a tax free nature, which is completely untrue. There is an entire category of taxable municipal bonds, higher yielding than tax free munis, significantly less risky than the equivalent rated corporate bond and are excellent for tax-deferred investment accounts like IRAs.

I would say that anyone who is looking to invest in individual bonds and is limiting themselves to corporates is missing out. But that's fine, to each his/her own.

 

[Freedom56]

I buy individual corporate bonds and have been doing so for over 25 years. But my focus is only in the technology, telecom, and pharma/biotechnology sectors. I also buy investment grade preferred stocks. Right now there is literally nothing worth buying. I only buy when there is forced fund selling.

 

[jazz4cash]

I had a review with my Fido advisor yesterday and he suggested buying some individual bonds using the Fido Bond desk reps. I only have one corporate bond and a few munis. I could use the help since I’m not finding attractive deals on my own. I’m going to dedicate some assets for this as my promo CDs mature and AA resets to 80% equities.

 

[tizod]

You will not find good deals without some risk. It takes work in this low rate environment. I'd add that buy only individual bonds. Funds have issues with rate change and no "maturity" thus the safety net is...imaginary with funds. I'd also add look at preffered stocks if you cannot find OK bonds for enough ROI. But also look at jr sub like DTJ or others. There are many sites to investigate for these niche areas. But avoid the funds!

 

[Ready]

I’ve read an entire book on how to buy bonds and still don’t feel comfortable with it. I’d be competing with professional fund managers who are negotiating millions of dollars of bond purchases for their funds while I would be looking to buy a small fraction of the bonds they are buying.

My bond funds have such low expense ratios that it seems like it would be very hard to make it worth my while. I think of it like trying to get a better price on a product than Costco. Costco buys hundreds of thousands of units of an item to get an extremely favorable price, then applies a very small markup to the customer. So trying to get a better price seems like an exercise in futility.

But I would like to learn more from those who have found success in doing so.

 

[yhoomajor]

I hold individual Corporate bonds. I used to hold Bond mutual funds, but saw those never appreciating in value much, even when interest rates were falling substantially (2008-2015). Found out mutual funds do bit more trading and many don't even hold bonds til maturity. Some of the things I've observed:

1) Even though bonds are suppose to be safer (relatively) during a downturn, in a panic they act just like equity. March 2020 saw many/most of my bonds swoon just as much as Equities did. Bonds didn't stop bleeding until after uncle Powell interjected and said he would buy off all bonds (that need to be offloaded to big daddy, aka Fed).

2) AAA-rated bonds don't pay much interest. You get safety (again relative), but almost no return after inflation.

3) Same with municipal bonds. Most pay very little interest. Ones that have higher coupon from years ago, their current prices are way above par. Also they are not safer, imho. If not for the latest federal bail-out ($2T stimulus), many were at risk of serious default.

4) BB-rated bonds do pay decent effective yield. Or at least they did when I bought those 3 years back. But then they also carry higher default risk. I avoid all issuers that are in real-estate, finance (other than TBTF Banks) or student loan (Sallie Mae et al) industry.

5) Most of my individual bond holdings are industrial, that Uncle Sam will move earth and heaven to keep them float. Think Boeing, FedEx, International Paper, General Mills, ATT, TBTF Banks etc. Basically you want to look for issuer that are bit risky (for better yield) but know uncle Sam will come and save them if they were to get really stressed.

6) if you think interest rates are headed to 5%+ in next 5-10 years, then avoid bonds.

7) I personally think that after next Fed flirtation/attempt of normalizing rates a bit (2-3-4 years from now or whenever they try that), market will swoon and fed will just bring the rates back closer to 0. That's why I hold bonds. Another factor in my mind is Federal debt. In next 4-6 years, looks like Federal debt is headed towards $40T. Even if interest rates were to rise to 3%, that would be roughly $1Trillion+ in interest alone for uncle Sam, per year. So uncle Sam will not let interest rates rise for much longer if they even get there somehow. Because Math doesn't add up.

