Two wikis on the Bogleheads site which I humbly suggest may be far more worth your time than this entire thread:
https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund
https://www.bogleheads.org/wiki/Rolling_ladders_versus_bond_funds
These two posts from a current thread on this topic from two of the savviest long-time investors there shed further light:
1. “I work in the field.
If you hold your bonds to maturity you have certainty over cash flows and control over your portfolio. Many people's natural reaction is that this reduces risk. Technically speaking it does not.
Are you engaged in liability matching? That is the maturity of the bond matches the time frame when the cash is needed. If so this is the exception to the rule.
Are you planning on rolling over your bonds at maturity? Or investing in the coupons that they throw off? If so, welcome to the club portfolio manager - you are now exposed to interest rate risk, just like those who invest in funds.
I can make a modest argument that one should build a bond portfolio that matches ones goals and risk tolerance. The problem is that you need a portfolio in the millions to justify the cost and complexity.”
2. “I maintained a TIPS ladder from 1998 to 2012. In this case, "diversification" not an issue for two reasons: one, being Treasury issues there is virtually no credit risk; second, there are not that many different issues; the Vanguard Inflation Protected Securities fund holds only 48, and I was holding over half that many.
The individual-bonds-versus-fund issue is much argued. I'm going to state my point of view, expecting to be contradicted by others as usual. The difference depends entirely on the degree to which you can predict and control your need to withdraw from the bond portfolio..
One extreme is full "defeasing," in which you know absolutely for sure that you will never need to buy or sell on the market, and that you will always be able to hold each bond to maturity. In this extreme you are immune to interest rate risk. With TIPS you are also immune to inflation risk; and you are unaffected by market fluctuations and don't need to take them into account. The problem is that the spending side of the equation is uncertain and risky, too, and you do not really have any certainty that you will never choose to liquidate before maturity. If you're allowed to make assumptions about how long you will be able stocks, you should be allowed to make the same assumptions about bonds.
The other, much more popular extreme is "mark to market," which is often misrepresented as saying that a portfolio of individual bonds has exactly the same risk as a fund, and it is just a psychological delusion to think anything else. In reality, "mark to market" is, absolutely, the appropriate model for a situation in which you assume that you might need to draw from the portfolio on any given day. The fluctuating daily value of your bond portfolio is meaningful is there is a probability that you will sell the bonds on any given day. However... this is where the big ideological fight comes in... the market value of an asset that is not for sale is irrelevant. Again, you can reconcile extremes by saying there is no such thing as "not for sale" and it is important to have some idea of the value of things you don't plan to sell, because humans plan and the universe laughs.
I believe that the proper evaluation of the risk of an asset must include, as input, the probability that the asset will be transacted on thus-and-such date. Really, the claims of "stocks for the long run" are claims that the risk of a stock that you know you will sell thirty years from today is different from the risk of a stock that you might sell any time.
My own firm belief is that if they are part of a well-structured serious plan that includes a credible likelihood of holding to maturity, why yes, individual bonds are less risky than a bond fund. They are less risky to the exact extent that holding to maturity will actually happen. However, the difference isn't all that dramatic.
In my case, my firm resolve to hold individual bonds to maturity was outweighed by the nuisance of managing the portfolio. And not just the nuisance of my managing it, when I started to look seriously and have seriously discussions with my significant other about where our money is, how to get it, and what to do with it, I realized that they were perfectly capable of dealing with a portfolio of five mutual funds, and that there was no way at all they could deal with a thirty-page statement. (Vanguard prints TIPS as a line and a narrow column of eight details under it, in landscape orientation, with fat headers and footers on each page. It only manages to lists two TIPS to a page!). Sticking with individual bonds was likely to make them go running for help to an advisor, which either of us wants to happen.
So I took a deep breath, wrote off my individual-bond-portfolio to "ego," and swapped them for the Vanguard TIPS fund, VAIPX.”