Confused about bonds

[jimbee]

They think that to beat the market you'd need an almost magical insight into what other investors will do. I think knowing how people behave helps but you can also do normal research. For example, past performance and the opinions of analysts matter.

I must have misunderstood your comment.

 

[Boho]

I must have misunderstood your comment.

I had a feeling it wasn't clear. I bet most people didn't know what I was talking about.

 

[hesperus]

With muni bonds you are taking credit, duration and tax risk. You are compensated chiefly by the yield. So I would ask myself:


- What is the duration of the fund? Is this risk too large for me?
- What kinds and amounts of credit risk am I taking on these bonds? Average rating? How much is below A and unrated? Are these risks I am willing to take?
- Do I believe there is some risk that the favored tax status of munis will change? Am I willing to bear this hard-to-quantify risk?
- Does the yield on these bonds compensate me adequately for the risks involved? How does this fund fit in with the rest of my portfolio?




Best to do your navel-gazing before you buy, but since you can sell with a few clicks it is still worth doing the thought process.

I'd agree that the vast majority of investors should stick to bond mutual funds, as it is probably the best bet. But for a high-net-worth individual who is also very tax-sensitive, my having a separately managed portfolio of individual bonds gives me greater timing and control over when I want to realize losses and gains on individual bonds if I decide to sell before maturity. And it minimizes the 'herd mentality' risk if other bond fund holders demand cash back at a bad time, forcing depressed sales of those bonds. Think fall 2008, or the summer of 2013. I have never lost a penny on my individual bonds since I hold them to maturity, and I expect this to be the case moving forward, even in a rising interest rate environment. The same may not be true for bond funds. Bottom line: With my bond ladder, my future income and return of principal are known. With a bond fund: my future income and return of principal are unknown

 

[brewer12345]

I'd agree that the vast majority of investors should stick to bond mutual funds, as it is probably the best bet. But for a high-net-worth individual who is also very tax-sensitive, my having a separately managed portfolio of individual bonds gives me greater timing and control over when I want to realize losses and gains on individual bonds if I decide to sell before maturity. And it minimizes the 'herd mentality' risk if other bond fund holders demand cash back at a bad time, forcing depressed sales of those bonds. Think fall 2008, or the summer of 2013. I have never lost a penny on my individual bonds since I hold them to maturity, and I expect this to be the case moving forward, even in a rising interest rate environment. The same may not be true for bond funds. Bottom line: With my bond ladder, my future income and return of principal are known. With a bond fund: my future income and return of principal are unknown

I have never seen a lot of difference between a pile of bonds inside a trust and a pile of bonds outside a trust. If you have a large enough allocation to directly held bonds that you can achieve acceptable diversification and not get skinned on pricing (a common occurrence at the retail end of the bond market), have at it.