Just my observations... based on timelines of when I dipped my toes in bond world. Bonds do evoke different emotions for different people. For preferred, I just buy the index, like PFF.

 

[njhowie]

I’ve read an entire book on how to buy bonds and still don’t feel comfortable with it. I’d be competing with professional fund managers who are negotiating millions of dollars of bond purchases for their funds while I would be looking to buy a small fraction of the bonds they are buying.

My bond funds have such low expense ratios that it seems like it would be very hard to make it worth my while. I think of it like trying to get a better price on a product than Costco. Costco buys hundreds of thousands of units of an item to get an extremely favorable price, then applies a very small markup to the customer. So trying to get a better price seems like an exercise in futility.

But I would like to learn more from those who have found success in doing so.

Although I can appreciate your hesitation for wading in to individual bonds, your justification and how you think of it is off the mark.

The price you get when purchasing a bond has little to do with the size of the purchase. Like anything else where there is a market, it is dependent on supply and demand at the exact time of the purchase and how "aggressive" the buyer/seller is. The supply and demand and aggressiveness of the buyer/seller for a bond on any particular day is going to be a function of the fundamentals/strength of the issuer and quality of the bond along with interest rates/futures that day.

Many times, the small retail investor gets a better price than the big institutional investor - I have many examples of that for myself and I'm sure Freedom56 can also attest to that in his own experiences. He's basically already told you that - in that he specializes in buying when the big boys are forced in to selling...unloading their big positions at lower prices. At least as it pertains to the muni market and where I focus my efforts, I could provide a lengthy discussion of why this happens. If you are interested, just drop me a message and I'd be happy to share/discuss. I would personally not waste my time in the muni market doing what I do if there were no advantage over simply putting my money in to a fund. I do outperform the muni fund managers, matching/beating their performance year after year with significantly lower risk. As I've indicated on other threads, and those who know me on the muni threads - my AA is 1/99 - 99% fixed income, with the bulk of it in municipal bonds.

If you simply do not have the time or desire to become knowledgeable about investing in individual bonds, or have a portfolio which is too small to do it effectively, then I fully agree that a mutual fund is the way to go - nothing wrong with that. However, don't be convincing yourself that just because a fund's expenses are low that it automatically translates in to better performance. Funds take higher risks when it comes to bonds. Skim through the holdings of any bond fund that you own or may be of interest to you. You'll see that they all contain some amount of dog sh*t - yield boosters that are really not investment quality...unrated or down at C rating or lower. On top of that, most funds are employing some amount of leverage - borrowing to make purchases, which (for example) can backfire and lead to Freedom's scenario where they get forced in to selling at just the wrong moment.

 

[foxfirev5]

foxfirev5 - You may be of the belief that municipal bonds are only of a tax free nature, which is completely untrue. There is an entire category of taxable municipal bonds, higher yielding than tax free munis, significantly less risky than the equivalent rated corporate bond and are excellent for tax-deferred investment accounts like IRAs.

I would say that anyone who is looking to invest in individual bonds and is limiting themselves to corporates is missing out. But that's fine, to each his/her own.

Great point. While I am aware of the various offerings I did jump to an inaccurate conclusion. Personally I chose the Treasury/CD route for absolute safety and simplicity. This is the money I plan to use for the rest of my life. At current rates I have no interest in individual bonds either corporate or muni. However I can understand why someone would like to juice up the income a little.

On the equity side I do have a mix of dividend ETF's, growth and blend as well as Intl. In the interest of full disclosure I also have another bucket of High Yield, EM, Preferred MF and ETF's. In total these comprise my risky portfolio. However I have no plans to live off these holdings.

