Quantum Sufficit
Recycles dryer sheets
- Joined
- Jan 24, 2011
- Messages
- 128
I am still trying to understand bond funds so take anything I say with several grains of salt. My current plan/thought is to ditch some of my bond funds (once their transfer to Schwab has been completed and the cost basis information has been transferred as well). Some of those stinkers, however, have improved a bit in the past week or so. But they still smell and are carrying an unrealized loss. I am going to mix in individual bonds (laddered) and CDs (laddered). The ballast argument doesn't work much with me anymore.
Here's an analogy that for me illustrates the difference between bond funds and individual bonds. (I am looking for the smarter folks here to start poking holes in it.)
Imagine you are going on a long drive in the car. With individual bonds, I can plan my trip pretty well balancing when and where I stop for the essentials: gas, food, bathroom breaks and stretching my legs and back. I might run into bad weather, accidents, heavy traffic, road construction, car problems, etc. But I have some options for planning for those things such as maintaining my vehicle, checking ahead of time on the weather, road construction, and traffic, planning my route to avoid major metro freeways during rush hour, etc.
With a bond fund, I am not alone in the car. I have the car full with other passengers. And as much as we might all agree in advance on a plan for when we are going to stop for gas, meals, bathroom breaks, etc., you know the chances are pretty good that as soon as we have been driving 20-30 minutes, someone in the car is going to speak up and announce that they have to go to the bathroom, or ask if we can stop at the next town so they can get a cup of coffee, or whatever. My "plan" for the trip isn't much more than a figment of my imagination.
I'd rather hold individual bonds. When I bought the individual bond I had my "plan." I was okay with the amount of principal, the interest rate and the term. If rates increase I will probably be disappointed. But I knew that was a possibility going into the deal and I still know the rate of interest I will earn if I hold the bond to maturity. I AM FINE WITH THAT. But with the bond fund, the whole plans gets screwed up as soon as someone else on this trip decides that they are hungry or they have to go to the bathroom. Then I, and everyone else in the car, have their travel plans messed up. I am not fine with that.
Yah but with my bond funds despite Nav declines the fund mgr is buying better yielding bonds with new money so I have watched my spendible income from yield sequentially albeit not quickly move up. When you buy individuals you are yield locked so it cuts both ways.