 

[Time2]

I'm retired 66yrs old, and have less than 2% of my NW in bonds. That 2% is in an HSA, and that came about only because of limited choices in the HSA.
With rates as low as they are on bonds, I just can't pull the trigger on bonds. Also with the way they acted back in February 2020, it doesn't seem as they are protection against a stock market drop.
All my life I have heard when you reach retirement shift over to a higher percentage of bonds, something like 60/40 to 40/60. I'm not so sure about that anymore.

Also, I'm limiting my income to the 12% tax bracket, so I can do Roth conversions for the next 10 years, (my wife is younger) to reduce our RMDs, so I don't want more income bonds would yield.

Does anyone have good numbers on how a 50/50 AA performed during the 2000 and 2008 drops to help convince me that I should except the low rates as portfolio protection?

 

[njhowie]

Also with the way they acted back in February 2020, it doesn't seem as they are protection against a stock market drop.

You need to ask yourself what is your objective in purchasing bonds? Are you in it to trade and attempt to make a profit? Or are you interested in income and capital preservation - primarily a buy and hold to maturity investor? If you are looking for income and capital preservation, how bonds acted in February 2020 is almost irrelevant - unless you were buying more, or for some reason were forced to sell. If you are buy and hold to maturity, it does not matter what the market price of the bond does on a day to day basis - does it? Why would you care? Did it have any effect on the income the bond is paying?

Regardless of how the market price of your bond fluctuates in the interim, on the maturity date it's going to be redeemed at 100.

 

[phil1ben]

I also buy individual municipal bonds and do not own any funds. I have been investing in individual bonds for almost 30 years and currently use the Schwab platform. However, muni bonds only represent about 25% of my investable assets which percentage is decreasing monthly.

As of late, I have been unable to replace called or matured bonds with other bonds acceptable to me, so I have been reallocating such sums to non-public real estate limited partnerships (mostly apartment complexes) which is the business I was in before I retired. I keep about 35% in individual stocks (no funds).

 

[Time2]

You need to ask yourself what is your objective in purchasing bonds? Are you in it to trade and attempt to make a profit? Or are you interested in income and capital preservation - primarily a buy and hold to maturity investor?

I would only buy a bond as a hedge against a stock market drop. I don't need/want income. I spend way below what I have been gaining in the market, and if It took a 40% tumble it would not affect my living standard, but of course I wouldn't like that!

If you are looking for income and capital preservation, how bonds acted in February 2020 is almost irrelevant - unless you were buying more, or for some reason were forced to sell. If you are buy and hold to maturity, it does not matter what the market price of the bond does on a day to day basis - does it? Why would you care? Did it have any effect on the income the bond is paying?

Regardless of how the market price of your bond fluctuates in the interim, on the maturity date it's going to be redeemed at 100.

I understand that, but I still have a hard time with the low return at this time.

 

[jazz4cash]

I think comparing the needs of an individual to choices made by a fund manager is a mistake. For one thing I see available quantities that would be ignored by a fund manager. I agree it takes more and more time effort and attention to find bonds that are attractive. Most of the munis I see are bid up beyond an acceptable return for me.

 

[Golden sunsets]

I invest in individual bonds to match maturities with estimated RMD's over the next 10 years, on a rolling basis. I'm currently scouting out bonds for our 2031 rung in DH's and my IRA's. The dollars are fairly big at about $175,000 for each year.. Our AA is 50/50. I have a mix of corporate, treasury and target maturity date bonds(Issued by Invesco and Blackstone) to match the year needed. As mentioned by one poster above, I am not concerned by day to day fluctuations as I always hold to maturity. I tend to think of their value as their par value, as that is the sum that will convert to cash in the year of maturity. Other parts of our FI allocation that are held outside of our tax deferred accounts are comprised of individual muni's, preferred stock, a rolling 5 year ladder of jumbo CD's, I bonds and some cash, due to low rates..

 

[disneysteve]

I tend to think of their value as their par value, as that is the sum that will convert to cash in the year of maturity.

That's a great point. Thanks.

 

[jr6035]

I have. With Fidelity. But have since gone to Ishares Ibond etf's.